Central Excise Authority Not A Secured Creditor Under IBC: NCLAT Chennai

The Bench observed that usage of the words ‘save as provided in’ in Section 11E of Central Excise Act, 1944 is in the nature of an exception, intended to exclude the class of cases, mentioned in Companies Act, 1956, The Recovery of Debts due to Banks and the Financial Institutions Act, 1993, SARFAESI Act, 2002 and IBC. Also, ‘Secured Interest’ as defined under IBC, excludes charges created by Operation of law. Further, the Master Circular No.1053/02/2017-CX, issued by the Ministry of Finance specifies that dues under ‘Central Excise Act, 1944’ would have first charge only after the dues under the Provisions of IBC are recovered.

Background Facts

M/s Samyu Glass Private Limited (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) by the NCLT.

The Resolution Plan submitted by M/s Renganayaki Agencies (“Successful Resolution Applicant/SRA”) was approved by the Committee of Creditors (“CoC”) with 100% majority votes. The NCLT also approved the resolution plan on 13.08.2020.

The Assistant Commissioner of Central Tax (“Appellant”) challenged the order dated 13.08.2020. It was contended that the Corporate Debtor had defaulted in payment of the Central Excise Duty, interest and penalty amounting to Rs. 22,60,32,948/-. However, the Resolution Plan earmarked only 0.13% of the claim amount towards Government dues. Whereas, the Financial Creditor and other Operational Creditors were given a higher percentage of their Claim amounts, which is unfair.

The Appellant placed reliance State Tax Officer v Rainbow Papers Limited, (2022) SCC Online SC 1162, wherein it was held that State is a Secured Creditor under Gujarat Value Added Tax Act 2003 (GVAT Act, 2003).

NCLAT Verdict

The Bench observed that the Central Excise Authority issued Demand Orders to the Corporate Debtor under the Central Excise Act, 1944. Section 11E of the Central Excise Act, 1944 is distinct from the provisions of GVAT Act, 2003.

It was further observed that usage of the words ‘save as provided in’ in Section 11E is in the nature of an exception intended to exclude the class of cases, mentioned in Companies Act, 1956, The Recovery of Debts due to Banks and the Financial Institutions Act, 1993, SARFAESI Act, 2002 and IBC. Also, ‘Secured Interest’ as defined under IBC, excludes charges created by Operation of law. Therefore, the decision in the matter of State Tax Officer v Rainbow Papers Limited, (Supra) are inapplicable to the Appellant’s case.

Further, the Master Circular No.1053/02/2017-CX, issued by the Ministry of Finance, Department of Revenue, Central Board of Excise and Customs, specifies that dues under ‘Central Excise Act, 1944’ would have first charge only after the dues under the Provisions of IBC are recovered.

Accordingly, the Bench held that Central Excise authority is not a secured creditor under IBC.

“Keeping in view, the aforenoted Section of the ‘Central Excise Act, 1944’ is quite different from the ‘GVAT Act, 2003’ and Clause 20 of the aforenoted Circulation, this ‘Tribunal’ is of the considered view that the Appellant herein, cannot be treated as a ‘Secured Creditor’.”

Case Title: The Assistant Commissioner of Central Tax v Mr. Sreenivasa Rao Ravinuthala & Anr.

Case No.: COMPANY APPEAL (AT) (CH) (INS.) NO. 346/2021

Counsel For Appellant: Mr. Raj Kumar Jhabakh, Advocate.

Counsel For Respondents: Mr. T.K. Bhaskar, Sr. Advocate For Mr. Shabeer Ahmed & Ms. Varuni Mohan, Advocates, For R1.

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