The import of Supreme Court Decisions in case of Paschimanchal Vidyut Vitran Nigam Ltd. versus Raman Ispat Private Limited & Ors. and State Tax Officer v. Rainbow Papers Ltd. is that statutory/government dues may constitute secured creditors consequent to specific provision under the applicable law creating a charge on the assets of the corporate debtor. The case of Rainbow Paper (earlier of the two decisions) dealt with Sec. 48 of the Gujarat VAT Act which contains specific provision to the effect that “any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person.” Similar provisions exist under Sec. 82 of the CGST Act, 2017 and Sec 142A of the Customs Act, 1962 and therefore dues under such laws would have the same fate. However, this may not imply an across-the-board application for all statutory dues, particularly under the Income Tax Act which does not appear to contain a similar provision for creating a charge over assets of the taxpayer against dues. The nature of statutory dues, whether secured or otherwise, will need to be determined on a case-to-case basis.
However, the aforesaid two decisions of the Apex Court appear to have created an ambiguity whether statutory dues, even where secured, should be regarded under the category of ‘secured creditor’ [Sec 53(1)(b)] or as a separate class of Government Dues [Sec. 53(1)(e)] as specifically provided in the liquidation waterfall. The ambiguity arises on account of contrary observations of the Court in the aforesaid orders.
In Paschimanchal Vidyut decision (later of the two decisions), the Court observed that: “The Gujarat Value Added Tax Act, 2003 no doubt creates a charge in respect of amounts due and payable or arrears. It would be possible to hold [in the absence of a specific enumeration of government dues as in the present case, in Section 53(1)(e)] that the State is to be treated as a ‘secured creditor’. However, the separate and distinct treatment of amounts payable to secured creditor on the one hand, and dues payable to the government on the other clearly signifies Parliament’s intention to treat the latter differently – and in the present case, having lower priority. As noticed earlier, this intention is also evident from a reading of the preamble to the Act itself.”
Contrary to the above, in Rainbow Papers decision against which a review petition was preferred but dismissed, the Court observed that “Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman’s dues for a period of 24 months preceding the liquidation commencement date.”
The Apex Court has considered the priority of secured statutory dues under the liquidation waterfall differently, and the ambiguity may now only be resolved by consideration of the issue by a larger bench of the Court. Until then, stakeholders will have to confront the uncertainty around the matter.
Having regard to the broader objective of IBC, there is enough literature to suggest that the framework of IBC laws favor waiver of government dues in pursuit of reviving viable businesses and promoting economic growth. However, over time concerns have been raised by statutory authorities that benevolent provisions have been misused and their interests completely ignored in resolution plans. A balance may therefore need to be drawn. Perhaps an option could consider secured government dues higher in priority [Sec 53(1)(b)] in case of liquidation whereas lower in priority [Sec. 53(1)(e)] in case of successful resolution. The IBBI, which has typically been proactive, needs to step in and address the lacuna in law by advancing suitable amendment in law, preferably as early as in the winter session of parliament, to resolve this debate. Leaving this impasse as an exercise of interpretation of law by the SC, which can be rather time consuming, will be counterproductive and only lead to uncertainty, costs, and litigation.
Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com.