Prior Registered Bank Charge Prevails Over Subsequent State Tax Lien, NCLAT Dismisses State Tax Officer’s Appeal in Gangotri Glazed Tiles Liquidation

NCLAT holds a 2012 bank security interest registered with the Registrar of Companies defeats a 2019 statutory tax lien; Rainbow Papers does not displace chronological priority where Section 52 IBC rights have been invoked.

The National Company Law Appellate Tribunal’s Principal Bench at New Delhi has dismissed an appeal by the State Tax Officer, Rajkot, challenging a direction by the NCLT Ahmedabad Bench to release a statutory charge over land belonging to Gangotri Glazed Tiles Private Limited, a company in liquidation. The three-member bench — comprising Justice N. Seshasayee (Judicial), Arun Baroka (Technical), and Indevar Pandey (Technical) — held that a security interest created by Rajkot Nagarik Sahakari Bank Limited in 2012 and duly registered with the Registrar of Companies must take priority over a lien asserted by the State Tax Department through letters to the village revenue officer in 2019. The tribunal also expunged adverse observations recorded against the liquidator by the NCLT and declared that no liability attaches to him for facilitating enforcement of the bank’s security interest under Section 52 of the Insolvency and Bankruptcy Code, 2016.

The Dispute Before the Tribunal

The corporate debtor, Gangotri Glazed Tiles Private Limited, based at Survey No. 130/P, N.H. 8-A, Wankaner, Dhuva, Gujarat, was admitted to the Corporate Insolvency Resolution Process on 27 January 2020 following a Section 9 application. On 2 November 2020, the NCLT Ahmedabad Bench ordered liquidation and appointed Mr. Keyur J. Shah as liquidator.

The State Tax Officer, Unit-92, Rajkot, claimed tax dues under the Gujarat Value Added Tax Act, 2003 and the Central Sales Tax Act, 1956 for assessment years 2010–11, 2011–12, and 2012–13. The appellant had written to the Talati-cum-Mantri of Dhuva Village on 25 November 2016 and again on 17 March 2017, 28 August 2018, and multiple dates in 2019, seeking attachment of the corporate debtor’s property. Village Form No. 2 reflected an attachment entry dated 26 August 2019.

On 27 November 2020, the appellant submitted its claim to the liquidator for Rs. 31,97,71,210/-, asserting first charge over the corporate debtor’s assets and seeking recognition as a secured creditor. The liquidator initially admitted the claim as an operational creditor. After the Supreme Court’s judgment in State Tax Officer v. Rainbow Papers Ltd. (2022), the liquidator reclassified the State Tax Department as a secured operational creditor by email dated 31 December 2022.

Rajkot Nagarik Sahakari Bank Limited, the secured financial creditor, had created a charge over the corporate debtor’s assets on 26 September 2012, duly registered with the Registrar of Companies. During liquidation, the bank filed its claim in Form D, expressly electing not to relinquish its security interest, thereby invoking its right under Section 52(1)(b) of the IBC to realise the security interest outside the liquidation estate. When the bank approached the Talati to enforce its security, it discovered the State Tax Department’s lien on the land at Morbi District, admeasuring 14,678.80 sq. mtrs.

The liquidator filed an interlocutory application before the NCLT Ahmedabad Bench. By order dated 30 July 2024 in IA No. 742(AHM)2022 in CP (IB) No. 473/2018, the NCLT directed the State Tax Officer to release the charge on the land and allowed the bank to proceed with realisation. The NCLT also recorded adverse observations against the liquidator in paragraphs 8 and 9(c), 9(d), and 9(j) of that order. The State Tax Officer appealed to the NCLAT.

The Appellant’s Case: Statutory First Charge Under GVAT and CST Acts

The State Tax Officer argued that Section 48 of the GVAT Act, 2003 creates a first charge over the property of a tax defaulter by operation of law from the date assessment orders are passed. Section 9(2) of the CST Act, 1956 requires dues under the CST Act to be assessed and collected in accordance with the general sales tax law of the relevant state — here, the GVAT Act. A conjoint reading of these provisions, the appellant contended, means the statutory lien predates the CIRP and qualifies the State Tax Department as a secured creditor under Section 3(30) of the IBC.

The appellant relied on the Gujarat High Court’s ruling in Shree Radhekrushna Ginning and Pressing Pvt. Ltd. v. SOG (Special Civil Application No. 5413 of 2022, order dated 29 March 2022), which held that a charge over immovable assets is created in favour of the state by operation of law under Section 48 of the GVAT Act from the date assessment orders are passed. It also cited the Delhi High Court’s Division Bench in IFCI Ltd. v. Commercial Tax Officer (WP(C) 337 of 2011) for the proposition that a charge by operation of law arises under the CST Act and carries priority.

On the Rainbow Papers question, the appellant argued that the Supreme Court’s dismissal of the review petition in Rainbow Papers — reported at (2024) 2 SCC 362 — upheld the original judgment treating the State Tax Department as a secured creditor, and that Section 238 of the IBC does not override the GVAT Act. The appellant further contended that Section 77(3) of the Companies Act, 2013, which requires registration of a charge with the ROC before a liquidator can take it into account, does not apply to a statutory authority, since the appellant is not a “company” and its charge arises by operation of law.

