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Business News/ News / India/  SC verdict on govt as secured creditor soon
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SC verdict on govt as secured creditor soon

The judgment is expected to have a bearing across the bankruptcy resolution spectrum, since treating such dues on par with loans from secured creditors will diminish the payouts to the latter

The judgment would determine whether government dues can be admitted on the same footing as other lenders in IBC cases. Premium
The judgment would determine whether government dues can be admitted on the same footing as other lenders in IBC cases.

New Delhi: The Supreme Court is set to rule whether the government can be considered a secured creditor when an insolvent company has not paid its dues. The judgment is expected to have a bearing across the bankruptcy resolution spectrum, since treating such dues on par with loans from secured creditors will diminish the payouts to the latter.

Under India’s Insolvency and Bankruptcy Code (IBC), secured creditors such as banks and financial institutions get priority in getting repaid through the resolution process, while unpaid dues to vendors, suppliers and government dues are treated as operational credit, and they fall lower in the so-called waterfall mechanism.

Last year, a two-judge bench of the apex court ruled in the Rainbow Papers vs Gujarat State Tax Department case that the government was a secured creditor. The appellants filed a review petition earlier this year, urging the court to reconsider its stance. A two-judge bench comprising justices A.S. Bopanna and Bela Trivedi admitted the petition and heard the arguments, and a final judgment is awaited soon.

Legal experts said there have been many instances where an insolvent company had tax dues or received tax notices, adding IBC tries to balance the interests of all stakeholders, including governments.

“However, the judgment on Rainbow Paper led to a situation where government bodies that are supposed to be receiving their dues much later in the queue, suddenly came up. The government bodies and authorities started to claim themselves as secured creditors and there was a spike in such cases," said Ashish Pyasi, independent counsel and an IBC expert.

Treating government on par with secured creditors will affect the interests of other stakeholders who are supposed to get a bigger pie, Pyasi said, adding the judgment caused change in the order of priority, “which is contrary to the objective of the Code."

Legal experts say this is one of the rare cases where the apex court has decided to dwell into its own verdict. Also, in a different insolvency case (Paschimanchal Vidyut Vitran Nigam Ltd versus Raman Ispat Pvt. Ltd and others) the apex court observed that the 2022 Rainbow Papers judgment was not in line with IBC provisions. Hence, industry participants are hopeful of a positive outcome.

“In a recent judgment, the Supreme Court has already observed that the Rainbow Papers judgment (which is under review) was not the correct position of law and that the government dues are placed lower in the scheme of things under the IBC. Hence, the reversal of the position with respect to government dues is very much expected," said Shashank Agarwal, advocate, Delhi High Court.

Even if the verdict is not reversed, legal experts are hopeful that the apex court will ensure that the judgment is applicable to the peculiar circumstances of the Rainbow Papers case, rather than being considered a legal precedent. “One of the most significant features of the insolvency laws is the waterfall mechanism, which gives secured creditors priority over operational creditors and governmental dues," said Anindya Mazumdar, partner, Singhania & Co.

 

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ABOUT THE AUTHOR
Priyanka Gawande
Priyanka Gawande is a senior legal correspondent at Mint. She has worked as legal reporter for four years with both television and digital mediums. Based in Mumbai, she reports on disputes across sectors including banking, corporates and finance. This also includes insolvency and bankruptcy cases and intellectual property rights (IPR) litigation. Her focus also comprises tracking capital markets and disputes relating to securities law. Previously, Priyanka worked with Informist Media for 2.5 years covering major insolvency and bankruptcy cases and corporate developments. She started her career in journalism with Business Television India (BTVi) where she reported on primary markets, banking, finance and insurance companies.
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Published: 06 Oct 2023, 11:38 PM IST
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