Statutory Tax Charges Do Not Create Secured Interest Under IBC: Madras High Court Mandates Removal of Property Attachment in Liquidation

The interplay between statutory tax dues and the provisions of the Insolvency and Bankruptcy Code has been a subject of intense legal debate. A recent landmark ruling by the Madras High Court in the case of Avenue Realty Vs Assistant Commissioner has provided critical clarity on this front. The Court categorically established that a statutory tax charge does not automatically elevate the government to the status of a "secured creditor" under the insolvency framework. Consequently, the Court ordered the removal of an attachment placed by the commercial tax department on a corporate debtor's property, which had been acquired by an auction purchaser during liquidation proceedings.

This comprehensive summary delves into the factual matrix, the core legal issues, the evaluation of judicial precedents, and the profound impact of recent legislative amendments on the priority of government dues.

Factual Background of the Dispute

The subject matter of the dispute revolved around a property originally owned by a corporate debtor, RLS Alloys Pvt. Ltd. Due to financial defaults, an operational creditor, M/s. Foseco India Limited, initiated insolvency proceedings against the corporate debtor. When the resolution process failed to yield a successful resolution plan, the National Company Law Tribunal (NCLT) ordered the liquidation of the company on 14.06.2019 under the provisions of the Insolvency and Bankruptcy Code, 2016.

During the liquidation phase, the official liquidator conducted a public auction. The appellant in the present matter, Avenue Realty, emerged as the highest bidder and successfully purchased the subject property on 24.10.2024.

However, a significant encumbrance existed on the property. The first respondent, representing the Tamil Nadu Value Added Tax (TNVAT) Department, had previously issued an order of attachment on the property on 03.02.2016 to recover tax arrears spanning the assessment years 2007-08 to 2014-15 from the assessee. This attachment was prominently reflected in the jurisdictional Encumbrance Certificate.

The Delayed Claim by the Tax Department

The tax authorities attempted to recover their dues by sending a communication to the liquidator on 10.08.2020, requesting the settlement of sales tax arrears from the sale proceeds. However, the liquidator rejected this claim on 24.08.2020, citing that it was barred by limitation, and advised the department to approach the NCLT for approval.

Simultaneously, the liquidator filed an application before the NCLT to lift the property attachment, which was dismissed. The tax department's subsequent application to admit their delayed claim was also dismissed for non-prosecution by the NCLT on 08.01.2024.