State Tax Department cannot automatically attach Properties Bought in IBC Liquidation

Avenue Realty successfully bid Rs. 10.35 crore for a property during an e-auction held by the Liquidator of RLS Alloys. The sale was finalized under the Insolvency and Bankruptcy Code (IBC), and a Sale Certificate was issued. However, the victory was short-lived. When the company tried to register the property, they discovered the GST Department had already attached it to recover Rs. 7.29 crore in old debts owed by the previous owner before it went into liquidation.

The purchaser initially lost their case before a Single Judge, who refused to lift the attachment. This led to an urgent appeal before the Division Bench to decide if a buyer should be held responsible for the “sins” of a bankrupt company.

Issue Raised: Can the GST Department maintain an attachment on a property sold via an IBC liquidation process to recover dues that built up before the company went bust?

HC Held: The High Court allowed the appeal, delivering a clear win for auction purchasers. The Court ruled that a liquidation sale under the IBC provides the buyer with a “clean slate” meaning the property is acquired free from all previous legal or financial burdens (encumbrances). The Judges explained that the GST Department is considered an “operational creditor.” Under the law, they cannot simply grab the property to get their money back.

Instead, they must stand in line and submit their claims to the Liquidator, who then pays out debts according to the “waterfall mechanism” set by Section 53 of the IBC. By keeping the attachment active, the department was essentially trying to “cut the line.” The Court ordered the Sub-Registrar to register the sale and commanded the GST Department to lift the attachment immediately. It reaffirmed that the IBC has an “overriding effect,” meaning its rules for a fresh start take priority over the recovery powers of the GST law.

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