Madras High Court: In a writ appeal filed under Clause 15, Letters Patent Act, a Division Bench of N. Sathish Kumar and M. Jothiraman, JJ., set aside the impugned order affirming the order of attachment made by the authority under the Tamil Nadu Value Added Tax Act, 2006 (TNVAT Act), for VAT dues by the corporate debtor, holding that the authorities under the TNVAT Act are not secured creditors and VAT dues cannot be recovered as if they were dues payable to a secured creditor. Once the National Company Law Tribunal (NCLT) has ordered liquidation under Section 33, Insolvency and Bankruptcy Code, 2016 (IBC) and a statutory liquidator has been appointed, the assets of the corporate debtor are dealt with as per Section 53 IBC, i.e. “waterfall mechanism”. And since amended Regulation 12, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 requires the creditors to submit their claims with proof and the TNVAT Authorities did not file a claim with liquidator in time, the order of attachment is invalid.
Background
In the absence of a successful resolution application, the third respondents (company) were ordered to be liquidated by NCLT on the basis of an application filed by an operational creditor. A liquidator conducted the public auction where the successful bidder purchased the property held by the third respondents which is the subject property. An order of attachment with respect to property for tax arrears under the TNVAT Act was passed by the first respondent as can be seen in the encumbrance certificate. The bidder being a successful auction-purchaser under the IBC proceedings, sought for quashing of the attachment order over properties purchased under public auction, through a writ petition.
Such writ petition was dismissed by a Single Judge Bench, holding that the petitioner (bidder) is to recover the amount from the person to whom amounts were paid by the liquidator through the liquidation process. The tax due is also secured interest as the first respondent also comes under the purview of the secured creditor and hence, secured interest is created. Therefore, the liquidator could not have ignored the rights of the 1st respondent, as the 1st respondent is a secured creditor within the meaning of Section 3(30) IBC.
Challenging the said order, the present writ appeal was filed.
Issue
Whether the charge created under Section 42, TNVAT Act had come within the ambit of Section 3(30) IBC and whether an auction-purchaser, who purchased an asset in liquidation proceedings under the IBC, can seek removal of attachment made by the authority under the TNVAT Act, 2006, for arrears payable by the corporate debtor for Assessment Years 2007-2008 to 2014-2015?
Analysis
It was the finding of the Court that the first respondent requested the resolution professional to consider the amount payable to him and requested the liquidator to settle the sales tax dues to the Government out of the sale proceeds on the property, which was rejected as a time-barred claim as the claim was not filed in time before the liquidator and the application for restoration was also not admitted. First respondent was asked to move to NCLT for approval but such application was rejected for non-prosecution. The liquidator’s application before the NCLT for removal of attachment was also dismissed.
The Court analysed Section 42, TNVAT Act which provides that tax which has become due under Section 21 shall become payable without notice of demand and arrears of such tax would operate as a charge on the properties of the person liable to pay such tax, penalty or interest, and Section 3(30) and (31) IBC which define secured creditor and secured interest, respectively. As per the Court, the impugned judgment held that the authorities under the TNVAT Act are secured creditors and that the VAT dues could be recovered as if they were dues payable to a secured creditor.
The Court also took note of several judgments such as Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657; STO v. Rainbow Papers Ltd., (2023) 9 SCC 545; RPS Infrastructure Ltd. v. Mukul Kumar (2023) 10 SCC 718 and Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P) Ltd., (2023) 10 SCC 60.
The Court said that the Ghanashyam Mishra case was concerned with a stage where a resolution plan had been approved under Section 31 IBC but the present case pertains to a situation where there is no successful resolution application and the NCLT has consequently ordered the Company into liquidation under Section 33 IBC. Once an order of liquidation is passed and a statutory liquidator is appointed, the assets of the corporate debtor are required to be dealt with in accordance with Section 53 IBC, commonly known as the “waterfall mechanism”. The dues are to be paid in the order of priority set out in Section 53 IBC and a non obstante clause under Section 238 IBC gives primacy to the mechanism for distribution of the assets of the corporate debtor in the manner prescribed under the IBC.
The Court noted that in Rainbow Papers case, the VAT authorities had specifically challenged the rejection of their claims by the resolution professional, which was subsequently affirmed by the National Company Law Appellate Tribunal (NCLAT) and the said order was challenged before Supreme Court. Whereas, in the present case, the claims have been rejected by the NCLT. Thus, the orders rejecting their claims cannot be collaterally revived in the present proceedings, as had been done in the impugned judgment.
