2025 (7) TMI 224 - AT - IBC

Treatment of Government dues - secured debt or not - secured creditor of the CD within the meaning of Section 53 of the IBC - Waterfall mechanism - Recovery of Central Excise Duty and Service Dues - HELD THAT - The Hon ble Supreme Court in Rainbow Papers 2022 (9) TMI 317 - SUPREME COURT had occasion to consider Section 48 of the Gujarat VAT Act 2003. In the above case the Appellant - State Tax officer has filed a claim in Form-B of Rs.47, 35, 72, 314/- towards VAT/ CST on the ground that the Sales Tax officer was a secured creditor. An IA was filed before the Adjudicating Authority which was rejected. The Appeal filed in this Tribunal also came to be dismissed which order came to be challenged before the Hon ble Supreme Court by the State Tax Officer. The Hon ble Supreme Court considered in the above case as to whether the State Tax Officer is to be treated as secured creditor within the meaning of Section 53 of the IBC. The Hon ble Supreme Court in the above case has held that State is a secured creditor under the GVAT Act. It was held that security interest could be created by operation of law i.e. by Section 48 in the above case. It was held that definition of secured creditor in IBC does not exclude any Government of Governmental Authority. The Appellant s submission is that in paragraph 52 of the judgment it was held that if the Resolution Plan ignores the statutory demands payable to any State Government or a local authority altogether the Adjudicating Authority is bound to reject the Resolution Plan. The State Tax officer was declared as a secured creditor on the strength of Section 48 of the Gujarat VAT Act which foundation is reflected in paragraphs 56 to 57 of the judgment. The State Tax Officer was held to be secured creditor by virtue of security interest created by operation of law i.e. Section 48. The above judgment of Hon ble Supreme Court cannot be read to mean that Hon ble Supreme Court has held that all Government dues are secured debt whether any security interest is created or not. The creation of security interest to declare a creditor as secured creditor is sine-qua-non for treating a creditor as secured creditor. The due of the Appellant are dues under Section 11E of Central Excise Act 1944. The Hon ble Supreme Court in CoC of Essar Steel v. Satish Kumar Gupta 2019 (11) TMI 731 - SUPREME COURT has laid down that there has to be equal treatment of creditors in a class. There can be no dispute to the proposition laid down by the Hon ble Supreme Court in the above case. The Hon ble Supreme Court however has held that there has to be equitable treatment with respect to creditors of a particular class. The Hon ble Supreme Court in the above case has held that equitable principle will apply in respect of creditors of the same class and that cannot be applied in case of secured and unsecured creditors. Section 55 of the Odisha Value Added Tax Act 2004 is pari materia to Section 48 of Gujarat VAT Act. Hence in the Resolution Plan reliance on judgment of Rainbow Papers has rightly been made treating the State GST Department to be secured creditor relying on Section 55 of the Odisha Value Added Tax Act and the Appellant cannot claim any parity with Section 55 of the Odisha Value Added Tax Act with respect to its claim in Section 11E. There are no substance in the submission of the Appellant that there has to be equal treatment with respect to State GST Department and the Appellant. There are no violation of Section 30 sub-section (2) sub-clause (b) in the facts of the present case and submission of the Appellant on the above count also fails. The aforesaid provision notices that the Customs Authorities would have the first charge on the property of the assessee under the Customs Act except with respect to cases under Section 529A of the Companies Act 1956; the Recovery of Debts Due to the Banks and the Financial Institutions Act 1993; and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 and the IBC 2016. Thus the legislative scheme which is delineated under Section 142-A is same as under 11E. Thus there cannot be any first charge on the assets of the CD which are being dealt with under the IBC. Thus Adjudicating Authority did not commit any error in rejecting the application filed by the Appellant. The Appellant cannot be held to be secured creditor of the CD and hence the Appellant also cannot claim any parity with the payment of State GST. The judgment of the Hon ble Supreme Court in Rainbow Papers cannot be relied by the Appellant for the proposition that for dues under Central Excise Act there shall be first charge on the assets of the CD. There is no merit in the Appeal. The Appeal is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the dues claimed by the Appellant under Section 11E of the Central Excise Act, 1944, qualify as secured debt under the Insolvency and Bankruptcy Code, 2016 (IBC), in light of the Supreme Court's judgment in Rainbow Papers Ltd.?

