The National Company Law Appellate Tribunal has clarified that statutory tax dues under the Gujarat Value Added Tax Act, 2003 create a first charge over corporate assets, entitling the State to secured creditor status in liquidation - provided the claim pertains to VAT and not CST. This judgment resolves critical ambiguity on the interplay between statutory charges and the IBC’s distribution waterfall.
Background & Facts
The Dispute
The appellant, the State Tax Officer of Gujarat, claimed statutory first charge over the assets of M/s. Shree Raghuvanshi Fibres Private Limited (Corporate Debtor) for unpaid VAT and Central Sales Tax (CST) dues across four assessment years (2014-15 to 2017-18). The appellant sought classification as a secured creditor under Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC), to receive priority in distribution of liquidation proceeds. The liquidator treated the claim as operational debt under Section 53(1)(e), leading to distribution of ₹8.8 crore to Bank of Baroda, the sole financial creditor, and rejection of the appellant’s claim.
Key Facts
- The Corporate Debtor incurred VAT arrears of ₹17,94,45,532 and CST arrears of ₹18,93,19,213, plus interest at 18% per annum.
- On 05.09.2019, the appellant issued a communication to the Mamlatdar seeking attachment and charge recording over the CD’s immovable properties; no such entry was made in revenue records.
- During CIRP (commenced 18.02.2020), the appellant filed Claim Form B on 07.07.2021 for ₹36,87,64,745, indicating 'N.A.' in the security interest column but simultaneously wrote to the Interim Resolution Professional to create a statutory charge under Section 48 of the GVAT Act.
- Liquidation was ordered on 30.08.2022.
- On 14.09.2022, the appellant filed Claim Form C for ₹43,45,22,907, again marking 'N.A.' in the security interest field but reiterating its claim under Section 48 GVAT Act.
- A revised claim of ₹45,17,26,706 was submitted on 03.03.2023, which the liquidator rejected as time-barred.
- The liquidator, on 03.10.2022, requested proof of security interest under Section 3(30) and 3(31) IBC, citing non-disclosure in Form C.
- The CD’s assets were sold on 09.01.2023 to M/s. Rama Agri Enterprise LLP for ₹9.45 crore.
- On 21.04.2023, the Stakeholders’ Consultation Committee (SCC) meeting noted the liquidator’s legal opinion on the Rainbow Papers case and classified the appellant’s claim as ‘Secured Operational Creditor - Government Dues’.
- On 24.04.2023, ₹8.8 crore was distributed to Bank of Baroda under Section 53(1)(b)(i).
- On 25.08.2023, the SCC meeting revised the position, citing Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. (2023) 10 SCC 60, and treated the claim as operational.
- The liquidator filed I.A. 1077/2023 under Section 54 IBC seeking dissolution of the CD on 19.02.2025.
Procedural History
- 05.09.2019: State Tax Officer initiates recovery via Mamlatdar; no charge recorded.
- 18.02.2020: Corporate Debtor admitted to CIRP.
- 07.07.2021: Claim filed under Form B in CIRP; 'N.A.' marked for security interest.
- 30.08.2022: Liquidation ordered by NCLT.
- 14.09.2022: Claim filed under Form C in liquidation; 'N.A.' marked again.
- 03.10.2022: Liquidator requests proof of security interest.
- 09.01.2023: Assets sold for ₹9.45 crore.
- 21.04.2023: SCC meeting; liquidator acknowledges ambiguity; Bank of Baroda gives undertaking to return funds if appellant is later classified as secured.
- 24.04.2023: ₹8.8 crore distributed to Bank of Baroda.
- 25.08.2023: SCC meeting revises position based on Paschimanchal.
- 19.02.2025: NCLT Ahmedabad dismisses appellant’s objection and orders dissolution.
- 11.05.2026: NCLAT delivers judgment on appeal.
The Parties' Positions
- Appellant (State Tax Officer): Argues Section 48 GVAT Act creates automatic statutory charge upon assessment; no registration required; claim should be treated as secured debt under Section 53(1)(b)(ii) IBC.
- Respondent 1 (Liquidator): Contends statutory charge must be proved via IBC-compliant mechanisms (information utility, ROC, CERSAI); failure to disclose in Form C = waiver; claim is operational.
- Respondent 3 (Bank of Baroda): Asserts its mortgage-based security is perfected; undertaking given in 2023 is conditional and non-binding absent legal change.
Relief Sought
The appellant sought: (1) reclassification of VAT dues as secured debt under Section 53(1)(b)(ii); (2) recall of ₹8.8 crore from Bank of Baroda for redistribution; (3) rejection of liquidator’s classification of CST dues as secured; (4) setting aside of dissolution order pending proper distribution.
The Legal Issue
The central question was whether Section 48 of the Gujarat Value Added Tax Act, 2003 creates a statutory first charge that qualifies the State as a secured creditor under Section 3(30) read with Section 3(31) of the IBC, and whether such charge must be proven through registration under Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016, or whether disclosure in the claim form is mandatory.
Arguments Presented
For the Appellant
The appellant relied on Shree Radhekrushna Ginning & Pressing Pvt. Ltd. v. State of Gujarat (SCA No. 5413 of 2022), holding that a statutory charge under Section 48 GVAT arises automatically upon assessment and requires no registration. It argued that Section 3(30) of the IBC includes charges created by operation of law, and Regulation 21 does not prescribe exclusive modes of proof. The appellant emphasized that its contemporaneous communication to the liquidator put him on notice of the statutory claim, and the 'N.A.' entry in Form C was not a waiver but a result of the form’s inapplicability to statutory charges. It further cited State Tax Officer v. Rainbow Papers Pvt. Ltd. (2023) 9 SCC 545, affirming that statutory tax dues are secured debts, and relied on IFCI Ltd. v. Commercial Tax Officer to extend the charge to CST dues via Section 9(2) of the CST Act.
