Interplay of Statutory dues under the Indian Insolvency Regime

Interplay of Statutory dues under the Indian Insolvency Regime

The judgement of the Hon’ble Supreme Court, in the case of State Tax Officer v. Rainbow Papers Limited¹ has recently dealt with two crucial issues pertaining to the Code

In the year 2016, India took a historic stride towards the enactment of robust, uniform, and comprehensive insolvency and bankruptcy framework, namely, the Insolvency and Bankruptcy Code, 2016 (“Code”). The Code being a contemporary law, a lot of ambiguities pertaining to the scope and applicability of the Code have and are continuing to evolve.

Out of several pertinent issues arising in the Code, one issue that often arises for consideration is about the realization of statutory dues in casethe Corporate Insolvency Resolution Process (“CIRP”) is commenced against the corporate debtor. The present article discusses about the position in respect of realization of statutory dues, particularly when the claim for the statutory dues before Resolution Professional is either filed beyond the prescribed time limit or are not filed by the authorities.

The judgement of the Hon’ble Supreme Court, in the case of State Tax Officer v. Rainbow Papers Limited² has recently dealt with two crucial issues pertaining to the Code. One is with respect to whether the tax authorities qualify as “secured creditor” under the Code whereas the other was pertaining to the admission of belated claims by the Resolution Professional. While the latter issue is fairly settled, the observation recorded by the Hon’ble Supreme Court with respect to the treatment of tax authority as “secured creditor” appears to be in contradiction to the judicial precedents, schemes, and provisions of the Code.

The Hon’ble Supreme Court observed that it is the duty of the Resolution Professional to inspect the books of the Corporate Debtor where the statutory dues are recorded, and to include the same in the information memorandum. In case, the Resolution Plan does not reflect the statutory dues or statutory demand payable to any authority, the adjudicating authority is bound to reject the Resolution Plan.³

The same appears to be in contradiction with the judgement pronounced by the Hon’ble Supreme Court in the judgement of Ghanshyam Mishra and Sons (P.) Limited v. Edelweiss Asset Reconstruction Company Limited⁴, wherein the Hon’ble Supreme Court held that when the resolution plan is approved by the Adjudicating Authority, the claims provided in the plan shall stand frozen and will be binding on corporate debtor and its employees, members, creditors, including the central government and state government. The judgement further held that all the claims which do not form part of resolution plan shall stand extinguished.⁵

The aforesaid observation of the Hon’ble Supreme Court in Rainbow Papers necessarily implies that the statutory dues have to be considered in the resolution plan irrespective whether the authorities has filed the claim with resolution professional or not. The judgement has completely shifted the burden of proof to record the statutory dues on the resolution professional even when the claims are not filed by the authorities or are belatedly filed by the authorities.

It is an undisputed fact that statutory dues under the provisions of the Code are indeed treated as “Operational Debts” and consequently, the authorities are treated as “Operational Creditors”⁶. Ideally, all the operational debts and operational creditors should be kept on the same pedestal, however, the observation made in Rainbow Papers has given an additional edge to the authorities for realizing the statutory dues. The same creates different classes of creditors within the operational creditors, which is certainly not the intention of the Code.

Additionally, the Hon’ble Supreme Court in Rainbow Papers while placing reliance on Section 3(30) and Section 3(31) of the Code also held that the State Government would qualify as ‘secured creditor’ as security interest can also be created by way of operation of law. Accordingly, the Hon’ble Supreme Court went on to hold that the Committee of Creditors cannot prioritize the other secured creditors at the cost of statutory dues.⁷

The Code defines secured creditor as a creditor in whose favour security interest is created⁸. Further, the term “Security Interest” is also defined under Section 2(31) of the Code. The combined reading of Section 3(30) and Section 3(31) of the Code indicates that the creation of the security interest in favour of secured creditor needs to be performed by way of a transaction to secure the payment or performance. There should be a positive act between the parties to perform or enter into a transaction. The statutory dues that had to be recovered from the corporate debtor is by way of “operation of law” and not by way of entering into a “transaction”. Further, the term “transaction” is inclusively defined under Section 2(33) of the Code to include an agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor.

Hence, in the authors view, the observation of the Hon’ble Supreme Court in Rainbow Papers that statutory dues to be recovered from the corporate debtor is created by way of operation of law and would qualify as security interest does not flow from Section 3(30) read with Section 3(31) of the Code.

In fact, the aforesaid interpretation as adopted by the authors, is recently being suggested by the Government in its public notice dated 18 January, 2023. The Government in the notice categorially discussed the judgement of Hon’ble Supreme Court in Rainbow Papers and suggested that all the debts owed to the Central Government and the State Government, irrespective whether they are secured by way of operation of statute, shall be treated equally with other unsecured creditors only, unless the said dues are owned on account of a consensual transaction⁹.

The aforesaid change suggested by the Government is a welcome move to eliminate the uncertainty that has arisen in light of the judgement of Rainbow Papers. It is hopeful that the aforesaid change would be approved by the Parliament in the upcoming monsoon session and the debate about the issue of realization of statutory dues by the authorities would be put to rest.