Legal validity of Resolution Plan which ignores/waive off Dues of ‘Government authorities’
–Muhammed Ijaz V, Final Year Law student, Faculty of Law, University of Delhi
The Insolvency and Bankruptcy Code, 2016 (Code/IBC) being an umbrella legislation for insolvency resolution of all entities in India—both corporate and individuals which provides for the Reorganization and Bankruptcy of Corporate Persons, Partnership Firms, and Individual Firms. The key aim for codifying insolvency law was to provide for greater coherence in law and facilitate the application of consistent and lucid provisions to different stakeholders affected by business failure or the inability to pay debt.[i]
In the Insolvency Resolution Process for Corporate Persons, an issue is generally discussed as to the status of statutory dues payable by the Corporate Person – whether a resolution plan which ignores/waive off the statutory demands payable to state governments, or legal authorities, is liable to be rejected ?.
In light of numerous erstwhile judicial interpretations which supports and recognizes the statutory provision relating to position of statutory debts and dues payable to central and state government and local authorities under IBC , it is well settled that Operational debt includes statutory debts and dues owing to the Central, state, as well as any local authorities. As a result, these creditors are also to be considered as operational creditors and their claim cannot be disregarded in any resolution plan under the IBC.
The Hon’ble Supreme Court recently in STATE TAX OFFICER (Appellant(s) Versus RAINBOW PAPERS LIMITED Respondent(s)[ii] has once again reiterated that a resolution plan which ignores the statutory demands payable to state governments, or legal authorities, is liable to be rejected. It said that the definition of secured creditor in the Insolvency and Bankruptcy Code (IBC) does not exclude any government or legal authority. It inter alia held that the Section 48 of the Gujarat Value Added Tax, 2003, hereinafter referred to as the “GVAT Act”, is not contrary to or inconsistent with Section 53 or any other provisions of the IBC.
Facts of the Case
The respondent (Rainbow Papers Limited), engaged in the business of manufacture and sale of Crafts and Oars within and outside the State of Gujarat since 16th April, 1990.The appellant (Gujarat State Tax Officer) has, from time to time, been assessed for Value Added Tax (VAT) and Central Sales Tax (CST) under the GVAT Act. It is stated that an amount of Rs.53,71,65,489/- is due from the Respondent to the Sales Tax authorities towards CST and VAT.
The present appeal in Supreme Court arises against a judgment and order[iii] passed by the Hon’ble NCLAT dismissing filed by the Appellant, against an order of Ahmedabad Bench of the NCLT[iv] rejecting the application made by the appellant as not maintainable and holding that the Government cannot claim first charge over the property of the Corporate Debtor, as Section 48 of the GVAT Act, which provides for first charge on the property of a dealer in respect of any amount payable by the dealer on account of tax, interest, penalty etc. under the said GVAT Act, cannot prevail over Section 53 of the IBC.
After admission of the CIRP which was initiated by one of Operational creditor of respondent, the appellant filed a claim before the Resolution Professional (herein after referred as ‘RP’) appointed by CoC claiming that Rs.47.36 crores (approximately), was due and payable by the respondent to the appellant, towards its dues under the GVAT Act. The claim was filed beyond time. Following the appointment of the RP, the appellant called upon the RP to confirm the claim of the appellant towards outstanding tax dues, for which the RP informed the appellant that the entire claim of the appellant had been waived off, the appellant challenged the Resolution Plan before the Ahmedabad Bench of the NCLT contending that Government dues could not be waived off. The appellant prayed for payment of total dues of Rs.47,35,72,314/- towards VAT/CST on the ground that the Sales Tax Officer was a secured creditor.
The Adjudicating Authority being the Ahmedabad Bench of the NCLT rejected the application made by the appellant as not maintainable.
The Adjudicating Authority (NCLT) Ahmedabad held
“13. The Resolution Applicant again filed the amended resolution plan on 26.05.2018. On scrutiny RP issued certificate on 28.05.2018 in compliance of the Regulation 39(2). Accordingly, RP/the applicant issued notice dated 29.05.2018 for convening the eighth and final meeting of CoC on 04.06.2018. In the said meeting, CoC sought certain changes in the plan. In view of that, the Resolution Applicant was permitted to provide the addendum to the revised plan within a period of one (1) day which was accepted and duly acted upon by the Resolution applicant.
