[Pratyush is a student at National Law School of India University, Bangalore.]
Recently, in State Tax Officer (1) v. Rainbow Papers Limited (Rainbow Papers), the Supreme Court of India ruled that if the proposed resolution plan does not take into account the statutory dues payable to a governmental entity, the Adjudicating Authority is bound to reject the said plan. A necessary consequence of this judgment is that if the company is not in a position to pay its statutory dues as part of its debt, it would be compelled to go under liquidation as stipulated under Section 53 of the Insolvency and Bankruptcy Code 2016 (IBC). This position has been criticized by various authors for going against the settled jurisprudence of treating government dues as subordinate to secured creditors. While the judgment obviously merits a review, this article attempts to present a narrower interpretation of the Rainbow Papers judgment such that not every governmental entity claiming a statutory due is equated to the status of a ‘secured creditor’.
Settled Position Prior to the Judgment
Courts/tribunals in India have faced similar situations before wherein they had to consider the priority of statutory dues under customs law, income tax law, etc. as compared to the dues of a secured creditor. In Sundaresh Bhatt v. Central Board of Indirect Taxes and Customs, the Supreme Court had to deal with the position of the Customs Act 1962 (Customs Act) with respect to the IBC, since the Customs Act also created a first charge under its Section 142A. The court in this case ruled that the IBC overrides the Customs Act since it is a more recent statute. Similarly, in M/s Cholamandalam Investment v. the Principal Commissioner, the Madras High Court also refused to accept that the dues of the Income Tax Department can be equated to the dues of a secured creditor. More importantly, in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, the Supreme Court had ruled that all kinds of government dues would fall under the category of operational debt and can be extinguished if they do not form a part of the approved resolution plan. Even the Viswanathan Committee Report on Bankruptcy Law categorically places any amount due to the Central or the State Government below the dues of secured creditors. Hence, there has been consistency in the position of the courts and the framers concerning the position of statutory dues under the IBC.
Dissecting the Ratio
The matter in Rainbow Papers concerned dues under the Gujarat Value Added Tax Act 2003 (GVAT). Section 48 of the GVAT states that tax dues payable to the government “shall be a first charge on the property of such dealer, or as the case maybe, such person.” The court held that Section 48 of GVAT creates a ‘security interest’ as defined under Section 3(31) of the IBC. Moreover, the court also held that the stipulated time period to file a claim under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 is not mandatory but discretionary in nature. Hence, a delay in filing claims could not be the sole reason for rejecting a claim.
Finally, coming to the crux of the matter, the court opined that Section 48 of the GVAT is not inconsistent with Section 53 of the IBC or for that matter any other provision of the IBC. Hence under Section 53, the state dues would be treated as the equivalent of debts owed to secured creditors. In paragraph 57 of the judgment, the Supreme Court noted that a security interest can be created by the operation of law. The point that the court implicitly put forth is that there are two ways through which security interest can be created. First, as noted in Concast Steel And Power Limited v. Mstc Limited, security interests are ordinarily created by agreements and second, after Rainbow Papers, they can be created by a statute. The logic put forth by the court for this position was that the definition of ‘secured creditors’ under the IBC does not expressly prohibit a government body. What the court failed to account for was the fact that the definition of ‘security interest’ under Section 3(31) of the IBC talks about the right created by a transaction. ‘Transaction’ under Section 3(33) of the IBC is defined as an “agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor.” Hence, by the very nature of this definition, security interest would only include a right that is formed owing to a consensual agreement between any two parties. The definition does not provide any scope for a statutory created security interest at all. However, it is seen in the National Company Law Tribunal (NCLT) that all government dues are sometimes argued to be falling under the ratio of Rainbow Papers. The next section attempts to provide clarity regarding this confusion.
Clarification or Dilution?
The Supreme Court in Rainbow Papers has gone against the settled position of law. However, various recent National Company Law Appellate Tribunal (NCLAT) judgments such as Deputy Commissioner State Taxes and Excise v. Sh. Sanjay Gupta and Commissioner of State Taxes and Excise v. Naresh Kumar Sood, Liquidator have relied on the ratio of Rainbow Papers, to rule that government bodies having statutorily created first charges are to be treated as secured creditors under the IBC. This is a stark shift in jurisprudence from the earlier stance of courts where they ruled that IBC would override other statutes and not according government authorities the status of a secured creditor. In light of such a shift in the legal position of the treatment of statutory dues during the insolvency process, it becomes imperative to ascertain the exact scope of the new judgment.
In NRC Limited v. State of Maharashtra, the Bombay High Court stated that Rainbow Papers must be read in context. The approach was somewhat similar to the exercise that the Supreme Court had conducted in the review petition of the Vidarbha judgment where the court stated that a judgment cannot be read like a statute and must only be interpreted in the context of its facts and circumstances. According to the Bombay High Court, the two things that were considered by the judges in Rainbow Papers were first, the charge was created by a statute under the GVAT and second, the claim was put forth to the resolution professional before the resolution plan was approved by the committee of creditors under Section 30(4) of the IBC. Hence, it becomes very clear that the statute should explicitly state if it aims to designate a particular government body as a secured creditor while claiming its dues.
This interpretation was also endorsed by the Chandigarh Bench of the NCLT in the matter of Haryana through Excise and Taxation v. Anup Sood Resolution Professional. In this case, the bench opined that there would be no assumption that a charge by the nature of being statutory in nature would mean that it would be given a priority status. It would have to be argued by the governmental authority on the basis of the statute that it seeks to file its claim under. If the said authority is unable to do so, then the claim would be treated as an operational debt. There can also be another situation wherein the statute creates a first charge but still does not create the position of a secured creditor because of the way the provision has been framed. In Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawachharia, NCLAT Principal Bench, New Delhi was faced with a similar situation. The NCLAT noticed that Section 82 of the Maharashtra Goods and Services Tax Act 2017 while creating a first charge for the government authority created an exception for the IBC and hence the Rainbow Papers judgment would not be applicable in the said case.
Conclusion
The Supreme Court has wandered away from the settled position. Many have argued that such a stance by the court defeats the whole purpose of the priority list under the IBC. Till the time the judgment is either reviewed or overruled, the ratio would essentially mean that the entire corporate insolvency resolution process would have to treat certain kinds of government dues as a priority. This article attempted to show that the judgment was not as grave as has been argued in courts and has been clarified if not diluted by subsequent judgments.
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