What therefore emerges is that on the facts of the present case the CIRP was undertaken. Claims were invited and the State during the process failed to substantiate it and at the stage of liquidation did not lodge its claim. In light of the judicial pronouncement above the debt therefore did not form a part of the resolution plan and therefore stood extinguished.
In the facts of the present case having failed to assert its claim the State as an operational creditor/stakeholder/secured creditor would have to fall in line as per the “waterfall mechanism” under Section 53 of the IBC.
That once having relinquished its interest under Section 52, the State cannot continue the insistence of maintaining the charge in the revenue records and its claim will have to stand in priority.
Even otherwise as per Section 100 of the Transfer of Property Act, a charge cannot be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of such charge.
Excerpts of the Order;
# 1. By way of this petition under Article 226 of the Constitution of India, the petitioner has prayed for the following reliefs:
“28(A) YOUR LORDSHIPS may be pleased to issue a writ of mandamus writ in the nature of mandamus or any other appropriate writ, order or directions directing the Respondent No. 2 to certify the Entry No. 4454 in revenue record pursuant to the sale of the land in question by way of registered sale deed dated 17.12.2021 in favour of the Petitioner;
B) YOUR LORDSHIPS may be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, order or directions setting aside order dated 05.01.2022 passed by Respondent No. 3 and further set aside the consequential Entry No. 6295 mutated in the revenue record;
BB) YOUR LORDSHIPS may be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, order or directions quashing and setting aside endorsement of Respondent No. 4 – Circle Officer rejecting the Entry 4454 as the same was without hearing the Petitioner and is completely illegal;
# 2. Facts in brief are as under:
2.1 The petitioner is a public limited company incorporated under the Companies Act, 1956. It is engaged in the business of rice processing and exporting and is the world’s largest rice miller.
2.2 The petitioner is an auction purchaser of land being non agricultural land situated at Survey No.113, Village:Varsamedi, Taluka:Anjar, District:Kutch, admeasuring 44,212 square meters. The land in question was purchased by an auction by way of a registered sale deed dated 17.12.2021 from the liquidator of M/s. Gran Electronics Private Limited.
2.3 M/s.Gran Electronics Private Limited has purchased the land from one Neha Ashwin Mehta vide sale deed dated 30.08.2005. The company had obtained permission for bona-fide industrial use as provided under the Bombay Tenancy and Agricultural Lands Act. Since, M/s.Gran Electronics Private Limited was desirous of availing financial facilities, it approached the Indian Overseas Bank for availing financial facilities. In order to secure financial assistance from Indian Overseas Bank and Saraswat Bank an equitable mortgage deed dated 02.06.2006 was created. The loans were repaid and the mortgage deed was released. Desirous of obtaining additional financial facilities, M/s.Gran Electronics Private Limited approached IFCI Limited and secured the said financial facility by executing an indenture of mortgage dated 03.12.2015. Since the company had to close its operations, an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, was filed by one Universal Digital Connect Limited against M/s.Gran Electronics Private Limited. By an order dated 17.01.2020, the National Company Law Tribunal, Mumbai, admitted the petition and ordered moratorium under Section 14 of the Code and appointed an Interim Resolution Professional.
2.4 The Interim Resolution Professional issued a public advertisement dated 25.01.2020 inviting claims as per the provisions of the Code. Interim Resolution Professional was thereafter confirmed as the Resolution Professional. The list of claims with respect to the operational creditors was put forth in the several claims. It is the case of the petitioner that the claim of the sales tax department in the sum of Rs.77,08,69,644/- was rejected. In a meeting held on 30.06.2020, it was decided to liquidate M/s.Gran Electronics Private Limited. An application was accordingly filed and vide order dated 12.02.2021, the National Company Law Tribunal ordered liquidating M/s.Gran Electronics Private Limited and further appointing a liquidator.
2.5 On 19.02.2021, a public announcement was issued by the liquidator calling for the stakeholders to submit their claims on or before 20.03.2021. By a letter dated 23.02.2021 the liquidator had also addressed a letter to the office of the Assistant Commissioner of State Tax asking him to submit its claim. No claim was received from the State Goods and Services Department. Thereafter, an auction sale notice was issued on 14.09.2021 for sale of assets including the land in question. E-auction took place on 01.10.2021 which was extended thereafter. The petitioner participated in the auction proceedings and submitted a bid form on 26.10.2021. He was declared as a successful bidder of the land in question and the buildings. He was informed accordingly and the payments were made by the petitioner to the liquidator.
