A Bench comprising justices Justices AS Bopanna and Bela M Trivedi while affirming its last year’s view said it had considered the waterfall mechanism and the other provisions of the Code before arriving at its decision for deciding the priority for distribution of sale proceeds of assets, etc. The case does not “fall under the ambit of review,” it said.
On September 6 last year, the top court ruled that any insolvency resolution plan, approved by the financial creditors by ignoring the statutory demands payable to state and Central governments or other legal authorities, was liable to be rejected. It held that a committee of creditors that might include banks and financial institutions (FIs) cannot secure its own dues at the cost of statutory dues owed to any government authority.
Lenders argued that the SC’s decision was contrary to the legislative intent and the express provisions of the IBC, which is to promote the availability of a line of credit by providing a time-bound resolution mechanism and to ensure promotion of investments. Previous SC judgements had held that IBC would override any central or state legislation which was inconsistent with it and that banks and FIs had priority in asset distribution over dues of “any government or government authority,” counsel Sanjay Kapur had argued on behalf of SBI.
The judgement has serious ramifications since it ranks the ‘crown debts’ (central and state tax dues) at par with workmen dues and ignores the settled law that these (crown debts) are lower in priority than the dues of lenders.
Legal experts said that the Tuesday’s decision not only goes against the Parliamentary intent but also the recommendations of two panels – Bankruptcy Law Reforms Committee and Insolvency Law Committee – which had taken the view that the government dues cannot be treated equal to that of secured creditors.“This decision acts as a disincentive to the financial creditors to approach the National Company Law Tribunal under the IBC for resolution and change in management of the bankrupt company. Now under the waterfall mechanism, the proceeds have to be shared not only with workmen but also with the government. By virtue of the Rainbow papers judgment as affirmed in review has the effect of treating the government at par with secured creditors where the dues of the former are backed by a statutory charge,” said SC senior lawyer Dhruv Mehta.He further said that secured creditors may now prefer to recover their debts under the Sarfaesi Act. “The financial creditors will think twice before approaching the NCLT and this defeats the entire purpose and objective of IBC,” the senior lawyer said.
According to Sameer Parekh, Managing Partner of Delhi-based law firm Parekh & Co, IBC being a crucial piece of legislation “has to be enforced as enacted. Stability of business environment is also critical for growth of the economy.”
“The judgement in Rainbow seeks to alter the priority for payment from the IBC waterfall mechanism relying on a State law… The judgement was distinguished in the Paschimanchal Vidyut Vitran Nigam Ltd’s case where the SC held that ‘the legislative intention to treat the dues payable to government being different from dues payable to secured creditors was noted’,” he said.
“Accordingly, the SC should have allowed the review petition and given effect to the intention of IBC. There is no ambiguity in the law and at an appropriate stage, the court ought to reverse Rainbow and implement the priority under the IBC,” Parekh said.
