Insolvency Law: Supreme Court Divided Over Government's Position As Secured Creditor

Experts say that this situation can be resolved authoritatively only through a judgement by a larger bench.

<div class="paragraphs"><p>Supreme Court of India. (Source: Varun Gakhar/BQ Prime)</p></div>
Supreme Court of India. (Source: Varun Gakhar/BQ Prime)

In a judgement that irked India Inc. last year, the Supreme Court held that dues owed to the government rank equally with other debts, including debts on account of workmen's dues, meaning that the government would be considered a secured creditor under the Insolvency and Bankruptcy Code.

This stance has now attained finality as the top court has dismissed a batch of review petitions filed against the judgement. 

The court has held that the 2022 judgement did not merit a review since it was a well-considered ruling without any mistake or error apparent in it.

After the 2022 ruling had come out, experts had opined that what the Supreme Court had laid down was fundamentally different from what the legislature had intended.

The admitted position is that government debts rank below secured creditors and workmen dues in order of priority, said Harish Chander, former executive vice president at Edelweiss ARC.

The parties seeking a review of the judgement argued that the top court had failed to consider the waterfall mechanism and other relevant provisions of the IBC while classifying the government as a secured creditor. 

The waterfall mechanism set out under the IBC lists an order of priority for the purpose of distributing the assets of a company under liquidation. In essence, it provides for a hierarchy of claims from various classes of creditors.

However, the top court said that the waterfall mechanism was given adequate consideration in the judgement, and it was clearly held that the debts owed to a secured creditor, which would include the government authorities, will rank equally with other specified debts, including those on account of workmen dues. 

Financial lenders may not be happy with the equal status being given to statutory dues and secured debt. This may potentially impact lending decisions and the recoverability of loans, Sushmita Gandhi, partner at IndusLaw, told BQ Prime.

Given the impact of the decision, it may be referred to a larger bench for a final decision, she said.

The Supreme Court delivered a judgement earlier this year, wherein it was opined that the 2022 judgement completely missed out on the waterfall mechanism under the IBC. It was held that dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors.

This situation has now resulted in two different Supreme Court judgements on a similar issue. This situation can only be resolved through a judgement on this issue by a larger bench, according to Anoop Rawat, partner at Shardul Amarchand Mangaldas & Co.

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