Rajasthan High Court Refuses To Grant Priority of Government Dues Over Debts Due To Secured Creditors

The petitioner/department has pleaded that the company M/s. Punsumi India Ltd. is under liquidation and the Officer Liquidator (OL) had invited claims with regard to outstanding dues against the company. The department had sent its claim via communication and the OL communicated that the claim was not in the prescribed format and the same was time barred and delay was to be condoned by the High Court.

The department submitted its claim before the OL with the documentary evidence and affidavit, and the OL called for certain information from the department, which was responded to by them.

The department has pleaded that they had several communications with the OL to make the entire payment as a preferential claim. The OL informed the High Court that it had declared a 100% dividend and distributed it amongst the workers, and there was no sufficient fund in the credit of the company-in-liquidation. The property had been sold to IFCI, who had distributed the entire amount amongst the secured creditors of the company-in-liquidation.

The department contended that as per Section 47 of the Rajasthan Value Added Tax Act, 2003, first charge of the property was created in favour of the department and a request was made to pay the outstanding amount to the department.

The department submitted that the OL failed to treat the claim of the department as preferential over and above the other claims. As per the statutory first charge under Section 47 of the Rajasthan Value Added Tax Act, 2003, the department was entitled to receive the entire amount as a preferential claim. When the amount was not received, the department was constrained to file an application before the court.

The department contended that, as per erstwhile Section 50 of the Rajasthan Sales Tax Act, 1994, the amount of tax or any other sum payable by a person under the Rajasthan Sales Tax Act was to be the first charge on the property of that person. After the enactment of the Rajasthan Value Added Tax Act, 2003, as per Section 47, the amount of tax or any other sum payable by a person has the first charge on the property and therefore the OL is under bounden duty to release the amount of tax which was due against the company-in-liquidation.

The OL submitted that provisions contained in Section 529A of the Companies Act, 1956 have an overriding effect and have a non-obstante clause. The provisions of the Companies Act will prevail in respect of the company which is wound up. Even if there is a provision in the erstwhile Rajasthan Sales Tax Act, 1994, or the Rajasthan Value Added Tax, 2003, the creditor cannot have preferential treatment in respect of payment and the applicant-department is treated like any other.

The issue raised was with respect to preferential treatment or priority to be accorded to the state claim/crown's debt vis-a-vis the claim of workmen and other secured creditors.

The court noted that Section 529A starts with the non-obstante clause and provides for preferential payments to be made to workmen's dues and debts due to secured creditors.

The court observed that clause (c) of the proviso to sub-section (1) of Section 529 provides that if the due debt of a secured creditor is not realised or the amount of workmen's portion in his security is less, it shall rank pari passu with the workmen's dues for the purposes of Section 529A Companies Act, 1956.

"This Court finds that Section 530 of the Act of 1956 provides for preferential payments in winding up proceedings and the different preferential payments are to be made subject to the provisions of Section 529A of the Act of 1956. As per clause (a) of sub-section (1) of Section 530 of the Act of 1956, all revenues, taxes, cesses, and rates due from the company to the Central or State Government or local authority, the same will be payable within the stipulated time," the court said.

The court said that bare reading of the two relevant provisions i.e. Section 529A and 530 makes it clear that priority has to be given to the workmen's dues in winding up of a Company and debts due to the secured creditor.

"This Court finds that even the preferential payments to the revenues, taxes, cesses, etc. due from the Company in winding up to the Central or the State Government or the local authority, will be subject to the provisions of Section 529A of the Act of 1956. This Court, if accepts the plea of the learned Advocate General, in a way, would be re-writing Section 530 of the Act of 1956 and the same cannot be done by this Court. The legislature-Parliament, if has brought any change in respect of the preferential payment and only the dues of workmen have been given priority, no grievance can be allowed to be raised by any other person including the State. The legislature, if in its wisdom has thought that dues of workmen and other secured creditors are required to be protected, no inference can be drawn that the legislature has caused any discrimination for the States to claim their dues," the court observed.

Case Title: Asstt. Commercial Taxes Officer Versus M/s. Punusumi India Limited

Case No: S.B. Company Application No. 24/2018

Citation: 2022 LiveLaw (Raj) 168

Dated: 12/05/2022

Counsel For Petitioner: Advocate General M.S.Singhvi assisted by Advocates Darsh Pareek & Sheetanshu Sharma

Counsel For Respondent: Advocate Rahul Lodha

Click Here To Read/Download Order