Recently, in the case of State Tax Officer c. Rainbow Papers Ltd, 2022 SCC OnLine SC 1162, decided by a bench consisting of Indira Banerjee and AS Bopanna, JJ rescinded the earlier order in which it was held that Section 53 of the Insolvency and Bankruptcy Code would prevail over the GVAT Act as the first claim on the property of the debtor company can only be made by the government. Section 48 of Gujarat Value Added Tax, 2002 provides that the first charge on the property of a concessionaire in respect of any amount payable by the concessionaire on account of tax etc. under the law cannot prevail over article 53 of the Insolvency and Bankruptcy Code. , 2016.
The bench held that the NCLAT had clearly erred in its observation because nothing in Section 48 of the GVAT Act is contrary or inconsistent with anything given under Section 53 of the IBC or any other provision thereof.
Article 53: The core of the Insolvency and Bankruptcy Code
A cascading mechanism is provided for by article 53 of the code according to which the proceeds of the sale of liquidation assets will be distributed. According to the interpretation, it can be seen that real-time secured financial creditors stand to gain from the achievements while all other creditors following them are left dry. The word “something” makes it clear that the SFCs are also unable to recover their full due. One of the reasons for such low realization is that the value of the debtor company’s assets is extremely low compared to the contributions that belong to it.
The court in the present case observed that under sub-paragraph (1) (b) (ii) of Article 53, the debt due to the secured creditor would also include the State under the VAT law , and that they must rank pari passu with the specified debts including all debts in respect of workers’ dues for a period of 24 months preceding the commencement of liquidation.
The conundrum of inter-se priorities between secured creditors in liquidation
In another recent case of Oriental Bank of Commerce v. Anil Anchaila, the decision of the National Company Law Appellate Tribunal has reignited the debate about the importance of inter-se priorities among secured creditors. It has been held that, in the process of distributing the proceeds received from the sale of secured assets, if the financial creditor’s security interest in the corporate debtor’s assets has been released, that secured financial creditor cannot seek priority over other secured creditors creditors.
The NCLAT held that after the surrender of the security, the secured financial creditor is only entitled to receive the sale proceeds pro rata with the other secured creditors given under section 53 of the IBC.
In the Rainbow Paper case, the court looked at the scheme of GVAT and IBC statutes and said IBC Section 3(30) defines the term “secured creditors” in favor of which the securities will be credited. And these titles will only be created by law. It should be noted here that the definition of secured creditors does not exclude any government or governmental authority. Similarly, the state is a secured creditor under the GVAT Act.
Questioning the validity of the resolution plan:
The court in the recent case also shed light on the validity of resolution plans that do not meet the requirements of section 30(2) of the IBC, it will not be binding on the central government, the government of the state or any statutory authority
On the validity of a resolution plan that does not meet the requirements of Section 30(2) of the IBC, the Court held that it would be invalid and non-binding on the central government, any government of State, any statutory or other authority, any financial creditor, or any other creditor to whom a debt in respect of royalties arising under a law then in force is owed.
If the conditions set out in Article 31 are met, the contracting authority is obliged to approve the resolution plan pursuant to Article 31 (1). Whereas under Section 31(2), the adjudicating authority “may” reject the resolution plan that fails to meet the compliance standards set out in Section 31. Elaborating on this point, the court said further observed that if the established facts and circumstances are such that the discretion is necessary in a particular manner, then he must exercise his discretion in that particular manner. Further, if prima facie the resolution plan does not comply with the IBC or any law, the resolution plan must be rejected.
The court held that if the resolution plan ignores the statutory requirements, it is payable to any state government or judicial authorities, etc., the decision-making authority is bound to reject such plans. Accordingly, the court observed that the creditors’ committee, which could also include financial institutions or other creditors, cannot secure its own rights at the cost of any statutory right held by the government or any governmental authority or any other right of this type.
Therefore, if a company is unable to repay its debts included in its legal obligations to the government or any other such authority and there is no plan to dissipate the debts gradually , a uniform proportional reduction, the company must be liquidated and the assets sold must be distributed in the manner stipulated in article 53 of the IPC. Although it can be seen that the decision of NCLAT in Oriental Bank has somewhat weakened the position of secured financial creditors during the liquidation process and has exacerbated the dilemma related to inter-se secured financial creditors. To a certain extent, limiting the rights of secured financial creditors at the resolution stage could be justified, since the recovery of the debtor company is a central concern during resolution processes. But extending this to the later phase of liquidation will hurt creditors as it will deprive them of their valuable property rights.
Views are personal.