Analyzing The Applicability Of Section 48 Of The GVAT On The Frontier Of Section 53 Of IBC, 2016

The bench held that NCLAT clearly erred in its observation as nothing in section 48 of the GVAT Act is either contrary or inconsistent to anything given under Section 53 of IBC or any other provision therein.

Section 53: The Heart Of The Insolvency And Bankruptcy Code

A waterfall mechanism is laid down by Section 53 of the code according to which the proceed obtained from the sale of the liquidation assets will be distributed. On interpretation, it can be seen that the Secured financial Creditors on a real-time basis stand to get something from the realizations while all the other creditors following them are left dry. The word "something" clearly states that the SFCs are also not able to recover their dues to the full extent. One reason for such a low realization is that the asset value of the corporate debtor is abysmally low as compared to the dues owned by him.

The court in the present case observed that under subsection (1)(b)(ii) of section 53, the debt owed to the secured creditor would also include the state under the GVAT Act, and they have to be equally ranked with specified debts including all the debts on account of the workman's dues for a 24-month period preceding from the commencement of liquidation.

The Conundrum Of Inter-Se Priorities Between Secured Creditors In Liquidation

In another recent case of the Oriental Bank of Commerce v. Anil Anchaila, the ruling of the National Company Law Appellate Tribunal has reanimated the debate surrounding the significance of inter-se priorities among secured creditors. It was held that, in the process of distribution of the amount received from the sale of secured assets, if the security interest of the financial creditor over the assets of the corporate debtor has been relinquished, such secured financial creditor cannot seek priority over other secured creditors.

NCLAT held that after the security has been relinquished, the secured financial creditor is only entitled to receive the sale proceeds on a pro-rata basis with other secured creditors given under section 53 of the IBC.

In the Rainbow paper case, the court delve into the scheme of both the statutes of the GVAT Act and IBC and said that section 3(30) of the IBC defines the term "secured creditors" in whose favor the securities will be credited. And those securities will only be created by law. Pertinent to note here is that the definition of secured creditors does not exclude any government or government authorities. Likewise, the State is a secured creditor under the GVAT Act.

Questioning The Validity Of The Resolution Plan:

The court in the recent case also shed light on the validity of the resolution plans which does not meet the requirements of section 30 (2) of the IBC, it will not be binding on the Central government, state government or any statutory authorities

On the validity of a resolution plan which does not meet the requirements of Section 30(2) of the IBC, the Court held that the same would be invalid and not binding on the Central Government, any State Government, any statutory or other authority, any financial creditor, or another creditor to whom a debt in respect of dues arising under any law for the time being in force is owed.

If the requirements given under Section 31 are fulfilled then the Adjudicating Authority is mandatorily required to approve the resolution plan under section 31 (1). While by virtue of Section 31 (2) the adjudicating authority "may" reject the resolution plan which does not stand to the conform standards given under section 31. Elaborating on this, the court further observed that if the established facts and circumstances are such that discretion is needed in a particular way then it has to exercise its discretion in that particular way. Also, if prima facie the resolution plan is not in conformity with IBC or any law the resolution plan has to be rejected.

The court held that if the Resolution plan ignores the statuary demands it is payable to any state government or legal authorities etc the adjudicating authority is bound to reject such plans. As a consequence, the court observed that the committee of creditors, which might also include the financial institutions or other creditors cannot secure their own dues at the cost of any statutory dues owned by the government or any government authority or any other such dues.

Hence, if a company is unable to pay back its debts included in its statutory dues to the government or any other such authorities and there is no plan which chalks out the dissipation of the debts in a phased manner, uniform proportional reduction the company has to be liquidated and the assets sold should be distributed in the manner stipulated in section 53 of the IBC. Though it can be seen that the decision of NCLAT in Oriental bank has somehow weakened the position of secured financial creditors during the process of liquidation and has exacerbated the dilemma related to inter-se secured financial creditors. To some extent limiting the rights of secured financial creditors at the resolution stage could be justified as to revive the corporate debtor is the focus during resolution processes. But extending this to the later stage of liquidation will affect the creditors as it will deprive them of their valuable property rights.

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