From Text to Intent: Evaluating Statutory Interpretation in STO v Rainbow Papers – By Dhruv Kohli and Sanya Singh

From Text to Intent: Evaluating Statutory Interpretation in STO v Rainbow Papers

In the case of Sanjay Kumar Agarwal v. State Tax Officer[1] (hereinafter referred to as “Review Petition”), the apex court dismissed the review petition(s) that were challenged against the decision in State Tax Officer v. Rainbow Papers Private Limited[2] (hereinafter referred to as “Rainbow Papers”) and thus in effect has cemented the position given in Rainbow Papers to be the correct position of law. The authors in the present case would argue and showcase that the decision rendered in Rainbow Papers to classify the tax authorities as a secured creditor is against the basic tenants of statutory interpretation and that the court in the Review Petition ought to have taken note of it. The authors in the present article would firstly describe in brief the decision in Rainbow Papers, following which the authors would showcase how the decision fail on application of varied rules of interpretation. Subsequently, the authors would analyse the Review Petition and conclude by holding that by virtue of the above decision(s), the courts have altered a crucial aspect of IBC.

The Decision in Rainbow Papers

In Rainbow Papers, the primary contention that was raised by the tax authorities was concerning the waiver of their claims in the resolution plan and that a resolution plan which waives government dues in its entirety is against section 30(2) of IBC[3]. It was further contended by the authorities therein that by virtue of section 48 of GVAT Act[4], they would qualify as a secured creditors under IBC.

The primary argument raised by tax authorities which also came to be accepted by the SC was that the definition of a secured creditor under section 3(30) of IBC[5] does not exclude government and by virtue of the inclusive definition of the term transaction under section 3(33) of IBC[6], tax authorities can be classified as a secured creditor under IBC.

The Fallacy in the Decision

The decision in the opinion of the authors is incorrect as it fails to apply the basic rules of interpretation. In the court’s reasoning, the definition of a secured creditor under section 3(30) does not exclude government and hence, there is nothing wrong in classifying the government as a secured creditor. The reasoning given here in the opinion of the authors is partly false. Section 3(30) of IBC defines a secured creditor to “mean a creditor in favour of whom security interest is created”. The term security interest is defined under section 3(31) to “mean a right, title or interest or a claim to property”[7]. A bare perusal of both these definitions showcases that both of them are restrictive in nature as they are a means clause.

In Bharat Cooperative Bank v. Employees Union[8], the SC had observed that the usage of the term means in a definition is to restrict the scope of the term. Usage of the term means in a definition signifies that the term is not only restrictive but also exhaustive in nature[9]. While the court was correct in saying that secured creditor does not exclude government or state, it does not even include them. The definition being restrictive and exhaustive only covers those in whose favour there’s a security interest. The court in para 57 then goes onto say that “security interest for the purposes of section 3(30) could be created by operation of law”. This observation in the opinion of the authors is incorrect as the court herein has very conveniently ignored the restrictive nature given to the definition of security interest under section 3(31).

Further, the SC’s reliance on the term transaction to include the tax authority as a secured creditor is also incorrect. While it is certain that section 3(33) uses the term includes and hence ought to be given an expansive interpretation, the same has to be done by keeping in mind the object of the act[10]. To give the words of a statute their natural or ordinary meaning[11] is a standard rule of construction of statutes. Another important rule of interpretation is of reading the statute as a whole[12]. This is also referred to as the elementary rule of interpretation[13]. By application of the same herein, by no stretch of imagination could the court include the statutory right under section 48 of GVAT under the term transaction.

Further, when the words of a statute are plain, ambiguous, and only susceptible to one meaning, the courts are bound to give effect to that meaning[14]. In the present case, the court should have simply given effect to the plain definition give under section 3(31). Instead, by reading interest by way of operation of law into section 3(31), the court has defeated the intent of the parliament. In a number of both domestic as well as international decisions, it has been squarely held that if a matter ought to have been there but is not there, cannot be supplied by courts as doing so would tantamount to legislation. While security interest can certainly be created by operation of law, it was not upon the courts to read/add it into section 3(31) as by doing so, the SC has ventured into the domain of legislature.

