A judgment of the Supreme Court, dated September 6, 2022, in the case of Rainbow Papers Ltd, opens a new chapter with regard to the examination of the sovereign’s claims for tax assessments under the provisions of the Code of the Insolvency and Bankruptcy ( CIB), 2016.
The court overturned the decision of the National Company Law Appeal Tribunal (NCLAT) which held that tax assessments under Gujarat’s Value Added Tax (VAT) proceedings would not constitute a secured debt under the law IBC. Incidentally, the NCLAT also found that the claims had not been submitted on time and should not be considered.
While the aspect relating to the admission of a late claim is more procedural, this article focuses on the question of whether the tax charge has the character of a secured claim.
Article 5(21) of the code defines a operational debt as
“operational debt“means a debt relating to the provision of goods or services, including employment, or a debt relating to the payment of contributions arising under any law now in force and payable to the central government, to any state government or to any authority local ;
Article 3(30) defines a secured creditor as a creditor in whose favor security is provided.
Security interest is defined in Article 31 “as a right, title or interest in or claim to property, created in favor of or furnished to a secured creditor by a transaction which secures the payment or performance of a obligation and includes a mortgage, charge, mortgage, assignment and charge or any other agreement or arrangement securing the payment or performance of any obligation of any person. Provided that this warranty does not include a performance warranty. »
The argument of the Gujarat Revenue Authority was that under the relevant VAT Act, the rights were secured on the assets of the taxpayer and the said Section 58 of the VAT Act should be read in the IBC and, therefore, his claim as a secured creditor was legally constituted.
The court was persuaded to conclude that the tax law provisions treating dues as a secured debt should stand.
This may not be the last word on the matter, as government assessments, including tax assessments, are defined as operational debt under Section 21 of Section 5 of the CIB. The code also defines a secured creditor as one in whose favor a security interest stalls created. Although there is no reason to read in the law that an operational debt cannot be guaranteed in all cases, the design of the CBI would lead one to believe that taxes and the like due to the government were not not intended to receive the status of a secured creditor.
The reasons are fourfold.
The first is that the nature of the items specified in the operational debt where the figure for government contributions indicates that these fall under the category of unsecured debt.
The second is that the creation of security under clause 31 of Article 3 is explicit about a bilateral contract to create such security. It does not take into account a legal provision of another law creating such security.
The third point is that article 53 of the CIB, which gives the mechanism of the cascade in the event of liquidation, does not place the statutory contributions at the top of the pile. He is behind a few other cases. So even the legislator, in his well-conceived plan, chose not to give the typical status that a sovereign debt requires.
The fourth aspect is that the fact that all tax laws provide ipso facto for the securing of property tax is well known to the legislator who enacted the IBC. If the intention was to give tax assessments secured creditor status, it would have been easier to specify this in the law.
The grip of the provisions of the relevant VAT law on the judges was more than logical and the construction of the IBC was largely ignored by the court in reaching this conclusion.
Recently, the court in the ABG Shipyards Ltd case prohibited customs authorities from attempting to seize goods on which duty was owed. The case is not on all fours with this dispute, but the authority of the IBC in situations where the code has been triggered and plans for resolution are made, has been recognized and all other statutory rights, whatever whatever their creation, were felt to be subordinate.
The IBC, as a code, is an island and the jurisdiction of all other laws is excluded in that island.
How did the court come to this conclusion in the Rainbow Papers case? At paragraph 56 of the order, the court held “Under section 53(1)(b)(ii), debts owed to a secured creditor, which would include the state under GVAT, must rank pari passu with other specified debts, including including debts in respect of a worker’s contributions for a period of 24 months preceding the date of the opening of the liquidation.”
The crucial point is that the provisions of Article 53 do not apply to a secured creditor, but only to the part of a debt of a secured creditor who has elected to be treated as unsecured by waiving the right to the security or in the event that the sale of the security is insufficient to satisfy the outstanding debt and the unsatisfied part becomes unsecured.
Certainly the decision will be revisited in future cases and until then the resolution round table which has so far only included bankers and bondholders and the like who are usually businessmen, would have a host of tax collectors among them who might argue that no settlement can be made until the last cake of taxes is paid!
Most likely, the IBC, which has so far only had very uneven success with very few resolutions where financial creditors only had a haircut and not a full tonsure, could end up being completely stuck without that no meaningful resolution occurs.