(b) Whether the judgment in Rainbow Papers, which held that statutory dues under Section 48 of the Gujarat VAT Act constitute secured debt by operation of law, is applicable to the Appellant's claim under Section 11E of the Central Excise Act?

(c) Whether the Resolution Plan's differential treatment of the Appellant's claim vis-`a-vis the State GST Department's dues violates the principle of equitable treatment of creditors under Section 30(2)(b) of the IBC and the precedent set in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta?

(d) The effect and applicability of statutory provisions and judicial precedents, including the Supreme Court's decision in Sundaresh Bhatt Liquidator of ABG Shipyard Ltd. v. Central Board of Indirect Taxes and Customs, on the treatment of government dues during insolvency proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Whether dues under Section 11E of the Central Excise Act are secured debts under IBC, and applicability of Rainbow Papers judgment

Relevant legal framework and precedents: The Supreme Court in Rainbow Papers Ltd. held that statutory dues under Section 48 of the Gujarat VAT Act, 2003, constitute a secured debt by operation of law and enjoy priority under Section 53 of the IBC. Section 48 provides a first charge on the debtor's property for tax dues, overriding other laws. The IBC defines "secured creditor" to include those with security interests created by operation of law.

Section 11E of the Central Excise Act similarly provides that any amount payable under the Act shall be a first charge on the assessee's property, but contains a saving clause excluding such charge "save as otherwise provided" in certain statutes including the IBC.

Court's interpretation and reasoning: The Tribunal carefully compared Section 11E of the Central Excise Act with Section 48 of the Gujarat VAT Act. It noted that unlike Section 48, Section 11E explicitly excludes the operation of the first charge in cases governed by the IBC and other specified statutes. The phrase "save as otherwise provided" in Section 11E carves out an exception for insolvency proceedings under the IBC.

The Tribunal held that the Supreme Court's decision in Rainbow Papers is confined to the statutory framework of Section 48 of the Gujarat VAT Act and cannot be extended to claims under Section 11E of the Central Excise Act, which expressly excludes such first charge in insolvency scenarios. Therefore, no security interest arises by operation of law under Section 11E in the context of IBC proceedings.

Key evidence and findings: The statutory text of Section 11E with its saving clause was central. The Tribunal also relied on the Supreme Court's judgment in Sundaresh Bhatt, which dealt with a similar provision (Section 142A of the Customs Act) containing a similar saving clause excluding the IBC, reinforcing the principle that IBC overrides such statutory charges.

Application of law to facts: Since the Appellant's claim was based on Section 11E, which excludes first charge in insolvency, the Appellant could not be treated as a secured creditor under the IBC. The Resolution Plan's treatment of the Appellant as an unsecured operational creditor was therefore legally valid.

Treatment of competing arguments: The Appellant argued that all government dues should be treated as secured debts following Rainbow Papers and that the Review Petition against that judgment was dismissed, making it binding precedent. The Tribunal rejected this, emphasizing that Rainbow Papers applies only where the statutory provision creates a first charge without exceptions like those in Section 11E. The saving clause in Section 11E was decisive.

Conclusions: The Appellant's dues under Section 11E of the Central Excise Act do not constitute secured debt under the IBC. Rainbow Papers judgment is not applicable to the Appellant's claim.

Issue (c): Whether differential treatment of Appellant's claim compared to State GST Department violates equitable treatment principles under IBC

Relevant legal framework and precedents: Section 30(2)(b) of the IBC mandates that the Resolution Plan must provide for equitable treatment of creditors of the same class. The Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta clarified that equitable treatment applies to similarly situated creditors within the same class, but does not require identical treatment across different classes such as secured vs unsecured creditors or financial vs operational creditors.

