PRIOTITY OF
GOVERNMENT DUES OVER DEBTS DUE TO SECURED CREDITORS.
The
concept of priority of Crown debts over secured was considered in Dena Bank vs Bhikhabhai Prabhudas Parekh & Co[ 2000 (5) SCC 694] and Apex Court observed:
“The principle of priority of Government debts is founded
on the rule of necessity and of public policy. The basic justification for the
claim for priority of state debts rests on the well recognized principle that
the State is entitled to raise money by taxation because unless adequate
revenue is received by the State, it would not be able to function as a
sovereign government at all. It is essential that as a sovereign, the State
should be able to discharge its primary governmental functions and in order to
be able to discharge such functions efficiently, it must be in possession of
necessary funds and this consideration emphasizes the necessity and the wisdom
of conceding to the State, the right to claim priority in respect of its tax
dues. (See M/s. Builders Supply Corporation, Supra). In the same case the Constitution
Bench has noticed a consensus of judicial opinion that the arrears of tax due
to the State can claim priority over private debts and that this rule of common
law amounts to law in force in the territory of British India at the relevant
time within the meaning of article 372 (1) of the Constitution of India and
therefore continues to be in force thereafter. On the very principle on which
the rule is founded, the priority would be available only to such debts as are incurred
by the subjects of the Crown by reference to the States sovereign power of
compulsory exaction and would not extend to charges for commercial services or
obligation incurred by the subjects to the State pursuant to commercial
transactions. Having reviewed the available judicial pronouncements
Their Lordships have summed up the law as under :-
1. There is a consensus of judicial opinion that the
arrears of tax due to the State can claim priority over private debts.
2. The common law doctrine about priority of crown debts
which was recognised by Indian High Courts prior to 1950 constitutes law in
force within the meaning of Article 372 (1) and continues tobe in force.
3. The basic justification for the claim for priority of
State debts is the rule of necessity and the wisdom of conceding to the State
the right to claim priority in respect of its tax dues.
4. The doctrine may not apply in respect of debts due to
the State if they are contracted by citizens in relation to commercial
activities which may be undertaken by the State for achieving socio-economic
good. In other words, where welfare State enters into commercial fields which cannot
be regarded as an essential and integral part of the basic government functions
of the State and seeks to recover debts from its debtors arising out of such
commercial activities the applicability of the doctrine of priority shall be
open for consideration.”
In State
Of Bank Bikaner & Jaipur Vs.
National Iron & Steel Rolling Corporation And Others 1995 Scc (2) 19 Apex Court held that the Section 11- AAAA of the Rajasthan Sales
Tax Act creates a first charge on the property, thus clearly giving priority to
the statutory charge over all other charges on the property including a
mortgage.
It was thus settled position that if a statute creates first charge, it
will operate against the contractual charge created such as mortgage,
hypothecation etc.
When and
Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 came in
force , several banks contended that banks will have priority over the states
first charge because of non obstante clause contained in the Act.
The controversy
was set at rest in favour of States in the judgment of the Apex Court in Central
Bank Of India vs State Of Kerala & Ors 2009 (4) SCC 94, holding that
the DRT Act and Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 does not provide for first
charge in respect of secured debts due to Banks and hence the provisions of
State Sales Tax Laws creating first charge will prevail over the dues
recoverable from debtors.
Income Tax Act 1961
As
held by the Tax Recovery Officerv.Bank of India and 2 Ors,High Court Of Gujarat
At Ahmadabad Special Civil Application
No. 13196 Of 2008 And Special Civil Application No. 888 Of 2009 | 06-09-2011 that :
“But,
in the present case, such issues are not required to be determined in absence
of any provision creating first charge over the property under the Income Tax
Act. There is no such provision laid down under the Income Tax Act, under
which, the Income Tax Department can claim priority over the secured
creditor.”.Income Tax does not provide for priority of dues under the Act to
have priority of dues over contractual charge.
