The Supreme Court, in State Tax Officer vs Rainbow Papers Ltd, has greatly diluted the stringent provisions of the Insolvency and Bankruptcy Code. The case relates to an appeal against an order by the National Company Law Appellate Tribunal (NCLAT) that stipulated that the Gujarat government cannot claim first charge over the property of a corporate debtor, under Section 48 of the Gujarat Value Added Tax, 2003.

The Gujarat government’s claim of ₹47.36 crore was waived off by the resolution professional. The state government challenged the resolution plan before the National Company Law Tribunal (NCLT) and asked to be treated as a secured creditor. The application was dismissed by NCLT and, later, also by the NCLAT.

The question before the Supreme Court was whether Section 53 of the Code, which talks about how each category of debt should be divided among the claimants, overrides Section 48 of GVAT Act or not.

The Supreme Court has set aside the NCLAT order, as also the resolution plan of the committee of creditors, and allowed the appeal by the Gujarat government.

It also reiterated that the time period of three days for filing a claim under Regulation 12 was not mandatory and is only a direction. Accordingly, the resolution professional will be obliged to include the claim filed even before the committee of creditors meeting convened to approve the proposed resolution plan.

This mechanism will disturb the process of resolution as no information memorandum can be finalised and, consequently, no finalised resolution plan can be submitted.

The Supreme Court further held that in view of Section 48 of the GVAT Act, the Gujarat claim falls within the definition of ‘security interest’ under Section 3(31) of the code. Thus, the State becomes a ‘secured creditor’ under Section 3(30) of the code. The committee of creditors cannot secure its dues at the cost of the statutory dues owed to government authorities.

However, in our opinion, the statutory charge created under the GVAT Act would not amount to security interest and does not make government agencies a secured creditor. This is because ‘security interest’, as defined in Section 3(31) of the IBC, must be created through a ‘transaction in writing’ and the word ‘transaction’, as per Section 3(33), includes an agreement or arrangement in writing for transfer of asset or funds, goods or services from or to the corporate debtor. The security interest must be created through a ‘transaction in writing’ between the parties and would not include the charge created under the law.

As the Supreme Court has held that Section 48 of the GVAT Act is not contrary or inconsistent with Section 53 or any other provision of the code, the debt owed to a government agency will rank equally under Section 53(1)(b)(ii) of the code, with other secured creditors and workmen for their specified dues.

This judgement has far-reaching consequences and will categorise government dues as those secured by a statutory charge and those that are not. Secured dues would now fall under Section 53(1)(b)(ii) of the code, instead of Section 53(1)(e)(i), thereby substantially reducing the recovery of dues by banks and financial institutions.

A review petition has been filed.

(The writers are Managing Partner and Partner, respectively, with SNG & Partners, a law firm)