[Rakshit Agarwal and Tarun Ashok are third-year B.A. LL.B. (Hons.) student at the National Law School of India University, Bangalore]
The recent judgment by a division bench of the Supreme Court of India in Paschimanchal Vidyut Vitran Nigam Ltd v Raman Ispat Private Limited (‘PVVNL’) has, as we argue, settled the debate on whether statutory dues are to be considered as secured credit for the purposes of the Insolvency and Bankruptcy Code 2016 (‘IBC’). This post will be divided into three parts. The first section lays down a summary of the facts in issue and the ratio of the Court in PVVNL. The second part provides a brief analysis of the current position of law dealing with the treatment of statutory credit. In the final section, we provide a demonstration of the manner in which the judgment clarifies the legal position surrounding this issue. At the outset however, an important caveat is that the scope of the post is limited to situations where the resolution plan has been approved by the Adjudicating Authority. We therefore seek to examine whether an approved resolution plan can be set aside for want of payment of statutory dues.
Paschimanchal Vidyut Vitran Nigam Ltd v Raman Ispat Private Limited – An Analysis
The appellants in this case entered into a contract for the supply of electricity with the respondents, with a condition that the outstanding dues would constitute a charge on the respondent’s assets. However, during the pendency of the contract in 2017, the respondents got admitted into CIRP. In 2018, the Collector issued a notice for the recovery of outstanding dues by an auction of the respondent’s property. This was set aside by the Adjudicating Authority, who also passed a liquidation order. The key issue is whether the Electricity Act 2003, under sections 173-174, which provides for an overriding effect in cases of inconsistencies with any other law including the IBC, would have priority on debt claims under the resolution plan. Taking cognizance of the hierarchy of dues under section 53 of the IBC, where government debts are not only distinguished from secured credit but are also accorded lower priority than unsecured credit, the Court noted that the statutory dues are to be treated as distinct and separate from secured credit.
With respect to the arguments in support of the overriding effect of the Electricity Act, the Court noted that section 238 of the IBC has an overriding effect in general, which would prevail over the non-obstante clauses of the Electricity Act. Thus, the Court dismissed the appeal of the PVVNL that sought to obtain priority for the electricity dues. Before making analytical claims as to the suitability of such a decision, we will proceed to analyze the hierarchy of dues and the current position of law dealing with the treatment of government dues as secured credit.
The Contemporary Treatment of Statutory Dues as Secured Credit
The general principle that has been laid down so far across a wide range of cases involving statutory dues is that the exclusion of their payment has been held to be valid where there is no overriding clause within the specific statute in question. This section will briefly highlight the jurisprudence surrounding the same.
In Ghanshyam Mishra v Edelweiss Construction Company, a three judge bench of the Supreme Court relied on landmark cases such as K Sashidhar v Indian Overseas Bank, Arcelor Mittal v Satish Kumar Gupta and CIT v Monnet Ispat & Energy Ltd to reinforce various crucial principles. First, the commercial wisdom of the Committee of Creditors is of paramount importance and judicial scrutiny of the Resolution Plan is restricted to the touchstones of sections 30(2) and 61(3) of the Code. Second, section 238 of the Code has an overriding effect over other laws in force. It arrived at this conclusion from judicial precedents as well as the Finance Minister’s speech in the Rajya Sabha debates on the 2019 IBC Amendment. Third, it clarified that once the resolution plan is approved by the Adjudicating Authority, all debts to the Central or State Government shall stand extinguished and the plan would have binding effect.
The legislative rationale behind this is the ‘clean slate’ principle – that the resolution applicant should not be confronted with surprise claims that would jeopardize their plans and make them unviable post-resolution. The key takeaway from the court’s harmonious construction of sections 3(10) and section 5(20) and (21) was that a claim regarding statutory dues would fall under the ambit of operational credit/debt and would be dealt with according to the waterfall mechanism envisioned under section 53. It gives preferential treatment to secured credit over statutory dues, thus bringing out the distinction and the need for differential treatment between the two.
Ghanshyam was relied on by the NCLAT in Damodar, which heard a challenge to the Resolution Plan for being violative of section 30(2)(e) of the IBC. The appellants submitted that the West Bengal Electricity Regulatory Commission Regulations, 2013 had been contravened by the Resolution Plan, and therefore the plan was violative of the IBC. The regulation in question mandated the repayment of outstanding dues for the re-connection of electricity services.