Section
226 & 227 of the Income Tax Act, read with Rule 93 of the Second Schedule, is
claimed by Revenue to create first
charge upon any asset for recovery of unpaid tax. Further, it is claimed that Section
281 goes to the extent of declaring transfer of assets as void if done during
pendency of a proceeding under some circumstances.
II
Schedule of Income Tax Act….
Rule
93. Nothing in this Schedule shall affect any provision of
this Act whereunder the tax is a first charge upon any asset.
In Karnataka
State Industrial Investment Development Corporation Ltd., Versus Commissioner
of Income-Tax, Mangalore & Another 2013 AIR(Kar) 104 it
is held :
“14.
Regard being had to the provisions of the State Financial Corporations Act, it
is clear that a first charge on the property is created clearly giving priority
to the dues of the said statutory authority over all other charges on the
property, on the basis of the mortgage, since the income
tax act, 1961 does not provide for a priority to the statutory
charge over all other charges including mortgage under the ‘SFC Act’.
15. Although, learned counsel for the respondent
points to rule 93 of the second schedule of
the income tax act, 1961, which contemplates that nothing in the said
Schedule shall affect any provision of the Act whereunder tax is a first charge
upon any asset, is unable to refer to any provision of income tax act, whereunder income-tax due can be treated as a first charge on the
assets of the assesses. So also, reference made to Section 281 of the Act too
is not in the direction of establishing creation of a prior charge in favour of
the Income Tax department over the assets of the assessee. Since what is
contemplated under the Section is in relation to certain transactions of
transfer being void during the pendency of an assessment proceeding.
16. Learned counsel for the petitioner is
correct in his submission that in similar though not identical circumstances,
the Division Bench of the High Court of Punjab and Haryana in Axis Bank Ltd.
Vs. Commissioner of Income-tax, Ludhiana, (2012) 17 taxmann.com 139 (Punj.&
Har.) declined to accept the plea of the Revenue that rule 93 of
the second schedule of the income
tax act, 1961 creates a prior charge
over the assets of the assessee even though there is a provisional attachment
order issued under Section 281B of the Act.”
Stock Exchange, Bombay vs. V.S.Kandalgaonkar, in CIVIL APPEAL NO.4354
of 2003 Supreme Court held on 25.09.2014 that :
“24. The first thing
to be noticed is that the Income Tax Act does not provide for any paramountcy of dues by way of income tax.
This is why the Court in Dena Bank’s case (supra) held that Government dues
only have priority over unsecured debts and in so holding the Court referred to
a judgment in Giles vs. Grover (1832) (131) English Reports 563 in which it has
been held that the Crown has no precedence over a pledgee of goods. In the
present case, the common law of England qua Crown debts became applicable by
virtue of Article 372 of the
Constitution which states that all laws in force in the territory of India
immediately before the commencement of the Constitution shall continue in force
until altered or repealed by a competent legislature or other competent
authority. In fact, in Collector of Aurangabad and Anr. vs. Central Bank of India and Anr. 1967 (3) SCR
855 after referring to various authorities held that the claim of the
Government to priority for arrears of income tax dues stems from the English
common law doctrine of priority of Crown debts and has been given judicial
recognition in British India prior to 1950 and was therefore “law in force” in
the territory of India before the Constitution and was continued by Article 372 of the Constitution (at page 861, 862).”
Central Indirect Taxes
Prior
to the amendment of Central Excise Act 1962,Customs Act 1944 and Finance Act
1994, Apex Court had held that Government has no priority over secured
creditors in absence any specific provision in the respective statutes about
first charge in respect of dues under those statutes. Now by Finance Act 2011
all the three Act have been amended as follows establishing supremacy of dues
under respective enactments.