2.6 The Gram Panchayat – Varsamedi addressed a letter on 12.11.2021 to M/s.Gran Electronics Private Limited to pay outstanding property tax. On 15.11.2021, the petitioner requested the Gram Panchayat to issue No Due Certificate. A registered sale deed was executed on 17.12.2021. The liquidator by letter dated 17.12.2021 informed the Panchayat stating that any dues other than secured, unsecured or of the workman and employees will fall under operational creditors. Vide notice dated 10.01.2022, the SGST department in an absolutely illegal manner intimated attachment of the land in question. A pencil entry bearing no.4454 was mutated in favour of the petitioner. On a request made by the petitioner on 16.02.2022 to certify the entry, the Talati-cumMantri refused to do so on the ground that there existed a charge of the SGST department. By the impugned order dated 05.01.2022, the respondent no.3 has demanded an amount of Rs.56,01,79,095/- towards outstanding GST dues and mutated entry no.6295, inter-alia, recording a charge on the property of the SGST Department. Hence, the petition.
# 3. Mr.Devan Parikh learned Senior Advocate appearing with Mr.S.P.Majmudar learned advocate for the petitioner would make the following submissions:
3.1 That the Insolvency and Bankruptcy Code is divided into two halves. Firstly, Sections 1 to 32 are concerned with reconstruction of the company by a resolution process. Secondly, Section 33 onwards deals with the liquidation if the resolution plan is not possible.
3.2 That IBC is a complete code which deals with solutions on a holistic perspective concerning a company and all stakeholders, irrespective of whether the provision pertains to the resolution plan or the liquidation process which is settled law that all concerns including the company, creditors, purchasers start with a ‘clean slate’. He would submit that as far as the resolution process is concerned, the judgement of the Hon’ble Supreme Court in case of Ghanshayam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, reported in (2021) 9 SCC 657, has dealt with the issue and the Hon’ble Supreme Court held that a successful resolution application cannot suddenly face with undecided claims after a resolution plan submitted by him has been approved.
3.3 Mr. Parikh would also rely on a decision of the Supreme Court in the case of Paschimanchal Vidhyut Vitran Nigam Limited v. Raman Ispat Private Limited and others rendered in Civil Appeal No.7976 of 2012, whereby the Supreme Court has held that the IBC is a complete code. It has explained Section 52 of the Code inasmuch as, a secured creditor can either seek to opt to liquidate his secured assets on his own or to relinquish his security and permit the liquidator to sell the same. A specific procedure has been prescribed under Section 52(3). If the secured creditor liquidates his assets on his own, he can take his money and for the remaining he stands at the bottom of the waterfall mechanism. He would therefore submit that it is conclusively held that Sections 52 and 53 are complete and comprehensive code and all rights even of secured creditors in the secured assets stands diluted and compromised.
3.4 Mr.Parikh would submit that once the property was sold by the liquidator in the public auction and on “as is where is basis”, the secured creditor cannot be allowed to assert an entry for the asset once sold. He would submit that the claim of the SGST department was rejected by the Committee of creditors on 22.02.2020. Pursuant to an auction notice and proceedings thereafter, the petitioner had purchased the property by a registered sale deed dated 17.10.2021. As a purchaser, the petitioner was never aware of any dues. Reading the sale deed, it is very clear that it was categorically decided that the petitioner shall not be responsible to pay any dues to the Government.
3.5 Mr.Parikh would submit that even taking into consideration the position under the general law as per Section 100 of the Transfer of Properties Act, a charge created by operation of law or otherwise is not a mortgage. It is therefore not an interest in the property but only it is a legal or a contractual right to the person in whom the charge is vested. He would submit that as per the proviso to Section 100, a charge cannot be enforced against any property in the hands of the person to whom such property has been transferred for consideration and without any notice of change.
3.6 He would rely on the covenant in the sale deed wherein it was specifically stated that the purchaser will not be responsible to pay any due amount to the Government / Bank / Financial Institution / GST Department etc.
3.7 Mr.Parikh would submit that even as per Section 26E, no person can claim a preexisting charge against the purchaser.
3.8 He would therefore submit that under the IBC or under the general law, the charge under VAT Act 2005 cannot be enforced against the petitioner in the facts of the case.
# 4. Mr.Pranav Trivedi, learned AGP would oppose the petition and make the following submissions:
4.1 He would submit that pursuant to the dues, a charge is created in Section 48 under the Value Added Tax Act, 2003. Charge of the State Government being a crown dues would have precedence on the charge.
4.2 He would submit that once the property was sold on “as is where is basis” the dues of the State Government cannot be wiped out.
4.3 Mr.Trivedi would further submit that the rigors of Section 31 are not applicable to the facts of the present case. Since the insolvency proceedings did not materialize the rights of dues of the State Government did not get extinguished. He would submit that once there was a failure of insolvency resolution process, the rights of the secured creditor are restored.