The Review Petition

Before delving into the Review Petition that was entertained by the SC, it is important to briefly consider the law on review. The power to review has been conferred upon the SC by virtue of Article 137 of the Indian Constitution. The SC has also framed the Supreme Court Rules, 2013 wherein, Order XLVII deals with the provisions of a review. Rule 1 of the said order provides that the SC in a civil proceeding may review its own judgment on any of the grounds mentioned under Order XLVII, rule 1 of the CPC. Under CPC, one of the grounds to seek a review is that there ought to be an error or mistake on the face of it.

In BCCI v. Netaji Cricket Club[15], it was observed that rule 1 as mentioned above is wide enough to include a misconception of fact or of law and an application for review on this ground would be maintainable. In Parison Devi v. Sumitri Devi[16], it was held that an apparent error has to be “self-evident” in nature. An error on the face of record should be visible by merely looking at it and should not require a long-drawn process of reasoning[17]. In S. Murali Sundaram v. Jothibai Kannan[18], it was observed that the power of review cannot be exercised when there are 2 opinions possible on the same point.

The petitioners before the SC in the Review Petition primarily placed reliance on the observations made by another bench of the SC in PVVNL v. Raman Ispat[19]. The bench in the Review Petition did not go substantially into the merits of Rainbow Papers. Instead, the primary reasoning for rejection of the review was that observations made by a coordinate bench cannot be grounds to file a review. The bench also notes that the argument that the court in Rainbow Papers did not look at several other provisions of IBC is incorrect and hence dismissed the petition.

It was incorrect for the SC in the Review Petition to hold that the court in Rainbow Papers has taken due note of all the relevant provisions of IBC. As showcased in the previous section, the SC in Rainbow Papers very conveniently ignored the provisions of section 3(31) of IBC and in opinion of the authors, the fallacy as committed in Rainbow Papers was an “error on the face of it”. The court in Rainbow Papers did not consider the restrictive nature of section 3(31) and went onto add a new element into it, which should qualify as an error on the face of it.

Analysis & Conclusion

With the dismissal of the Review Petition, the law as laid down in Rainbow Papers stands supreme. As a result, a prospective resolution applicant would now have to duly consider even government dues and the ambit of the term security interest which the parliament had restricted now stands vastly expanded. Reconsideration of the said position on the judicial side seems to be a far-fetched option. In opinion of the authors, a remedy for this has to come from the legislative side, wherein an express amendment is brought to section 3(31) which specifically excludes security interest created by operation of law. Although, in January 2023[20], the MCA did hint at undoing the position of Rainbow Papers, the lack of action ever since then is reflective of the government’s intent to benefit from this.

References:

[1]Sanjay Kumar Agarwal v. State Tax Officer, (2023) ibclaw.in 140 SC

[2]State Tax Officer v. Rainbow Papers Private Limited, (2022) ibclaw.in 107 SC

[3]Section 30(2), Insolvency and Bankruptcy Code 2016

[4]Section 48, Gujarat Value Added Tax Act 2003

[5]Section 3(30), Insolvency and Bankruptcy Code 2016

[6]Section 3(33), Insolvency and Bankruptcy Code 2016

[7]Section 3(31), Insolvency and Bankruptcy Code

[8]Bharat Cooperative Bank v. Employees, (2007) 4 SCC 685

[9]Commercial Taxation Officer v. M/s Rajasthan Taxchem Limited, (2007) 3 SCC 124

[10]Ramesh Mehta v. Sanwal Chand Sanghvi, (2004) 5 SCC 409

[11]Kehar Singh v. State of Delhi, AIR 1988 SC 1883

[12]Kehar Singh v. State of Delhi, AIR 1988 SC 1883

[13]Attorney General v. Prince Earnest of Hanover, [1956] UKHL J1205-1

[14]Nelson Motis v. Union of India, AIR 1992 SC 1981

[15]BCCI v. Civil Appeal No.11671170 of 2023

[16]Parison Devi .  Sumitri Devi, (1997) 8 SCC 715

[17]Arun Dev Upadhyay v. Integrated Sales Services Limited, 2023INSC610

[18] S. Murali Sundaram v. Jothibai Kannan,  Civil Appeal No.11671170 of 2023

[19]PVVNL v. Raman Ispat, (2023) ibclaw.in 81

[20]Ministry of Corporate Affairs Discussion Paper, available at <https://www.mca.gov.in/content/dam/mca/pdf/IBC-2016-20230118.pdf>