The court ruled against them, and cited Ghanshyam to postulate that all statutory dues would stand extinguished if excluded from the approved Resolution Plan. It held that a combined reading of various provisions of the IBC would make it abundantly clear that a Resolution Plan cannot contravene any law if a statutory provision was not overridden by section 238. However, it is clearly evident that section 238 would become redundant if all laws in force have to be followed while formulating the Resolution Plan. Therefore, it concluded that section 238 would have an overriding effect on the Statutory Regulations in the present case.
While the treatment of statutory dues seems to be clear insofar as it is treated as operational credit, the position was complicated by the widely criticized judgment in State Tax Officer v Rainbow Papers, where the Supreme Court determined that the provision for a first charge under section 48 of the Gujarat Value Added Tax Act 2003 (GVAT’) was not inconsistent with section 53 of the IBC. It opined that the Government would constitute a secured creditor by virtue of the creation of a security interest in their favor through the operation of law through the GVAT Act, which gave them a first charge on the property. It concluded that debts due to a secured creditor would rank equally with other debts including workmen’s dues according to section 53 (1)(b)(ii) of the Code. This decision deviates from established precedents mentioned above which treated statutory dues as operational debt.
The complication in the legal position resulting from Rainbow Papers was remedied to an extent in the case of Jet Aircraft where there was a specific exclusion clause present under section 82 of the Maharashtra GST Act 2017 which provided the government a first charge on property, from which the operation of the IBC was exempted. The apex Court relied on this to hold that the state was to be treated as an operational creditor and was consequently not entitled to challenge the approval of the resolution plan. It differentiated Rainbow Papers by virtue of the statutory exemption granted to claims under the IBC and held that the same was confined to its factual situation.
The question that came up for consideration in Sree Metaliks was similar to Jet Airways, insofar as there existed a savings clause in section 142A of the Customs Act excluding claims under various statutes including the IBC from a first charge on property. The court therefore differentiated the present case from Rainbow Papers using the rationale in Jet Airways, and relied on Ghanshyam Mishra to decide that the statutory dues would stand extinguished.
Thus, an analysis of the established precedent above reflects a proposition that the non-presence of an overriding or non-obstante clause would result in statutory dues being treated as operational credit. The question that remains is whether tax statutes with non-obstante clauses that do not exempt the IBC from its operation, such as that in Rainbow Papers, would have an overriding effect over the resolution plan contemplated under the IBC. It is in these situations that PVVNL provides us with a clearer position of law, which we argue is good law.
Significance of the Judgment
The current judgment is a marked distinction from the principle laid down in Rainbow Papers, re-affirming the position that statutory credit is not secured credit and Rainbow Papers is limited to its facts alone. Fortunately, to bring in more clarity regarding the issue at hand, the Supreme Court has affirmed the principle that the IBC would prevail despite the presence of a non-obstante clause in another statute. This upholds the legislative intent behind the presence of an IBC as well as the previous dicta of the Court as outlined above. As a result of the judgment, it is now re-established that section 238 would prevail over non-obstante clauses as well. We will now proceed to expound on the importance and necessity of the same.
First, the judgment does well in further setting aside the controversial ratio put forth in Rainbow Papers. In recognizing Rainbow Paper’s failure to acknowledge the design and intent of the waterfall mechanism envisaged under section 53 of the IBC, the Court affirms the differential treatment that ought to be granted to secured credit and statutory credit. As observed by the Court, the use of distinct terms to describe two different dues under section 53 means that they cannot be treated as one and the same. Further, it also emphasizes on the effect of section 238, which Rainbow Papers fails to account for. The judgment also recognizes the Parliamentary intent of giving primacy to section 238 over other inconsistent laws.
Second, as already emphasized in Ghanshyam, the judgment merely strengthens and reinforces the ‘clean slate’ principle, which seeks to ensure that resolution applicants are not confronted with claims that jeopardize the resolution plan and alter its viability. This furthers the legislative intent, ensuring that the IBC fulfills its role as a public interest legislation to prevent hardships to insolvent entities. Furthermore, it ensures a smooth, hassle-friendly insolvency resolution process. Such a measure contributes to the ease of doing business within India as well.
In this post, we have examined the treatment of statutory credit as statutory dues and examined the recent judgment in Paschimanchal Vidyut Vitran Nigam Ltd v Raman Ispat Private Limited. Having analyzed the judgment as well as the current position of law on this topic, we conclude that the judgment is good law that not only fulfills the purpose of the IBC but also furthers public interest.
– Rakshit Agarwal and Tarun Ashok