4.4 With regard to the submission of the learned counsel for the petitioner on “waterfall mechanism” he would submit that in the present case since the liquidator has while distributing the asset sold the asset on ‘as is where is basis’, the rights of the State Government stood secured. They do not stand relinquished even if the distribution is done after following watershed mechanism.
4.5 He would distinguish the judgement in the case of Paschimanchal Vidhyut Vitran Nigam Limited (supra), because in that case the issue was with regards to removal of charge prior to distribution of assets under the watershed mechanism. In the present case, the sale was on an ‘as is where is basis’.
# 5. Considered the submissions made by the learned advocates for the respective parties.
5.1 A recapitulation of facts would indicate that one M/s.Gran Electronics Private Limited had obtained financial facilities from IFCI Limited. Unable to sustain its business, it had closed its operations from February 2019 onwards. An application under Section 7 of the IBC was filed by one Universal Digital Connect Limited and on 17.01.2020 the National Company Law Tribunal (NCLT) admitted the petition wherein moratorium under Section 14 of the Code became operative and an IRP was appointed.
5.2 On 25.01.2020 a public advertisement was issued inviting claims. The advertisement/public announcement was issued under Regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Reforms) Regulations 2016. In accordance with the Regulations a creditor had to provide/submit proofs of claim by 06.02.2020.
5.3 On 22.02.2020 the IRP was confirmed as a Resolution Professional and list of claims with respect to operational creditors were put forth.
5.4 The Sales Tax Department on 30.06.2020 submitted its claim of Rs.77,08,69,644/- which was rejected by the Resolution Professional. After a unanimous vote of the Committee of Creditors to liquidate the company the NCLT Mumbai, on 12.02.2021 passed an order liquidating M/s.Gran Electronics Private Limited (‘GEPL’ for short). The relevant portion of the order of the NCLT reads as under:
“5. The Applicant further submitted that the estimated liquidation value of fixed assets of the Corporate Debtor is Rs.8,59,59,303/- and the total amount of claims admitted by the Applicant against the Corporate Debtor is Rs. 13,20,90,326/-. This apart from the claim of IFCI Limited which is in the amount of Rs.191,09,39,984/- which could not be admitted because of the judgment of the Hon’ble National Company Law Appellate Tribunal (NCLAT) in the matter of Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Limited [Company Appeal (AT) (Insolvency) No. 346 of 2018]. The claim of the Sales Tax Department was also not admitted as requisite documents supporting the claim of Rs. 77,08,69,644/- were not submitted. Further in the said meeting, a plan for the contribution of the liquidation costs was discussed, showcasing the estimated total value of the assets to the tune of Rs.190.08 Lakhs. Thereafter, the RP had informed the CoC that substantial funds in order to meet the said costs were available.”
XXXX
e. That the Corporate Debtor to be liquidated in the manner as laid down in the Chapter by issuing Public Notice stating that the Corporate Debtor is in liquidation with a direction to the Liquidator to send this order to the ROC under which this Company has been registered.
f. All the powers of the Board of Directors, key managerial persons, the partners of the Corporate Debtor hereafter ceased to exist. All these powers henceforth vest with the Liquidator.”
5.5 A public announcement was made on 19.02.2021 under Regulation 12 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016. The stakeholders were called to submit their claims with proof on or before 20.03.2021 to the liquidator. The liquidator addressed a letter on 23.02.2021 to the Assistant Commissioner State Tax to submit claims in accordance with Rule 16 of the Liquidation Process Regulations. However, the State Tax Department did not lodge any claim either physically or through e-mail. An E auction for 01.10.2021 was notified on “AS IS WHERE IS” “AS IS WHAT IS” and “WHATEVER THERE IS BASIS”. By a subsequent corrigendum the date was changed to 29.10.2021. The petitioner on 26.10.2021 offered to bid for the land and building and made a deposit of EMD. On 29.10.2021, the petitioner was declared as a successful bidder and the balance amount was credited in the liquidator’s account. A sale deed was executed on 17.12.2021. A sale certificate was issued by the liquidator of GEPL. The relevant extract of the covenant with respect to past dues reads as under:
“The purchaser will not responsible to pay any due amount to the government / Bank / Financial Institute / Semi Government Office / GST Department / VAT Department / Labour Department / Central Excise Department / Income Tax Department or any other Government Department or to the Gram Panchayat or any other public body or authority in respect thereof since the same will fall under the waterfall mechanism and will be dealt with in the manner specified in Section 53(1) of IBC, 2016.”