In Tata Metaliks Limited, A Company ... vs The Union
Of India (Uoi) And Ors. ... on 20 February, 2008 : 2008 (126) ECC 183, 2008 (152) ECR 183
(Bom),Bombay High Court held that there is no provision in the Central
Excise Act 1944 And Customs Act 1962 making the dues under
the respective Act has priority over secured creditors. Krishna Lifestyle Technologies Ltd. decided on Feb. 05,
2008 in Writ Petition No. 4171 of 2007 relied upon..
Thereafter,
the Finance Act 2011,amended Central Indirect Taxes Law as under:
CENTAL EXCISE ACT 1944
Section
11E. Liability under Act to be first charge.
Notwithstanding
anything to the contrary contained in any Central Act or State Act, any amount
of duty, penalty, interest, or any other sum payable by an assessee or any
other person under this Act or the rules made thereunder shall, save as
otherwise provided in section 529A of the Companies Act, 1956, (1 of 1956) the
Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of
1993) and the Securitisation and Reconstruction of Financial Assets and the
Enforcement of Security Interest Act, 2002, (54 of 2002) be the first charge on
the property of the assessee or the person, as the case may be. –( Ins. by Act 8 of 2011, s. 51
(w.e.f. 8-4-2011)
CUSTOMS ACT 1962
142A.
Liability under Act to be first charge .- Notwithstanding anything to the
contrary contained in any Central Act or State Act, any amount of duty,
penalty, interest or any other sum payable by an assessee or any other person
under this Act, shall, save as otherwise provided in section 529A of the
Companies Act, 1956, the Recovery of Debts Due to Banks and the Financial
Institutions Act, 1993 and the Securitisation and Reconstruction of Financial
Assets and the Enforcement of Security Interest Act, 2002, be the first
charge on the property of the assessee or the person, as the case may be Ins. by Act 8 of 2011, s. 51
(w.e.f. 8-4-2011)
SERVICE TAX LAW (FINANCE ACT 1994)
88. Liability
under Act to be first charge.—Notwithstanding anything to the
contrary contained in any Central Act or State Act, any amount of 2[tax], penalty, interest, or any other sum
payable by an assessee or any other person under this Chapter, shall, save as
otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956) and
the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51
of 1993) and the Securitisation and Reconstruction of Financial Assets and the
Enforcement of Security Interest Act, 2002 (54 of 2002), be the first charge on
the property of the assessee or the person as the case may be.
LEGAL STATUS
Dues under statutes mainly airse under
Customs Act, Excice Act , Income Tax Act, State Tax Laws such as Sales Tax Acts
, Profession Tax Acts, other Acts under Article 366(29A) of Constitution of
India.
Income Tax Act does not provide for priority of dues under enactments. However, the State Tax laws in
most of the States and Excise, Customs and Service Tax law provide for priority of its dues under those
enactments.
These enactments survive so long as the
Central Legislation do not provide priority to certain creditors under any enactment.This because it is settled
position that in case of conflict between the Central Legislation and State
Legislation, provisions of Central Legislation will prevail.
In
UCO Bank & Another Versus
Dipak Debbarma & Others[2017 (2) SCC 585] Apex Court observed:
In interpreting
Article 246 regard must be had to the constitutional scheme which visualises a
federal structure giving full autonomy to the Union Parliament as well as to
the State legislatures in their respective/demarcated fields of legislation.
The problem may, however, become a little more complex than what may seemingly
appear as the two legislations may very well be within the respective domains
of the concerned legislatures and, yet, there may be intrusion into areas that
fall beyond the assigned fields of legislation. In such a situation it will be
plain duty of the Constitutional Court to see if the conflict can be resolved
by acknowledging the mutual existence of the two legislations. If that is not
possible, then by virtue of the provisions of Article 246(1), the Parliamentary
legislation would prevail and the State legislation will have to give way notwithstanding the fact
that the State legislation is within the demarcated field (List II). This is
the principle of federal supremacy which Article 246 of the Constitution
embodies.
