October 31, 2023 dismissed the review petition filed seeking the review of the judgment passed in the matter of State Tax Officer v. Rainbow Papers Ltd. (Rainbow Papers) and reaffirmed its decision to hold that statutory authorities having a security interest created under any other legislation will be treated at par with the secured creditors under section 53(1)(b)(ii) of the Insolvency and Bankruptcy Code, 2016 (IBC).

 

The review petition was filed in furtherance to the judgment passed by a coordinate bench in the matter of Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Private Limited & Ors., (Paschimanchal Order) wherein while dealing with similar question of law, the coordinate bench inter alia, held that even if a charge is created by any statute, given a categorical distinction between the dues payable to a secured creditor and governmental dues, any security interest created in favour of any governmental authority shall not be accounted in for the purposes of distribution as per the IBC.

 

The Supreme Court, while upholding its judgment, dismissed the review petitions on the following ground:

  • firstly, the observations of a coordinate bench of the same strength on the correctness or incorrectness of a question of law as decided by another bench of same strength cannot be a ground for review; and
  • secondly, section 53(1) and other provisions of the IBC were duly considered for the arriving at the conclusion.

 

The judgment in Rainbow Papers has had the effect of altering the statutory prescription under the IBC. With this ‘government dues’ – having a lower priority, are equated with ‘secured creditors’ – having a much higher priority in the ‘liquidation waterfall’ as prescribed under the IBC.

 

Apart from being contrary to the legislative intent, which specifically lowered the primacy of government dues, the judgment also appeared to have ignored the provisions of the IBC with regard to its primacy and overriding effect. The said position came to be suitably clarified by the latter judgment of the Supreme Court in the matter of Paschimanchal. It was clarified that Rainbow Papers was ‘limited to its own facts’. Further, it duly recognized Parliament’s intention about the separate and distinct treatment of amounts payable to secured creditors on one hand and due payable to government. However, with the dismissal of the review petition (of Rainbow Papers), the legal position, as it stands now, is that the ‘government dues’ having a ‘statutory charge’ will again be treated at par with secured lenders.

 

This judgment has once again created confusion, as clearly the interests of the financial lenders have been compromised. The situation warrants that the matter / issue be referred to a larger bench so that the issue is settled once and for all.