Case Law Analysis on State Tax Officer Vs. Rainbow Papers Ltd.
Adv. Barkha Bansal
LL.M., Corporate and Financial Law and Policy
1. Introduction
1.1. Statement of Facts and Holding
The respondent company owed Rs.53,71,65,489/- to the Sales Tax authorities in relation to CST and VAT. Proceedings were initiated against the respondent and the appellant attached the property of the respondent as security. The appointed resolution professional who was called upon to confirm the claim of the appellant. The appellant was informed that the entire claim of the appellant has been waived off and this decision of the resolution professional was challenged before the NCLT claiming that the Sales Tax Officer was a secured creditor. NCLT rejected the claim as not done within the due time and because Sales Tax officer do not fall under the meaning of section 3(30) and 3(31) of the Insolvency and Bankruptcy Code 2016 (IBC)[1]. Based on the erroneous decision of the NCLT, the matter came was appealed before the Supreme Court which found that the appellant falls under the meaning of secured creditor under the IBC and also held that section 48 of the The Gujarat Value Added Tax Act 2003[2] (hereafter GVAT Act) overrides section 53 of the IBC 2016[3].
1.2. Legal Issues
The main legal issue dealt with by the Supreme Court was whether the appellant is to be considered a secured creditor under IBC and whether section 48 of GVAT prevails over section 53 of IBC.
1.3. Importance of the Case
The decision of the Supreme Court marks as an important judgement because it clarified the application and interpretation of section 53 of IBC when it comes to debt owed to the government. The decision of the Supreme Court clarified that even the government can be a secured creditor if the nature of the transaction falls under the purview of section 3(30) and (31) of IBC 2016. Such a decision was important to safeguard the rights and interest of the government.
1.4. Objective of the Commentary
The primary objective of this commentary is to understand the legal issues of the case and analyze how the court/tribunal dealt with the legal issues. In addition to that, the commentary provides a critical alternate reasoning that the court could have adopted and analyze the same based on rights of the stakeholders, economic policies and constitutionality of the approach.
1.5. Statement of Conclusion
The commentary concludes that the decision of the Supreme Court was appropriate considering the importance of debt recovery for public bodies and government authorities. Also, the decision clarified how secured creditor is to be construed for the purpose of IBC 2016.
2. Background
2.1. Legal Basis of the case
The primary dispute in this case was in relation to the status of the government or the Sales Tax Officer in relation to being a creditor of the respondent company. Since the respondent company owed a huge amount of money to the government, the entire transaction falls under the purview of the IBC 2016 along with GVAT Act. Based on this the government contended that the decision of the resolution professional and NCLT are wrong and that he respondent needs to satisfy the debt owed to the government.
2.2. Relevant Legal Principles/Provisions
The claim has been brought because NCLT held that section 48 of GVAT Act cannot prevail over section 53 of IBC. Section 48 of GVAT states that tax owed to the government has to be paid on priority. On the other hand, section 53 of IBC provides a hierarchy based on which distribution after liquidation is done where the secured creditors are not prioritized and comes after several other parties. This case also involved section 3(30) and 3(31) of IBC which defined secured creditors and have been used by the Supreme Court to determine whether the government or the Sale Tax officer falls under the meaning of secured creditor.
2.3. Procedural History
After the respondent was place into liquidation, the interim resolution professional waived off the money owed by the respondent to the government on 22nd October 2018. On 20th December 2018, the appellant challenged the decision of the resolution professional before NCLT Ahmedabad bench claiming that the state is a secured creditor and hence entitled to satisfaction of dues. The NCLT held that the application is not maintainable because of late filing and because the government cannot claim the first charge over a property which means that section 48 of GVAT Act does not prevail over section 53 of IBC. The decision of NCLT was appealed before the Supreme Court which held in favour of the government considering it a secured creditor and holding that section 48 of GVAT prevails over section 53 of IBC.