Banking is field of legislation under Item 45
of List I of VII th Schedule to the
Constitution of India. Section 31 B and Section 26E of The Recovery of Debts and Bankruptcy Act, 1993 and
Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act,
2002 respectively has purported to create priority of recovery of
Secured Creditors over Government dues. Though the State tax law provide for
priority in view of Article 246, the Act of Parliament will prevail. Consequently
,it is held by several High Courts that the Secured Creditor being a bank can
recover the sale proceeds out of sale of secured assets in prioriy over
Government dues.
The Recovery of Debts and Bankruptcy Act, 1993 and Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002
By amendment of
the Recovery of Debts and
Bankruptcy Act, 1993, section 31B was inserted. It came in force with effect
from 1.9.2016 as Notified by Government.
"31B Notwithstanding anything contained in any other
law for the time being in force, the rights of secured creditors to realise
secured debts due and payable to them by sale of assets over which security
interest is created, shall have priority and shall be paid in priority over all
other debts and Government dues including revenues, taxes, cesses and rates due
to the Central Government, State Government or Local Authority.
Explanation.- For the purposes of this section, it is
hereby clarified that on or after the commencement of the Insolvency and
Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are
pending in respect of secured assets of the borrower, priority to secured
creditors in payment of debt shall be subject to the provisions of that
Code."
By amendment to Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 , section 26E was inserted
which came in force with effect from 24.01.2020.
"26-E. Priority to secured creditors.-
Notwithstanding anything contained in any other law for the time being in
force, after the registration of security interest, the debts due to any
secured creditor shall be paid in priority over all other debts and all revenues,
taxes, cesses and other rates payable to the Central Government or State Government
or local authority.
Explanation.- For
the purposes of this section, it is hereby clarified that on or after the
commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases
where insolvency or bankruptcy proceedings are pending in respect of secured
assets of the borrower, priority to secured creditors in payment of debt shall
be subject to the provisions of that Code."
These amendments were differently worded in The
Recovery of Debts and Bankruptcy Act, 1993 and Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 though the same
were inserted by one amending Act. Different High Courts have taken consistent
view to the effect that secured creditors shall have priority in realizing its
secured debts over Government dues notwithstanding any thing contained in any
other law for the time being in force. It has been interpreted that secured
creditors will have priority despite the respective legislation have created
first charge on assets of the assessee because of non obstante clause.
List of
important judgments considering the
amended provisions are as follows:
1.
Full Bench
Decision of the Madras High Court in Assistant Commissioner Vs. Indian Overseas
Bank & Ors. AIR 2017 Madras 67 dt 10th Nov.2016;
2.
Axis Bank
Limited vs State of Maharashtra Writ
Petition No 1796 of 2015 dt 7th
March, 2017; 2017 (3) AIR(Bom) R 305
3.
Bank of
Baroda Vs. Commissioner of Sales Tax,
M.P., Indore & Anr. and by the High Court of Madhya Pradesh (2018) 55
GSTR210 (MP )dt 31st
Jan,2018;
4.
Bank Of
Baroda Through Its ... vs State Of Gujarat R/SPECIAL CIVIL APPLICATION NO. 12995 of 2018 dt 16th September, 2019;
5.
Kalupur
Commercial Co-Operative ... vs State Of Gujarat R/SPECIAL CIVIL APPLICATION NO. 17891 of 2018 dt 23rd September, 2019;
6.
ASREC (India)
Limited vs State of Maharashtra Writ Petition No. 1039 of 2017 dt 13th Dec 2019; 2020 (2) BCR 243
7.
Cosmos Co-operative Bank Vs. State of Maharashtra and
others, 2019 SCC OnLine Bom 9527
8.
Medineutrina Pvt. Ltd. (Company) Through its Director -
Dilipkumar Versus District Industries Centre (D.I.C.), Udyog Bhavan, Nagpur
& Others Writ Petition No. 7971 of 2019 18th Feb 2021 ;
All abovestated judgments have taken similar
view to the effect that the State’s dues will have to yield to the dues of the
secured creditors because of non obstante clause in the amended provisions.
