A division bench of the Hyderabad High Court has ruled that secured creditors will get priority over the proceeds from the liquidation of the assets of a company stemming from action taken under the Insolvency and Bankruptcy Code (IBC).
The bench of Justice Sanjay Kumar and Justice Amarnath Goud held that section 53(1) as enacted by the legislature was clear on the order of priority which would be accorded to different types of creditors under the IBC, once the debtor company went into liquidation.
While workmen’s dues get first priority under section 53, secured creditors come next, and dues to be deposited into the Consolidated Fund of India (CFI), are a distant fifth.
The bench held that dues owed to the Income Tax Department constituted a potential input into the CFI and that it was not for the Court to delve into the legislative intent behind such prioritization.
The Court was hearing a petition filed by Leo Edibles and Fats challenging the sub-registrar Erragadda’s failure to register immovable property which they had purchased after liquidation proceedings were initiated against VNR Infrastructure by a National Company Law Tribunal (NCLT) appointed resolution professional.
The reason they were given was that the IT department had issued attachment orders prior to the initiation of liquidation under the IBC.
Leo edibles had deposited 25 percent of the total amount due as consideration for the building within twenty-four hours and were subsequently issued a letter of sale by the liquidator.
They claimed that it was at this point they found out that the building was encumbered by an attachment order, but paid the outstanding 75 percent, for fear of having to forfeit their deposit.
The buyer and the liquidator subsequently wrote to the IT department seeking a lifting of the attachment order, but to no avail. The department claimed that the IBC did not apply to them in relation to the said property, as the attachment order pre-dated the initiation of liquidation.
Senior counsel M Kiranmayee appearing for the State also argued that the language used under section 178 of the Income Tax (IT) Act 1961, implied that the department was to be treated as a secured creditor and that the amount notified by the income tax officer, must necessarily be set aside by the liquidator.
She relied on a judgment of the Supreme Court in Imperial Chit Funds (P.) Ltd. V/s. Income Tax Officer to make her case.
The Court, however, held that the amendment to section 178 (6) of the IT act which was brought about by section 247 of the IBC, made it clear that the IT department stood excluded as a secured creditor, once liquidation proceedings had been initiated under the Code.
The bench also observed that section 36(3)(b) of the Code was unequivocally clear on the point that “liquidation estate assets” may or may not be in the possession of the debtor, and this included (but not limited to) encumbered assets. Therefore, despite an existing attachment order, there could be no bar to the completion of the sale.
The Court also ruled that section 53 of the IBC applied to the IT department and that they would have to approach the NCLT appointed liquidator with their claims, which would be dealt with based on the priority accorded to them under the said provision.
Senior Counsel S Niranjan Reddy and Vadeendra Joshi appeared for the petitioners.
Read the order