The Varying Colors of Dues Payable to the Government in the IBC Regime – A Hue of Trust
Aditya Vyas
Advocate, Supreme Court of India
Introduction
The Indian landscape on the nature of dues payable to the government under the insolvency and bankruptcy regime is somewhat a variable one. Government dues, though not being explicitly defined under the Insolvency and Bankruptcy Code, 2016 (IBC), the determination as to whether a due is a government due or not plays a vital role to ascertain the hierarchy of repayment during the process of liquidation as under Section 53 of IBC. In the waterfall mechanism the government dues are referred to as “any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State”[1]. In plain understanding, this provision focuses on the recipient being the government. On a literal reading of the statute, this provision only focuses on the aspect of the entity receiving money. The provision is silent on the capacity of the government to receive the due. This article will examine the diverse colors given to the dues payable to the government by a corporate debtor in the process of an insolvency proceedings.
Government Dues with Different Facets
A government entity may enter into agreements with other counter parties as a contracting entity; it may impose penalties; it may charge tariffs for its services; it may impose taxes on the income/transactions; it may provide financial assistance and lendings, etc. The government or its undertakings exercise diverse tasks in different capacities. However, whatever be the nature in which a government entity operates, any monetary receipt on the part of the government eventually for a part of the consolidated fund of India/State. In absence of a specific definition under the IBC, there have been instances where the Courts have interpreted a due payable to the government in different categories.
Rainbow Papers – A Divergence to the Norm?
The divergence was tipped off by the case of State Tax Officer v. Rainbow Papers[2] (Rainbow Papers) where under Section 48[3] of the Gujarat Value Added Tax, 2003 (GVAT) providing for a first charge on the property of a dealer in respect of any amount payable by the dealer on account of tax, interest, penalty etc. was noted to be a secured credit stemming from a security interest created by an operation of law. The Hon’ble Supreme Court stepped into the classification of a due payable by the government on the basis of the nature of such receipts as determined under the GVAT which created a first charge in favor of the government.
In such a situation, the main interplay between the laws is not with respect to the hierarchy of debts but as to the nature of debts. It is necessary to determine the nature of debts in order to arrange the same as per the waterfall mechanism enshrined under the IBC. The categorisation of a secured creditor stems from the creation of security interest in favor of a creditor.[4] Security interest, under the IBC, rests on a wide amplitude of aspects which “secures payment or performance of an obligation” against a credit.[5] In plain words, a credit coupled with security interest, is a secured credit.
Section 3(31) IBC is not restrictive in its application, i.e., once the elements mentioned in the section are satisfied qua securing payment or performance of an obligation, any person can be a secured creditor. The definitions under Section 3 of the IBC overarchingly defines creditor which includes, “a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder”. It does not provide an exhaustive list as to who can and who cannot be a creditor, moreso a secured creditor. Once any person who satisfies the requirements of the creation of a security interest against a credit, the same can be classified as a secured creditor. Since there is no embargo on anyone becoming a secured creditor, statutorily, the main issue is even a government entity can wear the hat of a secured creditor subject to satisfying the requirement. According to the judgment of Rainbow Papers, this was held to be permissible since the due payable under Section 48 of GVAT, being a first charge on the property, etc. created a security interest in favor of the government. Additionally, where there is no specific prohibition on the government being a secured creditor and at the same time, there being no specific definition of government dues, the same deems to fall within the ambit of the IBC. The case of Rainbow Papers was during resolution proceedings and not during liquidation, so the applicability of Section 53 of IBC will not kick in as the same is restricted to liquidation. Even otherwise, the judgment of Rainbow Papers made a clarification that there was no conflict between the government dues being lower to the dues payable to the secured creditor and rather it was a matter left for the determination for the Court as to when a due, though being payable to a government entity will fall under the umbrella of a secured credit.
Raman Ispat – Trying to Confine the Divergence?
