NCLAT Upholds State Tax Department's Secured Creditor Status in Insolvency Proceedings

Tribunal Affirms Retrospective Application of Supreme Court's Ruling in Rainbow Papers Case, Securing Tax Department's Claims in Sterling Lam Limited Resolution  

In a pivotal decision, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has upheld the classification of the Gujarat State Tax Department's dues as secured debt under Section 48 of the Gujarat Value Added Tax (GVAT) Act, 2003, in the insolvency resolution process of Sterling Lam Limited. The ruling, delivered on November 13, 2025, aligns with the Supreme Court's judgment in the Rainbow Papers Ltd. case, which was applied retrospectively to determine the secured creditor status of the State Tax Department.

The case revolved around the distribution of Rs. 1.31 crores from the proceeds of an approved resolution plan, initially earmarked for the sole financial creditor, Cosmos Co-operative Bank Ltd. The Bank challenged the order of the National Company Law Tribunal (NCLT), Ahmedabad Bench, which directed the Resolution Professional to release the contested amount to the State Tax Department, treating it as a secured creditor.

The appellant bank argued that the adjudicating authority overstepped its jurisdiction by modifying the distribution under an already approved and implemented resolution plan. The bank contended that the plan had attained finality with no challenges from the State Tax Department regarding its classification as an unsecured creditor.

However, the NCLAT dismissed the appeal, underscoring that the adjudicating authority acted within its jurisdiction by ensuring compliance with the Supreme Court's binding precedent in Rainbow Papers. The Tribunal clarified that the adjudicating authority's directive did not alter the resolution plan but ensured its proper implementation in line with judicial precedents.

The NCLAT's judgment highlighted that Section 48 of the GVAT Act creates a statutory charge by operation of law, conferring secured creditor status to the State Tax Department. The Tribunal emphasized that the retrospective application of the Rainbow Papers judgment was obligatory, as it clarified existing legal provisions rather than introducing new law.

The decision reaffirms the legal framework wherein statutory dues, if backed by a charge under applicable state laws, are recognized as secured debts within insolvency proceedings. This ruling is expected to have significant implications for similar cases, aligning insolvency resolutions with statutory protections afforded under state tax laws.

Bottom Line:

Insolvency and Bankruptcy Code, 2016 - Classification of statutory dues under Section 48 of Gujarat VAT Act, 2003 as secured debt upheld - Adjudicating Authority cannot alter approved resolution plan but can ensure proper implementation based on binding judicial precedents.

Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Section 31, Section 53; Gujarat Value Added Tax Act, 2003 Section 48.

Cosmos Co. Op. Bank Ltd. v. Mr. Kailash T. Shah, (NCLAT)(Principal Bench, New Delhi) : Law Finder Doc Id # 2808317