2.4. Explanation of Legal Issues
The primary legal issue was whether the State falls under the category of secured creditor and whether section 48 of GVAT overrides section 53 of IBC based on which the decision of the resolution professional can be set aside. The court also decided on the question whether the rejection of claim by NCLT based on belated filing is correct.
2.5. Arguments of Parties
The appellant argued that the resolution professional failed to properly examine the books of the respondent which would have showed the debt owed to the state by the corporate debtor. Since the resolution professional did not conform with the requirement of IBC, the resolution plan is to be set aside. The appellant also argued that the state falls under the definition of secured creditor and is entitled to realize the payment. The appellant also contended that the reasoning of NCLT that section 48 does not prevail of section 53 of IBC is erroneous and the appellant being an operational creditor does not lose its status if being a secured creditor. The appellant based on the decision of Swiss Ribbons (P) Ltd. v. Union of India[4] argued that the resolution professional only is entitled to verify and process claims rather than accept of reject claims which means the resolution professional did not act in accordance with the procedures laid down under IBC.
2.6. Reasoning of the Tribunal/Court
The tribunal or NCLT rejected the application of the appellant based on late filing and for the government not being a secured creditor. On the other hand, the Supreme Court stated that late filing cannot be a ground for rejecting the entire application since the time period under regulation 12 is only directive and not mandatory. In addition, the resolution plan did not meet the requirements adequately of section 30(2) of IBC and hence cannot be confirmed by the CoC. Moreover, appellant is a secured creditor under the meaning of IBC and a distribution based on erroneous order of the resolution professional cannot stand. Lastly and most importantly, section 48 of GVAT prevails over section 53 of IBC because of the non-obstante clause of section 53.
3. Analysis
3.1. Critical Analysis of Reasoning of the Judge
Justice Indira Banerjee along with A.S Bopanna protected the interest of the government as an operational creditor of the respondent company. Such a decision was important to protect the money of the public that the government collects to progress and fund projects. However, the government also has to collect the due so that further projects can be funded and that public interests are served. Moreover, the Supreme Court gave a correct and more appropriate construction of section 3(30) and (31) because the provision does not exclude any government or public authority to have claims as a secured creditor. A secured creditor means a creditor in favour of whom security interest has been created. The security interest in this regard is the amount of tax owed by the respondent to the Sales Tax officer. The judge reasoned correctly that late filing cannot be a constructive ground for rejection of application because the time period under IBC is just a directive. Moreover, since the resolution professional failed to comply with the requirements of IBC while preparing the resolution plan, such a resolution plan cannot be valid under the meaning of section 30(2) of IBC and hence it cannot be approved by the CoC. The court also stated that the CoC cannot satisfy its debts at the cost of dues owed to the government which makes section 48 of GVAT Act prevail over section 53 of IBC.
3.2. Alternate Intellectual Reasoning
The decision of the Supreme Court cannot be questioned, however, this decision can also be reached using varied reasoning. It is important to understand the a debt owed to the government has to be prioritized because the stakeholder here is the public. For other private financial or operational creditor the stakeholders do not represent the interest of the public. Safeguarding the interest of the public needs to be prioritized in case of distribution after liquidation which otherwise would harm the economy of the country since government bodies will not be able to enforce their claims before the private creditors[5]. Such a situation would be unconstitutional in relation the rights of the public, who is the primary stakeholder in any government body. The fact that section 48 of GVAT Act prevails over section 53 of IBC can also be substantiated by saying that the amount owed to the government and the cause of action arose in Gujarat which means that the state jurisdiction and legislation can prevail over IBC. Moreover, secured creditor under section 3(30) has not be construed regardless of the creditor being an operational or a financial creditor. A creditor is secured when a security interest has been created under the meaning of section 3(31) of IBC and hence, the government here is a secured creditor. Moreover, NCLT misapplied the provisions and did not reject the order of the resolution professional. NCLT should have rejected the order of the resolution professional since the resolution plan did not meet the requirements of IBC and procedure laid down by law. Hence, such a plan cannot be maintained in the court of law and cannot be enforced against a state. The resolution professional and the NCLT erred in their reasoning and judgement because of which all their decisions are to be set aside.