For the Respondent
The liquidator contended that Regulation 21 requires proof of security interest only through IBC-recognized channels: information utility, ROC, or CERSAI. It argued that the appellant’s failure to disclose the charge in Form C, coupled with its request to the liquidator to create a charge, demonstrated acquiescence. It relied on Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. (2023) 10 SCC 60, holding that Rainbow Papers does not apply to liquidation. The liquidator also cited Brihanmumbai Electric Supply & Transport Undertaking v. Ashok Kumar Golecha (2025 SCC OnLine NCLAT 808) and Home Kraft Avenues v. Jayesh Sanghrajka (2025 SCC OnLine NCLAT 309), asserting that statutory charges are unenforceable without registration under Section 77(3) of the Companies Act, 2013. The Bank of Baroda added that its mortgage was duly registered and that its 2023 undertaking was conditional and non-binding.
The Court's Analysis
The NCLAT undertook a layered analysis of statutory interpretation, distinguishing between contractual and statutory charges, and between CIRP and liquidation.
"A charge created by operation of law does not require any mutuality of intent. The expression 'operation of law' only means working of the law."
The Court held that Section 48 of the GVAT Act creates a statutory first charge the moment an assessment order is passed. This charge is not contingent on registration, attachment, or recording by revenue authorities. The Shree Radhekrushna judgment was affirmed: the charge arises automatically and is not a contractual obligation.
The Court rejected the liquidator’s reliance on Regulation 21 as an exclusive proof mechanism. The regulation states that security interest "may be proved" by listed means, not "must be proved". The Court emphasized that statutory charges are proven by the statute itself, not by registration. The appellant’s communication to the liquidator, even if not in Form C, constituted sufficient notice.
"The maxim ignorantia juris non excusat has no application to civil law... it is mandatory for any governmental agency who claims statutory charge to bring it to the notice of the liquidator."
The Court clarified that while the appellant’s 'N.A.' entry was not ideal, it did not extinguish its rights. The liquidator’s own conduct - seeking legal opinion, classifying the claim as ‘secured operational creditor’ in one meeting, then reversing it - showed uncertainty, not finality.
Regarding CST dues, the Court held that Section 9(2) of the CST Act does not import the statutory charge of GVAT Act. The IFCI Ltd. decision was distinguished: it dealt with priority as crown debt, not statutory charge. The Court reaffirmed Dena Bank v. Bhikhabhai Parekh and Union of India v. SICOM, holding that crown debt priority applies only against unsecured creditors, not against perfected secured interests.
The Court then addressed Section 52(1)(b) and Proviso to Regulation 21A(1). The appellant, though a secured creditor, did not exercise its right to realize its security interest under Section 52(1)(b). By choosing to participate in distribution instead, it was deemed to have relinquished its right to enforce the charge. Consequently, it was entitled to be treated as a secured operational creditor under Section 53(1)(b)(ii), ranking after financial creditors but before other operational creditors.
The Court held that the Bank of Baroda’s undertaking dated 21.04.2023 was binding and enforceable, obliging it to return funds if the appellant’s claim was upheld.
The Verdict
The appeal was partly allowed. The appellant is entitled to be treated as a secured operational creditor for its VAT dues of ₹17,94,45,532 plus interest at 18% per annum, and as an operational creditor for CST dues. The liquidator must recalculate the amount due to the appellant under Section 53(1)(b)(ii) and direct the Bank of Baroda to return the proportionate amount from the ₹8.8 crore distributed on 24.04.2023. The balance of the claim, including CST dues, shall be paid as per Section 53(1)(e). The dissolution order stands confirmed. The Bank of Baroda shall comply within 60 days of the judgment.
What This Means For Similar Cases
Statutory Charges Are Not Dependent on Registration
- Practitioners must argue that statutory charges under state tax laws (e.g., VAT, Service Tax, Entry Tax) arise automatically upon assessment and do not require ROC or CERSAI registration.
- The burden shifts to the liquidator to verify the existence of such charges using statutory provisions, not procedural forms.
Disclosure in Claim Forms Is Notice, Not Waiver
- Failure to mark 'Secured' in Form C or B does not extinguish a statutory claim if contemporaneous written notice is given.
- Liquidators must proactively verify statutory claims; silence or non-disclosure in forms cannot be used to deny rights.
CST Dues Cannot Claim Statutory Charge Under GVAT Act
- Claims under Central Sales Tax Act cannot piggyback on state VAT statutory charges.
- Crown debt priority applies only against unsecured creditors; it cannot override secured interests under IBC.
Relinquishment Under Regulation 21A(1) Is Critical
- Secured creditors who do not exercise Section 52(1)(b) rights within the stipulated time are deemed to have relinquished enforcement rights.
- Such creditors still rank under Section 53(1)(b)(ii) - not as operational creditors - but must act promptly to preserve their position.
Undertakings by Financial Creditors Are Binding
- Written undertakings by financial creditors to return distributions upon legal change are enforceable.
- Such undertakings create a mechanism for equitable correction without reopening liquidation.
