Government Dues Not Inferior To Secured Creditors' Dues, Says Supreme Court


Rainbow Papers went into insolvency in July 2016, and had a tax liability of around Rs 47 crore under the Gujarat Value Added Tax Act, 2003.

The state filed claims pertaining to these dues, but the resolution professional waived off the entire amount saying the sales tax office is an operational creditor.

Therefore, the government cannot claim first charge over the property of the corporate debtor.

On appeal, both the insolvency tribunal and the appellate tribunal upheld the decision of the resolution professional. The state’s claims of first charge over the property of Rainbow Papers was rejected at both forums.

Consequently, the case landed before the apex court, where the government argued that the definition of ‘secured creditor’ under the IBC is broad enough to encompass all forms of security interests—right, title, interest or claim to property.

And under the GVAT Act, the claim of the tax department squarely falls within the definition of ‘security Interest’. This makes the state a secured creditor under the IBC, the tax department said.


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