NCLT Ahmedabad Denies Secured Creditor Priority To State Tax Dept. In Diamond Power Liquidation

The National Company Law Tribunal (NCLT) at Ahmedabad, has recently reiterated that priority in liquidation is governed strictly by Section 53 of the Insolvency and Bankruptcy Code (IBC), while dismissing a plea by the State Tax Officer to be treated as a secured creditor in the liquidation of Diamond Power Transformer Ltd.

“The priority of claims during liquidation is governed strictly by Section 53 and no deviation is permissible based on general statutory charges created under other enactments,” a coram of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma observed.

The State Tax Officer had sought priority under Section 53(1)(b)(ii) of the IBC. It relied on the Supreme Court's ruling in State Tax Officer v. Rainbow Papers Ltd. (2023). It argued that the statutory first charge under Section 48 of the Gujarat Value Added Tax Act constitutes a “security interest” under Section 3(31) of the IBC. On that basis, it claimed parity with other secured creditors.

The application was filed against Nitin Parikh, the liquidator.

The liquidator opposed the plea. He argued that priority under Section 53 is conditional upon relinquishment of security under Section 52. He relied on the Supreme Court's ruling in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. (2023).

The Tribunal examined the State Tax Department's Form-C (claim filed during liquidation) dated November 11, 2022. In Column 8A, the department had stated “No” to relinquishment of security interest.

The bench held that even if a statutory charge amounts to a security interest, priority under Section 53(1)(b)(ii) arises only when the secured creditor relinquishes its security interest to the liquidation estate. Since the applicant had not done so, it was not entitled to priority.

The tribunal further held that the IBC has an overriding effect under Section 238. Any statutory charge under the Gujarat VAT Act stands overridden to the extent of inconsistency.

The application was dismissed. The State Tax Officer's claim will be treated under Section 53(1)(e)(i). The liquidator must distribute proceeds strictly in accordance with the statutory waterfall.