Verdict in Rainbow Papers Ltd case ignored Section 53 of IBC: SC

The Supreme Court in a recent order in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited & Ors has denounced the court’s earlier judgement in State Tax officer Vs Rainbow Papers Ltd case. It said that the earlier judgment ‘missed altogether’ the waterfall mechanism of under Section 53 of the Insolvency and Bankruptcy Code (IBC).

Paschimanchal Vidyut Vitran Nigam Ltd (PVVNL) had contended that the rights of electricity suppliers like PVVNL were not subordinate and subject to the ‘priority of claims’ mechanism under the IBC. It had relied upon the court’s earlier judgement in the State Tax officer Vs Rainbow Papers Ltd case to further its plea.

However, the court rejected the claim of Paschimanchal Vidyut Vitran Nigam Ltd.

The Supreme Court said that the verdict in the Rainbow Papers case did not notice the ‘waterfall mechanism’ under Section 53 of IBC. It further said that Rainbow Papers was in the context of a resolution process and not in context of liquidation.

The court argued that Section 53 of IBC enacts the waterfall mechanism providing for the hierarchy or priority of claims of various classes of creditors.

“The careful design of Section 53 locates amounts payable to secured creditors and workmen at the second place, after the costs and expenses of the liquidator payable during the liquidation proceedings. However, the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers or was missed altogether. In any event, the judgment has not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to Central or State Government,” said the apex court.

“It would be possible to hold [in the absence of a specific enumeration of government dues as in the present case, in Section 53(1)(e)} that the State is to be treated as a ‘secured creditor’. However, the separate and distinct treatment of amounts payable to secured creditor on the one hand, and dues payable to the government on the other clearly signifies Parliament’s intention to treat the latter differently – and in the present case, having lower priority. As noticed earlier, this intention is also evident from a reading of the preamble to the Act itself,” the SC verdict added.

Therefore, the court argued that the judgement State Tax officer Vs Rainbow Papers Ltd is not applicable in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited & Ors.

Note: The Supreme Court in State Tax officer Vs Rainbow Papers Ltd held that statutory dues of the government are secured debts under the IBC. It said that Section 48 of the Gujarat Value Added Tax Act, 2003, which provides for a first charge on the property of a dealer in respect of any amount payable by the dealer on account of tax, interest, penalty, etc., is not in conflict with Section 53 of the IBC.

It also stated that PVVNL does not fall under the description of Section 53(1)(e) of the IBC.

“PVVNL undoubtedly has government participation. However, that does not render it a government or a part of the State Government. Its functions can be replicated by other entities, both private and public. The supply of electricity, the generation, transmission, and distribution of electricity has been liberalized in terms of the 2003 Act barring certain segments. Private entities are entitled to hold licenses. In this context, it has to be emphasized that private participation as distribution licensees is fairly widespread. For these reasons, it is held that in the present case, dues or amounts payable to PVVNL do not fall within the description of Section 53(1)(e) of the IBC,” the court said.

Note: Section 53(1)(e) identifies any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State.

Also See: Important Sections of IBC