9.
However , in
GMG Engineers & Contractor Pvt. Ltd., VS
State of Rajasthan S.B. Civil Writ
Petition No.6872/2017 dt 5th July, 2017, the Rajasthan High Court took a
view that :
“Learned Senior Counsel appearing for the petitioner-
company submits that Section 26E of the amended Act gives priority to the
secured creditor against all other debts and Government dues. In view of the
above, effect of first charge gets nullified. I have considered the aforesaid
argument also and find that Section 26E of the Act of 2002 gives priority to
the secured creditor. It cannot be construed to nullify the statutory first
charge. If the intention of Parliament would have been to nullify statutory first
charge then language of the amended provision would have been as providedin
Workmens' Compensation Act, Employees' Provident Fund Act, etc. The State dues
may be without a provision of first charge and in that situation, the secured
creditors would have priority over the State dues and, accordingly, amended
provision is to be given interpretation. It cannot, however, nullify a
provision for first charge on the property. The first charge on the property
creates right even as per the Act of
1882. It has already been observed that if intention of the Central Government
was to nullify first charge,the language of amended provision would have been
in the manner indicated by the Apex Court in the case of Central Bank of
India(supra). It is otherwise a case where attachment of the property in
pursuance of first charge of the State Government is much prior to the amended
Act of 2002 and 1993 thus those amendments would not apply even if subsequently
auction of the property was made. It is nothing but auction of the property
already attached by the Government, that too, after initiation of proceedings
under th Act of 1956.”
10.
Now recently, in Medineutrina Pvt. Ltd. (Company)
Through its Director - Dilipkumar Versus District Industries Centre (D.I.C.),
Udyog Bhavan, Nagpur & Others Writ Petition No. 7971 of 2019 18th
Feb 2021, Honourable Bombay High Court concurring with the earlier
decisions of the Court , observed thus:
“28. The
language of Section 37(1) of the MVAT Act 2002, has to be viewed in that
contextual background. Section 37(1) of the MVAT Act, 2002, creates a 'First
Charge on the property of the dealer', or as the case may be, person, for any
amount of tax, penalty, interest, sum forfeited, fine or any other sum payable
under the MVAT Act 2002. Though the dues of the Bank as a secured creditor, in
light of the language of Section 26-E of the SARFAESI Act, which has now been
brought into force w.e.f. 1/9/2016, will have priority, that does not have the effect of wiping out the
dues payable under any Central/State/Local Act, where, for the recovery of such
dues, a first charge has been created on the property by such statute, which in
the case of the MVAT Act, 2002, has been so created. It goes without saying
that when a statutory charge is created on the property, the same would go with
the property and would follow the property, in whosoever's hands the property
goes.
29. Thus the
notice of such a statutory charge on the property, is always presumed in law,
to one and all and none can claim ignorance of the same. In AI Champandy
Industries Limited (supra) itself the Hon'ble Apex Court has made a distinction
between an encumbrance as it is understood in the general parlance and an
encumbrance which is a charge on the property and runs with the property and
has held that if by reason of the statute no such burden on the title which
diminishes the value of the land is created, it shall not constitute any
encumbrance.
30. As Section 37(1) of the MVAT Act, 2002, creates a charge on the property, a
successful auction purchaser, thus would hold the property, upon which a
statutory charge has been created, subject to such charge and the property
would thus continue to be liable for any statutory charges created upon it,
even in the hands of such auction purchaser, though for non disclosure of such
charge by the secured creditor, the auction purchaser may sue the secured
creditor and have such redress, as may be permissible in law. This is moreso
for the reason that the priority given
in Section 26-E of the SARFAESI Act, to the Banks, which is a secured creditor,
would only mean that it is first in que for recovery of its debts by sale of
the property, which is a security interest, the other creditors being relegated
to second place and so on, in the order of their preference as per law and
contract, if any, as the case may be. Thus the dues under Section 37(1) of the
MVAT Act, 2002, being a statutory charge on the property, would also be
recoverable by sale of the property, and that puts a liability upon the auction
purchaser, who, in case he wants an encumbrance free title, will have to clear
such dues.”