Whereas the judgment of Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P) Ltd.[6] (Raman Ispat), pertained to liquidation proceedings, where the dues payable to Paschimanchal Vidyut Vitaran Nigam Ltd. (PVVNL) were held as charge against the assets of PVVNL in terms of the agreement. The property of Raman Ispat was attached before the District Magistrate and Tehsildar in pursuance of the agreement, at the request of PVVNL. In this case, PVVNL filed an appeal in the Supreme Court against the order of the NCLAT which refused to interfere with the order of the NCLT that allowed the application filed by the liquidator and directed the releasing of the attachment of the property in favor of the liquidator of Raman Ispat. The judgment of Rainbow Papers was relied upon by PVVNL in order to substantiate the claim of security interest created in favor of PVVNL by the agreement for electricity dues, thereby stating it to be falling in the category of a secured creditor. PVVNL, while claiming that the Electricity Act is a special legislation, the same would prevail over the IBC, especially in the light of Section 173 (Non-Obstante Clause) and 174 (Act to have Overriding Effect) of the Electricity Act. The Hon’ble Supreme Court while dismissing the claim of PVVNL and it’s reliance on the case of Rainbow Papers, noted that in the case of Rainbow Papers, the Court did not notice the waterfall mechanism under Section 53 of the IBC and its context was in terms of resolution process and not liquidation process, moreso when Section 53 specifically deals with the hierarchy of payments during the liquidation process.[7] The judgment of Raman Ispat further went on to note that the waterfall design under Section 53 was not brought to the notice or was missed by the Court.[8] Holding of PVVNL as a secured creditor in the absence of a specific enactment making it a secured creditor would not be possible especially when the Parliament, under Section 53 has mandated distinct treatment of the dues payable during the process of liquidation.[9] The Court while trailing through catena of judgments[10] highlighting where two non-obstante clauses are in conflict, IBC will prevail, noting that the judgment of Rainbow Papers, in its opinion, will be confined to the facts of its own case alone.
A Tangential Inflection of Rainbow Papers and Raman Ispat
From a reading of both the cases, it can be noted that both the judgments operated in their own different spheres of reasoning and logic. Rainbow Papers, more likely dealt with the aspect of classification of a due (whether payable to the government or otherwise) in the broader sphere of being a secured credit or not. This can be noted to stem from two fold of a reasoning; first, for the purpose of being a secured creditor, creation of security interest is a board categorisation and anyone who fulfills the requirements as prescribed under the IBC of having a security interest will be a secured creditor and second, that there is no specific definition of government dues mentioned in the IBC, except its categorisation under Section 53 which is based on any receipt to the government. Once the classification of the dues is done, thereafter the aspect of hierarchy comes into play. Thus, the judgment of Rainbow Papers was more on classification of dues, whether payable to the government or not, as per the statutory mandate. According to the Court, Section 48 of GVAT created a security interest, therefore, the dues payable under the said Section will be a secured credit and the recipient, though being a state will wear the hat of a secured creditor under Section 53. On the other hand in the case of Raman Ispat, the Court only dealt with the conflict of non-obstante clauses between the Electricity Act and the IBC, which is a settled position that IBC will prevail over other law, especially in the terms of Section 238 r/w Section 14. Moreover, in the case of Raman Ispat, the charge created was not by a statutory mandate but by an agreement and from this it has been implicitly laid down that when a government entity creates a charge through an agreement, the same shall not make it a secured creditor in the absence of a statutory mandate. This reasoning has actually confined the contours of Section 3(31) of the IBC which allows creation of security interest through an agreement where the government is a contracting party and the dues are payable to it. However, when there is statutory mandate, the same can be held permissible.
By the above logic, the Court in Rainbow Papers, did not actually fit any due payable to the government in the category of a secured credit, but it specifically noted that since Section 48 of the GVAT creates a security interest, the dues only under the said section will come under the category of a secured credit and not otherwise. Even in the case of Raman Ispat, it was noted that in the absence of a statutory mandate of a due being a secured credit, the same shall be a government due for the purposes of Section 53. According to this understanding in Raman Ispat, the judgment of Rainbow Papers has actually been buttressed since as per the Court Section 48 of GVAT was a statutory mandate creating security interest. Also, the noting of the Court in Raman Ispat that Rainbow Papers will be confined to the facts of its own case is also in harmony as only the dues under Section 48 of the GVAT has been held to be a secured credit and none other. From the above, it can be noted that, as per the present law, wherever a statute creates a security interest in favor of the government, such a due payable under the relevant provision can be considered as a secured credit. However, in most of the cases the adjudication of the court will be required in order to affirm the nature of the due where there are blurry lines.
