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Supreme Court refused to reconsider the position of tax dues under IBC
In its recent judgment 1, the Supreme Court rejected a review petition that sought to hold that the tax dues are not at par with secured creditors and will not find priority in the waterfall mechanism under Section 53 of the Insolvency & Bankruptcy Code, 2016 (IBC or Code).
We have summarized facts of the case and the gist of Hon'ble Court's judgment below:
- In State Tax Officer v. Rainbow Papers Ltd. 2022 (13) SCR 808, the Hon'ble Supreme Court held that the resolution plan cannot ignore tax dues and is at par with the secured creditor in the waterfall mechanism under Section 53 of the IBC.
- However, the coordinate bench of Hon'ble Court, having equal strength Paschimanchal Vidyut Vitran Nigam Limited C.A. No. 7976 of 2019, expressly discussed the waterfall mechanism laid down under Section 53(1) of the Code and stated that the 'government dues' would find least priority in the distribution of proceeds in liquidation. The Hon'ble Court also distinguished its Coordinate Bench's decision in case of Rainbow Papers Ltd. (Supra) and stated that it was not noticed the 'waterfall mechanism' under Section 53 of Code and the provision had not been adverted to or extracted in that judgment. It also stated that, in its view, the judgment in Rainbow Papers Ltd. (supra) has to be confined to the facts of that case alone.
- Since this issue posed a great challenge in the resolution process as govt dues were considered at par with secured creditors, the present review petition was filed by the petitioners relying on the Paschimachal (supra) case.
| Gist of the Hon'ble Supreme Court's Judgement |
Based on the arguments of both the parties involved, the Apex Court rejected the review petition filed in the present case. The gist of the judgment is as follows:
- The Hon'ble Court held that any passing reference of the impugned judgment made by the Bench of equal strength could not be a ground for review.
- A Coordinate Bench cannot comment upon the discretion exercised or judgment rendered by another Coordinate Bench of the same strength.
- If a Bench does not accept as correct the decision on a question of law of another Bench of equal strength, the only proper course to adopt would be to refer the matter to the larger Bench, for an authoritative decision, otherwise, the law would be thrown into the state of uncertainty by reason of conflicting decisions.
- The Hon'ble Court stated that the petitioner's contention that the Hon'ble Court, in impugned decision, had failed to consider the waterfall mechanism as contained in Section 53 and failed to consider other provisions of IBC, are factually incorrect. The Hon'ble Court further stated that, as evident from the bare reading of the impugned judgment, the Court had considered not only the Waterfall mechanism under Section 53 of IBC but also the other provisions of the IBC for deciding the priority to distribute the proceeds from the sale as liquidation assets.
In conclusion, the Hon'ble Court rejected the review petition.
- Sanjay Kumar Agarwal vs. State Tax Office (1) & Anr in Review Petition (Civil) No. 1620 of 2023 dated 31.10.2023
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Our Comments
The issue of government dues being considered at par with secured creditors under IBC has been hunting for a while and has created a state of uncertainty amongst the stakeholders at large. Now arising from Rainbow Papers Ltd. (supra) and Paschimachal (supra), two conflicting judgments of coordinate benches of the Hon'ble Court have equal strength. This has further increased the uncertainty. It is a view at large that considering government dues at par with the secured creditor goes against the objective of IBC. Therefore, this issue needs immediate attention and fix. While it is possible to request a larger bench to reconsider this issue but, the ideal way would be to bring a clarificatory amendment in the IBC to fix this in the statute itself.
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