Government agencies don’t have rights on the encumbered property of a company facing liquidation under the Insolvency and Bankruptcy Code, the Hyderabad High Court has ruled.

A Bench of Justices Sanjay Kumar and Amarnath Goud was hearing a case filed by Leo Edibles and Fats against a decision of the Sub-Registrar of Erragadda, Hyderabad. The government official had refused to register immovable property that Leo acquired from VNR Infra under the liquidation process overseen by the National Company Law Tribunal (NCLT).

The Sub-Registrar had claimed that the Income-Tax Department had issued attachment orders on the property before the IBC process took shape.

After the NCLT ruled in its favour, Leo deposited 25 per cent of the bid amount within a day, and was issued a sale letter by the liquidator. Subsequently, Leo realised that the building was served with an attachment order by the I-T Department. However, it paid the remaining 75 per cent for fear of default and forfeiture of the sum.

Both the company and the resolution professional wrote to the I-T Department, urging it to lift the attachment order, but the tax department claimed the IBC does not apply to the said property, as its order pre-dated the initiation of liquidation.

On the plea by Leo Edibles, the court held that the amendment to Section 178 (6) of the I-T Act was brought about by Section 247 of the IBC, which excludes the department as a secured creditor once liquidation had been initiated.

Amir Arsiwala, an advocate dealing with insolvency cases said the High Court ruling threw more light on judgement brings in lot more clarity in the entire insolvency proceedings, and clarified makes it clear that the statutory authority cannot to become a secured creditor to claim their dues.

However, he added that the I-T authority could definitely appeal the verdict in the Supreme Court.

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