Regulator must clarify due clearance order in insolvencies

Insolvency and Bankruptcy Board of India must come out with specific amendments to clearly spell out the provisions of the waterfall mechanism in case of the liquidation of a corporate debtor.
Regulator must clarify due clearance order in insolvencies

The Supreme Court’s judgement in the Rainbow Papers case upsets the insolvency applecart in India. The court has rejected requests for a review of its earlier order passed in September 2022, where it said that government dues must get higher priority when distributing the proceeds of an insolvent and liquidated company. Refusing to alter its view on the case, the court recently said that the earlier order did not miss the priority rule while deciding the matter. The order goes against the grain of insolvency law in India, which gives employees and financial creditors priority over statutory or government dues. It not only threatens the basic premise of the Insolvency and Bankruptcy Code (IBC), but also creates uncertainty about a law that was otherwise clearly spelt out. Curiously, it also goes against the Supreme Court’s judgement in another case—Paschimanchal Vidyut Vitran Nigam vs Raman Ispat—where the court said the Rainbow Papers judgement “missed altogether” the waterfall mechanism under IBC’s Section 53.

The core issue that needs settling is if secured statutory dues such as unpaid taxes should be treated in the manner of the financial creditors’ secured claims. The IBC is clear that government dues come in the priority list after dues of workers, employees and secured and unsecured financial creditors. The Rainbow Papers judgement, however, puts statutory dues at par with those of secured creditors. The framers of the IBC had deliberately given higher priority to the dues of employees, workers and financial institutions. One of the arguments was that the loans given by banks to an insolvent company are ultimately taxpayers’ money and hence they must get priority over government dues.

Two different sets of observations—in Rainbow Papers and Paschimanchal Vidyut—have certainly created confusion on the matter and would only further delay resolution of insolvency cases. The IBC must not lose its basic character in which banks and financial institutions’ claims get priority over government and shareholders’ dues. While some judgements can be case-specific and do not necessarily alter the basic design of the underlying law, the Insolvency and Bankruptcy Board of India, the regulator, must come out with specific amendments to clearly spell out the provisions of the waterfall mechanism in case of the liquidation of a corporate debtor.

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