M/S.Avenue Realty (A Partnership Firm) vs. The Assistant Commissioner

Facts

The appellant, M/s. Avenue Realty, purchased property in a public auction conducted under the Insolvency Bankruptcy Code, 2016 (IBC) on 24.10.2024. The property was previously owned by RLS Alloys Private Limited, which was ordered into liquidation by the National Company Law Tribunal (NCLT) on 14.06.2019. The first respondent, the Assistant Commissioner (GST), had passed an order of attachment over the property on 03.02.2016 for tax arrears under the Tamil Nadu Value Added Tax Act, 2006. This attachment was reflected in the Encumbrance Certificate. The appellant sought to quash this attachment order. The learned Single Judge dismissed the writ petition, holding that the tax due constitutes a secured interest and the first respondent is a secured creditor under the IBC. Aggrieved, the appellant filed this writ appeal.

Held

The Court allowed the writ appeal. It held that the clarificatory amendment to Section 3(31) of the IBC, which clarifies that security interest does not include interests created merely by operation of law, supports the interpretation that tax dues cannot be equated with secured creditor dues. The Court noted that the first respondent's claim was not admitted by the Liquidator, was rejected as time-barred, and an application for its restoration was dismissed for non-prosecution. Furthermore, the first respondent had given no objection for the sale of the property. The Court found that the validity of the sale could not be questioned solely based on an attachment reflected in the Encumbrance Certificate when the claim was not decided and not placed before the liquidator within the prescribed time. The Court directed the Sub-Registrar (second respondent) to make an appropriate entry in the Encumbrance Certificate clarifying that the earlier attachment will not operate as a bar for the writ petitioner to deal with the property free from encumbrance. The Court also noted that any success by the respondents in pending appellate proceedings would be subject to modification of this order. The Court did not expressly leave any issue undecided.

Key Issues

1. Whether the attachment order dated 03.02.2016 by the first respondent for arrears under the TNVAT Act, 2006, is binding on an auction purchaser of the property under the IBC, given that the claim was not filed in time by the first respondent before the Liquidator and the property was sold in public auction. Petitioner's Arguments: - The learned Single Judge erred by relying solely on the Supreme Court judgment in State Tax Officer Vs. Rainbow Papers Ltd. without considering other Supreme Court judgments that distinguish its applicability. - A clarificatory amendment to Section 3(31) of the IBC, assented to on 06.04.2026, clarifies that security interest does not include interests created merely by operation of law, implying retrospective application and invalidating the first respondent's claim as a secured creditor. - Assets of a corporate debtor in liquidation must be dealt with under the "waterfall mechanism" of Section 53 of the IBC, which was not considered by the Single Judge. Revenue/State's Arguments: - Section 42 of the Tamil Nadu Value Added Tax Act, 2006, creates a statutory charge on the properties for tax arrears, as decided in Rainbow Papers's case. - The attachment order, being a statutory right, cannot be raised. - There is no provision in the Registration Act to remove an attachment, as supported by the Supreme Court judgment in Tamil Nadu Mercantile Bank Ltd. Vs. Sub Registrar.