3.3. Critical evaluation of the decision
The decision of the Supreme Court was a landmark judgement because it clarified how the government is also a secured creditor and comes under the purview of claiming the debts owed by the corporate debtors. Such a decision was essential to entitle the government secure a dominant position among the creditors. The decision also clarified the primary duty of a resolution professional does not have adjudicatory powers and is not empowered to accept or reject claims and rather only verify and collate the claims. Therefore, if a resolution plan is made that does not conform with IBC requirements and any other procedure laid down by law, such a resolution plan is invalid and cannot be approved by the CoC.
In the case of,
Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Private Limited & Ors. (2023) ibclaw.in 81 SC , the following points were made which were overlooked in State Tax Officer v. Rainbow Papers Ltd. (2022) ibclaw.in 107 SC :
- In the Rainbow Papers case, section 53’s “waterfall mechanism” was overlooked. Moreover, it was not during liquidation but rather within the framework of a resolution process.
- The waterfall method, which establishes the priority or hierarchy of claims, is implemented by Section 53 of different credit classes. Government obligations are positioned far below those of operational and even unsecured creditors as well as secured creditors. This design was either completely overlooked or not brought to the court’s attention in the Rainbow Papers case. In any case, the Code’s provisions that treat payments owed to secured creditors differently than those due to the federal or state governments have not been acknowledged by the ruling.
- 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 having lower priority.
- The reliance on Rainbow Papers case is of no avail and that judgment has to be confined to the facts of that case alone.
4. Conclusion
4.1. Summary of the Legal Problem
The main legal problem was whether the government is a secured creditor who has the right to claim satisfaction of its debt at first as per the meaning of section 48 of GVAT Act or whether the government is to receive payment as per the hierarchy decided by section 53 of IBC. Excluding the government from the purview of secured creditor would harm the interest of the public and is contrary to section 3(30), 3(31) and several other provisions of IBC.
4.2. Holding of the Court
The Supreme Court held that the State is a secured creditor under section 3(30) of IBC for the purpose of GVAT Act and any delay in filing claim before the resolution professional and the adjudicating authority under IBC cannot be a reason for rejecting an entire claim when the debt is evident and valid.
4.3. Reflection
Based on the decision of the Supreme Court and the implications on Indian laws, I feel that such a clear and transparent decision was necessary. Moreover, there is a need to make the NCLTs more accountable for their erroneous decisions since they are adjunct to high authorities and are quasi judicial bodies. Moreover, the clarify presented by the court in relation the definition of secured creditor was a necessity considering the emerging use and application of IBC since 2016.
5. Bibliography
5. 1. Cases
i. Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17
ii. Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd (2021) 9 SCC 657
iii. Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Private Limited & Ors.,
5.2. Legislations
Insolvency and Bankruptcy Code 2016 (no.15)
The Gujarat Value Added Tax Act, 2003 (no1.)
5.3. Others
Sahiti Annam, ‘Issues Faced by the debt recovery tribunal and ways to ensure speedy adjudication’ (2022) 10(2) International Journal of Creative Research Thoughts 438, 442.
References:
[1] Insolvency and Bankruptcy Code 2016 (no.15) s.3(30) & (31).
[2] The Gujarat Value Added Tax Act, 2003 (no1.) s.48
[3] Insolvency and Bankruptcy Code 2016 (no.15) s.53.
[4] Swiss Ribbons (P) Ltd. v. Union of India (2019) ibclaw.in 03 SC
[5] Sahiti Annam, ‘Issues Faced by the debt recovery tribunal and ways to ensure speedy adjudication’ (2022) 10(2) International Journal of Creative Research Thoughts 438, 442.