Court's interpretation and reasoning: The Tribunal noted that the State GST Department's dues were treated as secured creditor dues by virtue of Section 55 of the Odisha Value Added Tax Act, which, like Section 48 of Gujarat VAT Act, creates a first charge without exceptions. Hence, the State GST Department's dues belong to a different class (secured creditors) than the Appellant's dues (unsecured operational creditors).

The Tribunal held that differential treatment between these two classes does not violate the principle of equitable treatment. The Appellant's claim to parity with the State GST Department was therefore unsustainable.

Key evidence and findings: The statutory provisions governing State GST dues (Section 55 of Odisha VAT Act) and Appellant's dues (Section 11E Central Excise Act) were pivotal. The Tribunal relied on the Essar Steel judgment's elucidation of equitable treatment principles and the classification of creditors.

Application of law to facts: Since the Appellant and State GST Department fall into different creditor classes, the Resolution Plan's allocation of 29.61% to State GST Department and 2.69% to the Appellant does not amount to discriminatory treatment violating Section 30(2)(b) of the IBC.

Treatment of competing arguments: The Appellant contended that both are government dues and should be treated equally. The Tribunal rejected this, emphasizing the statutory classification and the absence of any legal requirement for equal treatment across different classes of creditors.

Conclusions: The Resolution Plan's differential treatment of the Appellant and State GST Department is consistent with the IBC and Supreme Court precedents and does not violate equitable treatment principles.

Issue (d): Effect of other statutory provisions and judicial precedents on treatment of government dues in insolvency

Relevant legal framework and precedents: The Supreme Court's judgment in Sundaresh Bhatt upheld that the IBC overrides conflicting provisions in other statutes, including customs and excise laws, especially where those statutes contain saving clauses excluding insolvency proceedings. Section 142A of the Customs Act, similar to Section 11E of Central Excise Act, contains such exceptions.

Court's interpretation and reasoning: The Tribunal found that the legislative scheme in Section 11E of Central Excise Act and Section 142A of Customs Act are analogous, both excluding first charge where IBC applies. The Supreme Court's observations in Sundaresh Bhatt that demand notices issued post-initiation of CIRP are barred under the moratorium provisions of IBC reinforced the primacy of IBC.

Key evidence and findings: The statutory text and Supreme Court's rulings on the interplay between IBC and other statutes.

Application of law to facts: The Appellant's claim under Central Excise Act is subject to the IBC's overriding effect, precluding first charge status and secured creditor classification.

Treatment of competing arguments: The Appellant sought to distinguish its claim from those considered in Sundaresh Bhatt. The Tribunal found no merit in such distinction given the similarity of statutory provisions.

Conclusions: The IBC prevails over conflicting first charge provisions in other statutes, including the Central Excise Act, thus precluding secured creditor status for the Appellant.

3. SIGNIFICANT HOLDINGS

"The creation of security interest to declare a creditor as secured creditor is sine-qua-non for treating a creditor as secured creditor. The due of the Appellant are dues under Section 11E of Central Excise Act, 1944. Section 11E itself contains a saving clause excluding the operation of first charge in cases governed by the Insolvency and Bankruptcy Code, 2016. Therefore, Section 11E of the Central Excise Act is not pari materia to Section 48 of the Gujarat VAT Act and the judgment of the Hon'ble Supreme Court in Rainbow Papers cannot be applied in the context of Section 11E."

"Differential treatment of creditors belonging to different classes, such as secured and unsecured creditors, does not violate the principle of equitable treatment under Section 30(2)(b) of the IBC. The State GST Department's dues, secured by operation of law under Section 55 of the Odisha Value Added Tax Act, form a different class from the Appellant's unsecured operational creditor dues under Section 11E of the Central Excise Act."

"The Insolvency and Bankruptcy Code, 2016, being a special and more recent statute, overrides the provisions of other statutes including the Central Excise Act and the Customs Act, especially where those statutes contain saving clauses excluding the operation of first charge in insolvency proceedings."

"The Appellate Authority did not err in rejecting the Application seeking modification of the Resolution Plan to treat the Appellant as a secured creditor. The Appellant is not entitled to parity in payment with the State GST Department, and the Resolution Plan's allocation is legally valid."