“36. Thus the
purchase of the property on 'as is where is and what is there is ' basis, would
mean that the property was being had by the auction purchaser, with all its
rights, obligations and liabilities, whatsoever they may be, which would
include, all dues, impositions, restrictions as may have been imposed upon the
same and consequent to acquiring title to the property, cannot be permitted to
quibble out of it, on the alleged plea of not being noticed about any such
liability/imposition. In case the auction purchaser, did not want to have the
property, with its liabilities, he ought to have insisted on having the same
free of all encumbrances, altogether, before bidding for the same. That apart,
it is equally a duty of the auction purchaser, before bidding for the same, to
make inquiries about the impositions upon the property, so that he can have it
free of any encumbrances. After acquiring title to the property, the auction
purchaser cannot be heard to say that he will have the rights associated with
the property and not the liabilities. He takes it lock, stock and barrel, with
everything”
“37…………….. Thus
the obligation to deliver the property to the auction purchaser free from
encumbrances known to the secured creditor includes the responsibility to make
reasonable enquiries about the encumbrances and liabilities and to include such
liabilities in the notice inviting the bids, or if that is not done, in the
reserve price, fixed for sale of the security interest, so that the
encumbrances can be taken care of. This is also spelt out from Rule 9(7) and
(8) of the Security Interest (Enforcement) Rules, 2002”
“38…………….Thus,
information and details regarding any encumbrances upon the property which is
the security interest, which are easily obtainable from the statutory
authorities, ought to be so obtained by the secured creditor as well as the
authorised officer, which then needs to be entered in the notice of sale under
Rule 8 (7) (a) of the SI (E), Rules, 2002, which would result in bringing the
information about any encumbrance to the knowledge of the prospective bidders.
In absence of any such information, an auction purchaser may in the facts of
the given case, raise a claim that the purchase by him was without notice of
any such encumbrance and any charge found subsequent to the confirmation of the
auction, shall on that count, be not enforceable against the auction purchaser,
which may lead to litigation”
“40……….. When
the property is sold on 'as is where is' and 'as is what is' basis, though it
would also be for the bidder, to make reasonable enquiries about the
encumbrances/dues upon the property put to auction, including the status as to
availability of vacant possession, however, the mere mention of 'as is where
is' and 'as is what is', basis or any such phrase, should not absolve the
secured creditor of its obligation to make proper enquiries about other
dues/encumbrances upon the property, to obtain information about which, the
secured creditor has the means and wherewithal and to disclose in the auction
notice about such dues and also the situation about the possession of the property,
so that the bidder is consciously made aware of all the pros and cons about the
property, including the encumbrances/dues/possessory status and thereafter
cannot be heard to raise a plea of not having been informed, afterwards…………..”.
“44. Thus even
in the present case, the dues as claimed by the respondent no.2, being a charge
on the property, under Section 37(1) of MVAT Act, 2002, and the property having
stood attached by the respondent no.2, before the auction, the petitioner,
would be liable to pay the same to the respondent no.2, in order to obtain a
clear and marketable title to the property, having purchased the same on 'As is
where is and whatever there is basis'. In case the petitioner discharges the
aforesaid dues of the respondent no.2, it would then be entitled to a no dues
certificate from the respondent no.2.”
