India: Dealing With Claims Of The Statutory/ Government Authorities In A Resolution Plan, In Light Of Rainbow Judgement

I. First charge does not mean super priority: In view of the legal position as laid down by the Hon'ble Supreme Court, certain aspects maybe kept in mind while verifying and evaluating the statutory/ government claims. For instance, in case of the Rainbow Judgment, the Sales Tax Authority had asserted its claim as a secured creditor. This may not be the case with respect to all statutory/ government dues. Secondly, the provisions under the GAVT Act specifically provides for a first charge, with respect to the dues and sum payable under the act, notwithstanding anything to the contrary contained in any law for the time being in force. This may not be case with all governing statues. One such example is the Maharashtra Value Added Tax wherein section 37 creates a first charge for the dues and sum payable under the act. However, it is subject to any provision regarding creating of first charge in any Central Act for the time being in force, thereby ceding priority in favour of the secured creditors. Further, the Central Sales Tax Act 1956, casts an obligation on the liquidator under Section 17, to not part with any assets of the company or the properties in his hands, until he has been notified by the appropriate authority. Upon being notified, the liquidator shall set aside an amount equal to the amount notified. However, the subsequent provision protects payment in favour of secured creditors whose debts under law are entitled to priority of payment over debts due to Government.

On similar lines even the Income Tax Act does not provide for any in-built priority for the tax dues. This has also been confirmed and clarified by the Hon'ble Supreme Court of India in case of Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co². Similarly, the Finance Act 1994, which provides for abuilt-in charge for dues under the Act under section 88³, is also subject to any provisions under any Central or State Act.

Moreover, Section 82 of the CGST Act⁴, although it states that any amount payable by the taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be first charge on the property of such taxable person, the same is subject to the provisions of the Code. This section clearly saves the provisions of the Code. Apart from the aforesaid, Section 93 of the CGST Act which provides for continuation of liability for the tax dues on the survivors, is subject to the provisions of the Code.

What can be derived from the aforesaid discussion is that first and foremost, the position upheld under the Rainbow Judgment was specifically with respect to the GVAT Act and the facts that were present before the Hon'ble Supreme Court. Secondly, the proposition therein cannot be considered as blanket law applicable to all other prevailing Statutory/Governmental dues. Each and every claim of the Statutory/ Government Authorities will have to be individually examined in light of governing statue and especially the provisions dealing with the recovery and providing for statutory charge.

The statue providing for first charge for the statutory dues will not ipso facto be entitled as a priority over the dues of secured creditors, until and unless there is a non-obstante provision similar to that contained in section 48 of the GVAT Act as was the case in the Rainbow Judgment.

II. Inter-se Priority Among Secured Creditors: The next question that may naturally arise is that, even if the relevant statute does not provide for a priority and merely a first charge for the statutory dues, then also will such dues, as per the Rainbow Judgment, be entitled to be treated as a 'secured creditor'?.

Here, it may be seen that the Code under section 30(4), specifically protects inter-se priority between the secured creditor by laying down that "The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor..."

This issue was elaborately examined by the Hon'ble Supreme Court in the context of provisions of section 529 of the Companies Act 1956, in the case of ICICI Bank vs Sidco Leathers Ltd⁵, and it was held that:

The following observations of the Supreme Court are noteworthy in this context:

Even the Report of the Insolvency Law Committee (ILC)⁶, noted this aspect by observing:

ILC further deliberated the issue and observed that the principles stated above that emerge from the ICICI case are also applicable to the issue at hand under section 53 of the Code. Moreover, although this was a case where creditors had not relinquished their security, the principles hold good under the Code even when creditors have relinquished their security. The Code unlike the Companies Act 1956, expressly recognises secured creditors who have relinquished their security as a separate category in section 53(1)(b)(ii) and distinguishes them from unsecured creditors. The Code in a bid to encourage relinquishment, also specifically places secured creditors who have relinquished security higher than unsecured creditors.

The legal position as regards the authority of Committee of Creditor to decide the manner of distribution of resolution plan amount among different stakeholders is well established in a plethora of judgements. However, a limited question of inter-se priority among the creditors at liquidation stage is before the Hon'ble Supreme Court in the matter of Kotak Mahindra Bank Ltd Vs Technology Development Board & Ors⁷, The Apex Court, by way of its order dated 25th September 2021, has stayed the operation of the judgment and Order passed by the National Company Law Appellate Tribunal⁸ ("NCLAT") dated 5th April 2021, in which the NCLAT has disagreed with the view of Adjudicating Authority that the inter-se priorities amongst the Secured Creditors would remain valid and prevail in distribution of assets in liquidation.