The appellant also invoked Section 17(3) and (6) of the CST Act, which direct a liquidator not to part with company assets until the tax authority has been notified and the requisite amount set aside, and argued that the CST Act has not been amended by the IBC, unlike several other central statutes.

The Liquidator’s Case: Chronological Priority and Section 52 Enforcement

The liquidator, Mr. Keyur J. Shah, framed the central question as whether a statutory lien asserted in 2019 can override a prior registered security interest created in 2012, where the secured creditor has exercised its rights under Section 52 of the IBC.

The bank’s charge was created on 26 September 2012 and registered with the ROC — legally perfected. The State Tax Department’s lien, by contrast, was communicated to the Talati only in August 2019, was not registered with the ROC, and was not disclosed in the claim form filed during liquidation. The lien came to light only when the bank attempted enforcement.

The liquidator maintained that he had acted strictly within the framework of Sections 35, 36, 52, 53, and 238 of the IBC. He had invited and verified claims, prepared the list of stakeholders, permitted enforcement of the bank’s security under Section 52, and reclassified the State Tax Department as a secured operational creditor after Rainbow Papers. He argued that Rainbow Papers addressed classification of claims as secured or unsecured in the context of a resolution plan, not priority between competing secured creditors, and that no competing prior secured creditor existed in that case. In the present matter, Section 52 rights had been invoked, which was not the position in Rainbow Papers.

The liquidator also relied on Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. (2023), where the Supreme Court emphasised that the IBC’s priority scheme cannot be disrupted by statutory dues.

On the adverse observations in the NCLT order, the liquidator sought their expunction, contending that he had not ignored the State Tax claim, had not improperly handed over possession, had not failed to detect the lien (since it was undisclosed), and had not acted inconsistently after Rainbow Papers. He had not sold the secured assets; the bank was enforcing its own security interest independently under Section 52.

How the Tribunal Reasoned

The NCLAT identified the core issue as priority between two charges: the bank’s registered security interest of 2012 and the State Tax Department’s statutory lien of 2019. It accepted that the State Tax Department qualifies as a secured operational creditor following Rainbow Papers. The dispute, however, was not about classification but about which charge takes precedence.

The tribunal held that the bank’s charge, created in 2012 and registered with the ROC, must prevail. The State Tax Department’s charge, created by operation of law under Section 48 of the GVAT Act, arose only when assessment orders were passed — which, on the facts, occurred at a point later than 2012. The lien was also not registered with the ROC and was not disclosed in the claim form.

On Rainbow Papers, the tribunal distinguished the facts carefully. Rainbow Papers concerned the classification of state tax dues as secured debt in the context of a resolution plan, where no competing prior secured creditor existed and Section 52 enforcement was not in issue. In the present case, a prior registered security interest existed and Section 52 rights had been invoked by the bank. The tribunal held that Rainbow Papers “cannot invalidate the prior secured interest.”

The tribunal also found that the Gujarat High Court’s ruling in Shree Radhekrushna Ginning — relied upon by the appellant — actually supported the liquidator’s position. That judgment confirmed that the statutory charge arises from the date assessment orders are passed. Since the assessment orders creating the GVAT charge were passed after 2012, the bank’s earlier registered charge retained priority.

On the Delhi High Court’s ruling in IFCI Ltd., the tribunal accepted that a charge by operation of law arises under the CST Act and that the State Tax Department is a secured creditor. It held, however, that the question of priority is determined by the date of creation of the charge. The bank’s charge was created in 2012; the statutory charge in favour of the appellant arose in 2019. The circumstances were “totally different” and the judgment was of no assistance to the appellant on the facts.

The tribunal further noted the Paschimanchal ruling’s emphasis that the IBC’s priority scheme cannot be disrupted by statutory dues, reinforcing that the bank’s prior perfected security interest must be respected.

On the liquidator’s conduct, the tribunal found that he had acted in a bona fide manner and strictly in accordance with the Code and applicable regulations. The adverse observations in paragraphs 8 and 9(c), 9(d), and 9(j) of the NCLT’s order dated 30 July 2024 were expunged.

Order

The NCLAT dismissed Company Appeal (AT) (Insolvency) No. 1984 of 2024. It upheld the NCLT Ahmedabad Bench’s direction requiring the State Tax Officer to release the charge on the land at Morbi District, Survey No. 130 paiki, admeasuring 14,678.80 sq. mtrs., and permitting Rajkot Nagarik Sahakari Bank Limited to realise its security interest.

The tribunal declared that the liquidator had neither acted beyond his authority nor committed any procedural irregularity in facilitating the bank’s exercise of rights under Section 52 of the IBC. The adverse observations against the liquidator in paragraphs 8 and 9(c) and 9(j) of the NCLT order were expunged, and no adverse inference or liability was held to attach to the liquidator. All related interlocutory applications were disposed of. No order as to costs was made.