IBC Resolution Plan Can't Ignore Government Dues : Supreme Court Dismisses Review Petitions Against 'Rainbow Papers'

The Supreme Court on Tuesday (October 31) dismissed a batch of review petitions filed against a 2022 judgment which held that the definition of a secured creditor under the Insolvency and Bankruptcy Code (IBC) 2016 included any government or governmental authority and that a resolution plan which ignored dues to the government was liable to be rejected.

A bench comprising Justices AS Bopanna and Justice Bela M. Trivedi was considering five review petitions filed against the 2022 judgment in State Tax Officer v. Rainbow Papers Ltd 2022 LiveLaw (SC) 743 delivered by a bench comprising Justices Indira Banerjee (since retired) and AS Bopanna.

The judgment authored by Justice Bela M. Trivedi stated : “The submissions made by the counsels for petitioners that the court in the impugned judgment had failed to consider the waterfall mechanism as contained in Section 53 and failed to consider other provisions of IBC are factually incorrect. As evident from a bare reading of the judgment, the court had considered not only the waterfall mechanism under Section 53 but also other provisions of IBC for deciding the priority for the purpose of distributing proceeds from the sale as liquidation assets. In view of aforestated legal position, we are of the opinion the judgment sought to be reviewed does not fall within scope and ambit of review. So we're dismissing all the review petitions.”

The review petitioners had relied on the observations made by a coordinate bench in Paschim Anchal Vidyut Vitran Nigam Limited vs. Raman Ispat Private Limited and Others 2023 LiveLaw (SC) 534 to the effect that Rainbow Papers did not notice the 'waterfall mechanism' in Section 53. In Paschim Vihar, a two-judge bench observed that as per the waterfall mechanism, the the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors.

The review bench however did not accept the petitioners' arguments based on Paschim Anchal Vidyut Vitran Nigam by saying that "any passing reference of the impugned judgment made by the Bench of the equal strength could not be a ground for review."

 "It is well settled proposition of law that a co-ordinate Bench cannot comment upon the discretion exercised or judgment rendered by another co-ordinate Bench of the same strength. If a Bench does not accept as correct the decision on a question of law of another Bench of equal strength, the only proper course to adopt would be to refer the matter to the larger Bench, for authoritative decision, otherwise the law would be thrown into the state of uncertainty by reason of conflicting decisions," the bench observed.

For the review petitioners, a battery of senior lawyers appeared :Mr. Harish N Salve, Mr. Naveen Pahwa, Mr. Dhruv Mehta, Mr. Ramji Srinivasan, Mr. Siddharth Bhatnagar, and Mr. Sumesh Dhawan. Senior Advocate Maninder Singh and Advocate Aastha Mehta appeared for the State.

In State Tax Officer v. Rainbow, the Supreme Court held that the National Company Law Appellate Tribunal (NCLAT) had erred in law by rejecting an application by the Government of Gujarat for realising dues towards VAT from the corporate debtor.

The Supreme Court held  that if a resolution plan ignored statutory demands payable to any state government or legal authority, it would be bound to reject the resolution plan. The Court also highlighted that when a company is unable to pay its debts, including its statutory dues to the government or other authorities, liquidation and asset distribution under Section 53 of the IBC should be followed.

The Court had stated, "In our considered view, the Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues."

The Court further emphasized that Section 53 of the IBC does not override Section 48 of the GVAT Act. Section 48 of the GVAT Act does not conflict with or contradict any provisions of the IBC. The Court clarified that debts owed to a secured creditor, which includes the state under the GVAT Act, should rank equally with other specified debts, including workmen's dues for the 24 months preceding the liquidation commencement date.

It added “The State is a secured creditor under the GVAT Act. Section 3(30) of the IBC defines secured creditor to mean a creditor in favor of whom security interest is credited. Such security interest could be created by the operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.”

Consequently, the Supreme Court had set aside the judgment by NCLAT and allowed the appeal.  

Case title: Sanjay Agarwal v. State Tax Officer

Citation: 2023 LiveLaw (SC) 939

Click Here To Read/Download Judgment