Resolution Plan Ignoring The Statutory Debt Of The Government Is Liable To Be Rejected: State Tax Officer vs. Rainbow Papers Ltd.*


In a landmark order dated 6th September 2022, the Hon’ble Supreme Court of India (“Hon’ble Supreme Court“) laid down the paramount importance of considering the pending dues of the statutory authorities towards unpaid taxes prior to the acceptance of a resolution plan by the adjudicating authority. The Hon’ble Supreme Court categorically stated that any resolution plan which ignores the debts which are payable to the Government is liable to be rejected. On the question of whether Section 48 of the Gujarat Value Added Tax Act, 2013 (“GVAT“) would be inconsistent with Section 53 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) or not, the Hon’ble Supreme Court held that GVAT was neither inconsistent nor contrary to IBC, and that if any debt owed to the Government is being excluded from the resolution plan, then such a resolution plan “cannot be said to be in conformity with the provisions of IBC”, and the same ought to be rejected by the adjudicating authority.


  1. Rainbow Papers Limited (“Respondent Company“) was involved in the manufacturing of Crafts and Oars in an and outside of Gujarat since 1990.
  2. The State Tax Officer (“Appellant“) had assessed value added tax and central sales tax of an aggregate amount of ₹53,71,65,489/- (Rupees Fifty-Three Crores Seventy One Lakhs Sixty Five Thousand Four Hundred and Eighty Nine only) as due and payable by the Respondent Company under the GVAT to the Sales Tax Authorities. In pursuance thereof, the Appellant in 2016 initiated recovery proceedings and attached certain properties of the Respondent Company.
  3. Neeraj Papers Pvt Ltd. One of the Operational Creditor (OC) of the Respondent Company initiated Corporate Insolvency Resolution Process (“CIRP“) before National Company Law Tribunal, Ahmedabad Bench, which was admitted in September 2017. An Interim Resolution Professional (“IRP“) was appointed and claims were invited from the creditors of the Respondent Company in terms of Section 15 of the IBC (with the last date of submission of claims being 5th October, 2017).
  4. The Appellant filed its claim of approximately ₹47,36,00,000/- (Rupees Forty Seven Crores Thirty Six Lakhs only) after the expiration of the aforementioned time period. The Resolution Professional (“RP“), however informed the Appellant that the entire claim amount of approximately ₹47.36 crores had been waived off. In pursuance of the same, the Appellant challenged the Resolution Plan before the Ahmedabad Bench of the NCLT, contending that the Government dues could not be waived off, and further the Sales Tax Officer was a “Secured Creditor” within the meaning of IBC, however the same was rejected. Thereafter, the Appellant filed an appeal before the National Company Law Appellate Tribunal (“NCLAT“) challenging the order of the NCLT which was again dismissed, aggrieved by this the Appellant presented an appeal before the Hon’ble Supreme Court.

Issue Raised in the Appeal before the Supreme Court

  1. Whether the provisions of IBC and, in particular, Section 53 thereof, overrides Section 48 of GVAT

Contentions of the Appellant

  1. The Appellant argued that since recovery proceedings had been initiated against the Corporate Debtor, the books of accounts of the Corporate Debtor would reflect the pending taxes payable to the State. The Learned Solicitor-General had contended that by overlooking its primary role of properly examining such books of accounts of the Corporate Debtor, the RP had failed its duty. The Appellant further contended that such a Resolution Plan was not in tune with the process established under IBC, and hence was not binding on the State.
  2. The Appellant further highlighted that the meaning of the term ‘Secured Creditor’ as defined under IBC is extensive and broad enough to incorporate all types of security interests, including mortgages, charges, hypothecations, and any other agreements for securing payments for the performance of any duties or obligations therein. The findings of the NCLAT that under section 3(30) and 3(31) of the IBC the State was not a Secured Creditor was erroneous and contrary to the provisions of IBC.
  3. The Additional Solicitor General further argued that merely on the basis that the Appellant was an Operational Creditor does not translate to not being a Secured Creditor. Further, the Appellant made a claim before the RP long before the resolution plan was approved by the Committee of Creditors (“CoC“), yet the RP failed to include the Appellant’s claim in the resolution plan.
  4. It was further argued that IBC clearly states that under section 31 of IBC, the Adjudicating Authority can approve the resolution plan only after such plan (approved by the CoC) meets the requirements for payment to Secured Creditors under section 30(2). When the resolution plan does not meet such requirements as laid down u/s 30(2), then such a plan cannot be approved.