The Court observed that the impugned judgment overlooked the fact that the decision in Rainbow Papers Ltd. arose under the unamended Regulation 12, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which did not require a statutory authority to file a separate claim, which is not the position after the amendment to Regulation 12. In fact, there was no reference to Regulation 12 at all in the entire judgment. Under the unamended Regulation 12, a creditor was required to separately file a claim and was only required to submit proof in support of such claim and there was no requirement to file a claim in a particular manner. However, after the amendment to Regulation 12, a creditor is now required to submit a claim with proof.
The Court observed that in the impugned judgment, neither the regulation nor its amendment was noticed, whereby sub-regulation (2) of Regulation 12 was amended from “submit proof of claim” to “shall submit claim with proof”. Moreover, it was held in Paschimanchal Vidyut case that the decision in Rainbow Papers case is required to be confined to the facts of that case alone.
Therefore, it was not correct to hold that the claims of the VAT authorities cannot be ignored even if no claims have been made by them before the liquidator, by erroneously placing reliance on Rainbow Papers case which has no application to the facts of the present case.
VAT Authorities as secured creditors – On the point of Section 42, TNVAT Act, the Court stated that a charge is created over the properties of the assessee by operation of law in respect of unpaid/outstanding tax dues. It is a settled position of law that neither a charge nor the resultant order of attachment confers any title over the property of the assessee. The Court went on to examine whether the creation of a charge in favour of the Department by operation of law would elevate it to the status of a secured creditor? Section 3(30) IBC defines a “secured creditor” to mean a creditor in whose favour a security interest is created. Referring to definition of “security interest” under Section 3(31) IBC, the Court held that the definition does not cover cases where a charge is created by operation of law and is restricted to cases where a security interest is created by act of parties.
Upon analysing various judgments and provisions, the Court observed that the Insolvency and Bankruptcy Code (Amendment) Bill 2025, which received the assent of the President on 6 April 2026, clarified that security interests, including statutory charges in respect of Government dues, shall be treated as “secured” only where such interest is created by way of contract, which is contrary to the position laid down in Rainbow Papers case where the statutory dues were accorded the status of secured debts. Thus, the amendment explicitly sought to undo the consequences of the decision in Rainbow Papers and being a clarificatory amendment, it had retrospective application. The clarificatory amendment also supports the interpretation given in Paschimanchal Vidyut Vitran case that tax dues cannot be equated as being akin to the dues payable to a secured creditor.
Therefore, the Court held that when the claim application had not been decided, the property had been brought to public auction, and even the first respondent had also given no objection for the sale of the property, the validity of the sale cannot be questioned. Since the claim had not been decided and was not placed before the liquidator within the prescribed time, merely on the basis of the attachment reflected in the encumbrance certificate, it cannot be said that the claim stands automatically revived.
Decision
The Court held that, in light of Section 238 IBC, the order of attachment must necessarily be set aside. Thus, the impugned order affirming the order of attachment made by the authority under the TNVAT Act, for arrears payable by the corporate debtor was set aside by the Court, holding that the authorities under the TNVAT Act are not secured creditors and VAT dues cannot be recovered as if they were dues payable to a secured creditor.
The Court further stated that in the absence of a successful resolution application, once the NCLT has ordered liquidation under Section 33 IBC and a statutory liquidator has been appointed, the assets of the corporate debtor are required to be dealt with in accordance with Section 53 IBC, i.e. “waterfall mechanism”. Moreover, since the amended Regulation 12, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 now requires the creditors to submit their claims with proof and the VAT authorities did not file a claim with liquidator in time, the order of attachment was held to be invalid and set aside.
Since the attachment was not binding on the Registering Authority (second respondent), they were directed to make an appropriate entry in the encumbrance certificate, clarifying that the earlier attachment will not operate as a bar for the writ appellant to deal with the property free from encumbrance.
The Court further stated that though an appeal against the rejection of the claim petition is pending before the NCLAT and an application for restoration had also been filed, in the event the respondents succeed in the said proceedings before the appellate authority or any higher forum, the orders passed are subject to modification in accordance with the outcome of such proceedings.
[Avenue Realty v. Assistant Commissioner, Srirangam, 2026 SCC OnLine Mad 3739, decided on 17-4-2026]
*Judgment authored by: Justice N. Sathish Kumar
Advocates who appeared in this case:
For Appellants: T. Mohan, Mr. V.G. Suresh Kumar
For Respondents: R. Suresh Kumar, F. Deepak, Mr. Ramasamy Meyyappan