After holding as above the Court gave following
directions:
“The secured
creditor under the SARFAESI Act, therefore must in all cases ensure :
(a) that the property offered as a security interest is free from any
encumbrance whatsoever, at the time when it is so offered initially, to avail
financial credit by the owner/s;
(b) in all such cases, a title verification certificate, by a lawyer, at the
penalty of cancellation of his license to practice, in case such certificate is
found to be false, should be a must, which certificate should also contain a
statement that the lawyer has also verified the suits filing register of the
Court, within whose jurisdiction, the property is situated to ascertain,
whether the same is the subject matter of any litigation and an affidavit from
the borrowers that it is not so;
(c) in all such cases, a valuation certificate, by a government approved, at
the penalty of cancellation of his licence, in case such certificate is found
to be false, should be a must;
(d) immediately upon creation of security interest in its favour for payment of
its dues, the bank must inform all the Central/State/Local Authorities
regarding creation of such security interest, including the Sub-Registrar of
documents and City Survey office concerned;
(e) the bank/secured creditor, should before any property is attached and
auctioned :
(i) enquire with the Central/State/Local authorities regarding any dues on the
property sought to be auctioned and in case such dues are found, to mention the
same in the public notice to be published inviting bids, so that the bidder, is
made aware of the liability and encumbrance, which the property carries with
it.
(ii) where the secured creditor, has taken symbolic possession and is not in
physical possession of the property, the public notice must indicate the nature
of such possession and if the Secured creditor is unable to secure actual
possession, the reason for not getting such possession (whether there is a
tenant/licensee/family member/encroacher etc in occupation of the property, so
that the bidder, is consciously made aware of the situation in which the
property is and makes a conscious offer/bid.
(iii) Where the secured creditor, is aware of Statutory dues the payment of
which is a charge upon the property, the same could be included in the reserve
price, for sale of the property or got deposited from the bidder separately, so
that the encumbrance could be cleared, by the secured creditor.”
(iv) where the secured creditor is aware of encumbrance, the value for
discharging such encumbrance, either can be included in the reserve price or
got deposited from the bidder, so that the encumbrance could be cleared, by the
secured creditor.
It is thus clear that though the sections 31 B and 26E creates priority in
respect of receipt of sale proceeds on
sale of secured assets, the obligation to discharge State’s dues survives and
auction purchaser is liable to discharge the outstanding tax dues.
INSOLVENCY AND BANKRUPTCY CODE
2016 READ WITH COMPANIES ACT 2013
Under the
IBC, in case of default by debtors when Resolution Professional (RP) is
appointed by Tribunal, claims are invited from creditors, financial and
operational creditors. The statutory dues are classifiable as operational
creditors.The Revenue authorities are obliged to file its claims before the RP.
The bids will be invited from Resolution Applicant and rival Applicants file
their plans. If a plan is approved by Committee of Creditors , the same shall
be put before the Tribunal and on approval of the plan , the creditors will be
paid as per the plan approved. Not infrequently, statutory dues is provided
negligible amounts and revenue has no recourse , except appeal, to accept the
amount provided in the Resolution Plan,As per judgment of Apex Court dt
13.04.2021, in the case of Ghanshyam Mishra all liabilities not provided in the
Resolution Plan shall get extinguished in view of amendment in section 31 to
the effect that it shall be binding , inter alia, on the Government. Hence, no
further recovery beyond what is provided in Resolution Plan can be pursued.
However, when the Resolution Plan fails for
what ever reason or such plan is found to be not viable, the Debtor will be liquidated
and the priority of the Revenue is almost at bottom of all creditors and above
unsecured creditors.
Section 53(1) of the Code lays down the following order of priority in which the
proceeds from the sale of the liquidation assets shall be distributed:
1. IRP costs and liquidation costs
2. Workmen’s due for the period of twenty-four months preceding the
liquidation
commencement date and debts owed to a Secured Creditor
3. Wages and any unpaid dues owed to employees other than workmen
4. Financial debts owed to unsecured creditors
5. Any amount due to the Central Government and the State Government
including the
amount to be received on account of the Consolidated Fund of India and the
Consolidated Fund of a State, if any, in respect of the whole or any part
of the period of
two years preceding the liquidation commencement date
6. Any remaining debts and dues
7. Preference shareholders, if any
8. Equity shareholders or partners, as the case may be.
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