Judgement of the Supreme Court

  1. The Hon’ble Supreme Court accepted the arguments of the Appellant that under section 48 of GVAT, the claim of the Tax Department of the State, would be within the definition of “Security Interest” as set out under Section 3(31) of IBC. In respect of the observation of the NCLT and NCLAT that the claims of the State were made belatedly, the Hon’ble Supreme Court pointed out that under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 – which gives time for the submission of any claims against a Corporate Debtor (with proof) in the time period as provided under the public announcement (under section 15 of IBC), the same was not mandatory but only discretionary.
  2. The Hon’ble Supreme Court held that if any grievance is brought before the Adjudicating Authority regarding the resolution plan, then it was the duty of such Authority to thoroughly examine the resolution plan and check if the same met the criteria laid down under section 30(2) of IBC. A resolution plan not satisfying such criteria would be invalid and binding on the Government, any statutory or other authority, the financial creditors, or other creditors of the Corporate Debtor.
  3. The Hon’ble Supreme Court further emphasized on the term used under section 31(2) for approving or rejecting a resolution plan. While the term “shall” is used for the approval of the resolution plan, the term “may” is used in case of rejecting a resolution plan. Although the statute states that a resolution plan may be rejected, it can also be interpreted that it may not be rejected. Thus, even if the Adjudicating Authority has the power to reject the resolution plan under section 31(2), the Authority must keep in mind that such discretionary power cannot be exercised “arbitrarily, whimsically, or without proper application of mind”.
  4. In the event a resolution plan is not in conformity with the provisions of IBC, then the principle interpretation of the term “may” would change to “shall” as such a plan has to be rejected. If the resolution plan ignores the debt of the Government, the Adjudicating Authority is duty bound to reject such plan. The CoC and other financial creditors cannot secure their own interests and dues at the cost of the pending debt of the Government.
  5. The Hon’ble Supreme Court came to the conclusion that “Section 48 of GVAT is not contrary to or inconsistent with Section 53 or any other provisions of IBC”. As per section 53(1)(b)(ii) of IBC, the Government’s debt is to rank equally with other specified debts. The State being a secured creditor under GVAT, would fall within the ambit of a Secured Creditor u/s 3(30) of IBC, as the definition does not exclude the Government.
  6. The NCLT and NCLAT had erred in law by rejecting the appeals of the Appellant, and further that the RP could not reject the claim of the Appellant solely on the ground of delay in filing.

Analysis of the Judgement

The views of the Hon’ble Supreme Court that any resolution plan which fails to satisfy the requirements of Section 30 (2) of IBC is bound to be rejected, would possibly lead to a massive inflow of various state organizations challenging plans including approved resolution plans, and this will heavily burden the judiciary. The leeway of challenging such plans is afforded to state institutions irrespective of any ongoing dispute regarding the validity of the pending dues or the quantum thereof. Though tax dues are most of the times considered subservient to those of other secured creditors, which is even clear from the bear reading of section 30(4) of the IBC, the Hon’ble Supreme Court in this case was of an opposite view wherein by saying that the taxes must be paid without even considering the value of the entire liquidated company may be a farfetched approach. Furthermore, the Hon’ble Supreme Court also seems to have taken a very liberal approach on allowing time barred claims of the State Government and the interpretation of the term “may” for rejecting a resolution plan u/s 30(2) of IBC. While the object of IBC was revival of companies, going by the observation of the Hon’ble Supreme Court that financial creditors cannot secure their own dues at the cost of statutory dues, this would lead to a preference of liquidation over resolution. The wide ambit given to the definition of “secured creditors” will now include all government authorities. These will have a far-reaching impact on how insolvency resolution progresses in the current environment.


* MANU/SC/1109/2022

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