5.6 Therefore, there was a clear stipulation thereunder that the purchaser i.e. the petitioner will not be responsible to pay any due amount to the government since the same would fall under the waterfall mechanism and will be dealt with in the manner specified in Section 53(1) of IBC, 2016. Certain other covenants in the sale deed read as under:
“THE VENDOR have not received any notice for acquisition of the said property from the government nor any suit or any recovery proceeding or any proceeding is pending in any court of law or before any competent authority in respect of the said property. The Purchaser shall be entitled to get its name entered in the government record, survey record and Gram Panchayat record of the said property by presenting this deed of sale and the vendor do hereby agree to give statement and signatures whenever and wherever necessary to transfer the said property in the name of the purchaser.”
5.7 Since the revenue record showed a charge of the State Tax Department, the Liquidator addressed a letter on 22.04.2022 to the office of the Deputy Commissioner (SGST). Relevant extracts of the letter read as under:
5.9 The scenario that unfolds on the basis of the aforesaid recapitulation of facts indicates that at the stage of the corporate insolvency resolution process, on the basis of a public announcement, that State Government had lodged its claim but the same was rejected for want of sufficient proof. We have, in the earlier part of this judgement reproduced the relevant portion of the order of the NCLT substantiating the fact that the State at that stage could not prove its claim. Post the initiation of resolution process which failed and it was resolved by the COC to liquidate the company and after such order of the NCLT liquidating the company and appointing the Resolution Professional as the Liquidator, the Liquidator once again called for lodging of claims by way of a public announcement under the liquidation process regulations. To this, as the letter dated 22.04.2022 indicates no claim was lodged in accordance with Regulation 31A of the Liquidation Regulations.
5.10 The relevant regulations, namely Regulations 6, 7, 10, 12 and 13 of Insolvency Resolution Process for Corporate persons read as under:
5.11 Regulations 16, 17, 31, 31A, 32 and 33 of the Liquidation Process Regulations, 2016 read as under:
5.12 Sections 7, 29, 31, 33, 52 and 53 of the IBC read as under:
5.13 Extensive reliance was paid to the decision of the Supreme Court in the case of Ghanshayam Mishra and Sons Private Limited (supra). The Supreme Court in the aforesaid case after an extensive review of the IBC and various decisions rendered thereunder, the Court observed that once the resolution plan is approved, it becomes binding on the stakeholders including creditors. Relevant paragraphs of the judgement read as under:
102. In the result, we answer the questions framed by us as under:
102.1 That once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;
102.2 The 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect;
102.3 Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority Grants its approval under Section 31 could be continued.”
5.14 What therefore emerges is that on the facts of the present case the CIRP was undertaken. Claims were invited and the State during the process failed to substantiate it and at the stage of liquidation did not lodge its claim. In light of the judicial pronouncement above the debt therefore did not form a part of the resolution plan and therefore stood extinguished.
5.15 Admittedly state tax dues and the State would be a claimant as an operational creditor. The claim lodged during insolvency process stood rejected and during the liquidation, no such claim was lodged. This fact is reiterated at the cost of repetition as this would lead us thus to examine the provisions of Section 52 and 53 of the IBC.
5.16 Reading Section 52 would indicate that a secured creditor in the liquidation proceedings may relinquish its security interest to the liquidation asset and receive proceeds on the sale of assets by the liquidation in the manner specified under section 53 or realise its security asset by enforcing its claim or settling it. In the facts of the present case having failed to assert its claim the State as an operational creditor/stakeholder/secured creditor would have to fall in line as per the “waterfall mechanism” under Section 53 of the IBC.
5.17 The decision of the Supreme Court in the case of Paschimanchal Vidhyut Vitran Nigam Limited (supra) appreciating the provisions held as under: . . .
5.18 Reading of the aforesaid paras would indicate that once having relinquished its interest under Section 52, the State cannot continue the insistence of maintaining the charge in the revenue records and its claim will have to stand in priority.
5.19 The argument of the State that since the asset was sold on a condition of “AS IS WHERE IS BASIS”, the charge of the State was rightly recorded is misconceived as the deed already records that the purchaser shall not be liable for payment of any outstanding dues of the government. This too was, in the opinion of the Court a clause that would relieve the petitioner of the liability to pay tax dues. In light of the decision in the case of Ghanshayam Mishra and Sons Private Limited (supra), the petitioner was entitled to a clean slate.
5.20 Even otherwise as per Section 100 of the Transfer of Property Act, a charge cannot be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of such charge. The State moved in to get a charge registered on 15.12.2022 much later.
6. For the aforesaid reasons, petition is allowed. The order dated 05.01.2022 is set aside and so also is the consequential entry no.6295 mutated in the revenue record. The respondents are directed to certify entry No.4454 in the revenue records pursuant to the sale of land in question by registered sale deed dated 17.12.2021. No costs.
-------------------------------------------
