IBC: Government Dues Not Inferior To Secured Creditors' Dues, Says SC

Dues owed to the government rank equally with other debts, including debts on account of workman’s dues, a division bench of the Supreme Court comprising Justice Indira Banerjee and Justice AS Bopanna said.

The apex court rejected the resolution plan for Rainbow Papers Ltd. on the ground that it didn't deal with the state's claim under the Gujarat Value Added Tax Act, 2003.

The court has failed to appreciate several concerns which have the capability of destabilising the insolvency processes under the Insolvency and Bankruptcy Code, Anoop Rawat, partner at Shardul Amarchand Mangaldas & Co., told BQ Prime.

According to Aparna Ravi, partner at Samvad Partners, this judgment represents a significant departure from the current treatment of statutory dues under resolution plans.

Rainbow Papers went into insolvency in July 2016, and had a tax liability of around Rs 47 crore under the Gujarat Value Added Tax Act, 2003.

The state filed claims pertaining to these dues, but the resolution professional waived off the entire amount saying the sales tax office is an operational creditor.

Therefore, the government cannot claim first charge over the property of the corporate debtor.

On appeal, both the insolvency tribunal and the appellate tribunal upheld the decision of the resolution professional. The state’s claims of first charge over the property of Rainbow Papers was rejected at both forums.

Consequently, the case landed before the apex court, where the government argued that the definition of 'secured creditor' under the IBC is broad enough to encompass all forms of security interests—right, title, interest or claim to property.

And under the GVAT Act, the claim of the tax department squarely falls within the definition of 'security Interest'. This makes the state a secured creditor under the IBC, the tax department said.

The bench agreed with the government's contention that its statutory charge under the GVAT Act falls under the purview of 'security interest' defined under the IBC.

Secured creditor is a creditor in favour of whom security interest is created. Security interest means right, title or interest or a claim to the property, created in favour of or provided for a secured creditor by a transaction which secures payment.

Section 53(1)(b)(ii)—which provides for debts owed to a secured creditor—would include the State under the GVAT Act, the apex court said.

Such dues are to rank equally with other specified debts, including debts on account of workman’s dues, it said.

Further, the bench observed that financial institutions and other financial creditors cannot secure their own dues at the cost of statutory dues owed to the authorities or the government.

The admitted position is that government debts rank below secured creditors and workman dues in the order of priority, Harish Chander, former executive vice-president at Edelweiss ARC and currently an independent counsel, said.

It’s certainly a paradigm shift from what the Supreme Court has laid down and the legislature had intended, Senior Advocate Ravi Kadam said.

The apex court rejected the creditors' committee-approved resolution plan for Rainbow Papers, allowing the resolution applicant to submit a fresh plan accounting for statutory dues.