In what is seen as a setback to lenders, the Supreme Court has dismissed a batch of five review petitions that sought a review of the apex court’s common judgment in the Rainbow Papers case, noting that the grounds for review were not met.
Review was sought to the Rainbow Papers case, which held that State-level tax authorities will enjoy parity with secured creditors as regards the priority for claiming the proceeds under the IBC.
In the Rainbow Papers case, the SC interpreted the definition of ‘secured creditor’ to hold that any government or government authority would be a secured creditor, as the charge created by a statutory law can be considered as a ‘security interest’.
This SC dismissal means that the legal position specified by the apex court in the Rainbow Papers case will remain intact, and tax authorities keen to recover tax dues, will enjoy the same rights as secured creditors under the IBC waterfall mechanism, said experts.
This SC dismissal is likely to impact the ongoing and future IBC cases, they said, adding that this matter has to be referred to a larger Bench for a final decision.
Interestingly, the Corporate Affairs Ministry, in its paper inviting comments on IBC changes this February, noted that concept of security interest was intended to cover a consensual transaction between parties (and not any similar interest created through mere operation of a Statute).
EXPERTS’ TAKE
Anoop Rawat, Partner (insolvency & bankruptcy) at Shardul Amarchand Mangaldas & Co, said the placement of statutory dues, which are secured under a statute on par with dues of secured creditors under Section 53 (waterfall provision), may potentially make the IBC an inferior platform than Sarfaesi, where the dues of secured creditors have priority over statutory dues.
“While the IBC focussed on resolution and Sarfaesi focuses on recovery, yet I feel that the principles of priority in IBC shouldn’t be inferior than Sarfaesi,” he added.
Commenting on the latest SC move, Sushmita Gandhi, Partner, Induslaw, said that financial lenders may not be happy with the equal status being given to statutory dues and secured debt.
This may potentially impact the lending decisions and impact the recoverability of loans. Given the impact of the decision, this may be referred to a larger bench for final decision, she added.
Hari Hara Mishra, CEO, Association of ARCs in India said “Bringing in Government dues, taxes, cess, other claims etc at par with rights of secured creditors from realisation proceeds will sub-optimise creditors rights. I hope Government will intervene to set things right to strengthen financial sector and address its negative fallout, of migration of existing huge haircuts in recovery towards baldness”.
He pointed out that Banks lend money on established norm of ability to repossess and enforce security interest for realisation of their dues in case of payment default.