Government Dues – A Hue of Trust
Apart from the dichotomy of dues payable to the government whether being a secured credit or not, some statutes create a trust in the favor of the government against the advances or loan given to the corporate debtor. One such statute is Section 16B of the National Housing Bank Act, 1987 which mandates that any amount received by the corporate debtor for the purpose of repayment of monies given by the National Housing Bank to the corporate debtor shall be held in trust. In this scenario, NHB has carved out its fund from the corpus of the corporate debtor by the creation of a trust and by this structure, the said monies will not form a part of the corpus of the corporate debtor, but will be the monies held by the corporate debtor for the NHB in trust.
In the case of Union Bank of India v. National Housing Bank & Anr.[11] the NCLAT ruled in the favor of NHB while holding that since the amount held by the corporate debtor, by virtue of Section 16B was held in trust for NHB and was admitted under the resolution plan, the same was held to be third party assets and were required to be paid to NHB. It was also held that the equation of NHB along with other financial creditors in the presence of a specific statutory mandate creating a special class would be a misplaced interpretation.
Another such statue where a flavor of trust exists is Section 29 of the NABARD Act where, in addition to the dues payable to NABARD being held as trust by the borrowing institution, under Clause (3) of Section 29, it has casted a duty upon the liquidator to return the assets as held in trust by the borrowing entity during the process of liquidation, which shall be a valid discharge of the dues and obligation payable towards NABARD.
Conclusion
As noted above, the judgments of Rainbow Papers and Raman Ispat operate in different facets where one is on the aspect of classification of dues payable to the government and the other on the aspect of overriding of the IBC and prevalence of the waterfall mechanism under Section 53. In absence of a specific definition of government dues under the IBC, a harmonious reading of the two judgments is required to be done. This is especially where one cannot lose sight of the fact that the government and its entities/undertakings undertake diverse roles and enter into a diverse set of transactions in various capacities. In such a situation where the government dues have not been defined, its categorisation deems importance wherever there is a specific statutory provision dealing with the due being payable to the government under a special category. If such an accommodation of interpretation is not given by the courts, the same will lead to frustration of the legislative intent in various statutes. More recently in the case of Greater Noida v. Prabhjit Singh Soni[12] (Prabhjit Singh Soni), a three judge bench of the Hon’ble Supreme Court has nudged along the lines of Rainbow Papers where a resolution plan was held not to be in alignment with Section 30(2) of the IBC read with Regulations 37 and 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 on the ground that the resolution plan therein did not specifically placed Greater Noida as a secured creditor in terms of Section 13-A of the U.P. Industrial Area Development Act, 1976 which created a charge in favor of Greater Noida. Though the judgment of Prabhjit Singh Soni did not deal with the issue of classification of dues payable to the government as government due or a secured credit along the lines of Section 53 of the IBC, however, the said observation is indicative of the Court’s intention to treat dues payable to the government as a secured credit wherever there is a statutory intention or a mandate indicating the same. Clearly where no scope of special treatment is provided under any statute for a due payable to the government, the same shall be treated as per Section 53 of the IBC. Nonetheless, it would bring much clarity if the legislature would provide a definition of government dues, however, till the time the same is not there, classification under special statutory circumstances is the only respite.
References
[1] Section 53(1)(e)(i) of the IBC.
[2] (2023) 9 SCC 545.
[3] 48. Tax to be first charge on property.— Notwithstanding anything to the contrary contained in any law for the time being in force, 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.
[4] Section 3(30) of the IBC.
[5] Section 3(31) of the IBC. See Para 29 of Rainbow Papers (2022) ibclaw.in 107 SC.
[7] See Para 49 of Raman Ispat.
[8] Para 49 of Raman Ispat.
[9] Para 50 of Raman Ispat. – Reliance was placed on the case of Member, Board of Revenue v. Anthony Paul Benthall, (1955) 2 SCR 842. – When two words of different import are used in a statute, in two consecutive provisions, it would be difficult to maintain that they are used in the same sense…
[10] Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, (2022) ibclaw.in 103 SC; Duncans Industries Ltd. v. AJ Agrochem, (2019) ibclaw.in 18 SC; Innoventive Industries (supra), CIT v. Monnet Ispat & Energy Ltd., (2018) 18 SCC 786; Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) ibclaw.in 54 SC and Jagmohan Bajaj v. Shivam Fragrances Private Limited, [2018] ibclaw.in 53 NCLAT.