14. The said amended revised resolution plan along with the addendum dated 05.06.2018 was placed for evoting before the members of the CoC which took place on two (2) days i.e. on 06.06.2018 and 07.06.2018. The CoC in their aforesaid e-voting resolved to approve the resolution plan along with the addendum with majority of 79.79% voting share in favour of the Resolution Applicant.
xxx xxx xxx
16. On filing of the application by the RP under Section 30(6) read with section 31 of the Code, notices were issued to the CoC and suspended management. CoC approved and conceded to the fact of filing application by the RP under section 33(6) of the Code and have supported the argument advanced by the Ld. Counsel of the RP. No representation received from the suspended management.”
The appellant filed appeal before the NCLAT against the aforesaid order of the Adjudicating Authority, under Section 61 of the IBC has been dismissed by the NCLAT by the judgment and order impugned.
The NCLAT held
“35. We find that the Appellant has not filed claim within time. It approached the ‘Resolution Professional’ at belated stage after approval of the ‘Resolution Plan’ by the Adjudicating Authority.
36. Learned counsel for the ‘Resolution Professional’ submitted that the claim of the Appellant- ‘State Tax Officer (1)’ comes within the meaning of ‘Operational Debt’ as defined under Section 5(21). The claim of the Appellant also does not fall within the meaning of ‘Secured Creditor’ as defined under Section 3(30) read with Section 3(31) of the I&B Code.
38. In view of Statement of Objects and Reasons of the ‘I&B Code’ read with Section 53 of the ‘I&B Code’, the Government cannot claim first charge over the property of the ‘Corporate Debtor’. Section 48 cannot prevail over Section 53. Therefore, the Appellant – ‘State Tax Officer-(1)’ do not come within the meaning of ‘Secured Creditor’ as defined under Section 3(30) read with Section 3(31) of the I&B Code’.”
Arguments of the Appellant
On behalf of the Appellant, it has been argued as following
- Argued that in view of the statutory charge in terms of Section 48 of the GVAT Act, the claim of the Tax Department of the State squarely falls within the definition of “Security Interest” under Section 3(31) of the IBC and the State becomes a secured creditor under Section 3(30) of the Code.
- The NCLAT order which has held that the Tax Department of the State does not fall within the meaning of “Secured Creditor”, come to such a conclusion on the erroneous premise that Section 48 of the GVAT Act, 2003, cannot prevail over Section 53 of the IBC.
- It was not the case of the Appellant that Section 48 of the GVAT Act prevails over Section 53 of the IBC. It was the case of the Appellant that the State falls within the purview of “Secured Creditor”.
- Mere fact that a creditor might be an operational creditor would not result in loss of status of that operational creditor as a secured creditor. The finding of the Appellate Authority is contrary to law and cannot be sustained.
- Referring to Section 30(2) of the IBC, the counsel argued that the afore-mentioned provision mandates the RP to ensure that the Resolution Plan conforms to the parameters/requirements laid down in the said provision. It was the duty of the Resolution Professional to examine, ensure and verify that the resolution plan conformed to the parameters/requirements laid down under Section 30(2) of the IBC.
- The learned counsel inter alia argued that the RP was obliged to receive, verify and collate claims and forward the same to the Adjudicating Authority for approval. The counsel cited Swiss Ribbons (P) Ltd. v. Union of India[v], where this Court held that the Resolution Professional does not have adjudicatory powers to accept or reject the claim. His duty is only to receive, verify and collate the claims.
Observations & Decision by the Supreme Court
The Supreme Court held that a Resolution Plan which ignores the statutory demands payable to any State Government or a legal authority, altogether, is liable to be rejected and observed :
“46. Under Section 31 of the IBC, a resolution plan as approved by the Committee of Creditors under Sub-Section (4) of Section 30 might be approved by the Adjudicating Authority only if the Adjudicating Authority is satisfied that the resolution plan as approved by the Committee of Creditors meets the requirements as referred to in Sub- Section (2) of Section 30 of the IBC. The condition precedent for approval of a resolution plan is that the resolution plan should meet the requirements of Sub-Section (2) of Section 30 of the IBC.”
The bench further affirmed the above position by relying on Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another[vi] held that Resolution Plans would have to conform to the statutory provisions of the IBC.
The bench has also refused to accept the NCLAT observation with reference to the Tax Department of the State not falling within the meaning of “Secured Creditor”, and held that the definition of secured creditor as provided in the IBC covers Government or Statutory authorities as well.
“57. As observed above, the State is a secured creditor under the GVAT Act. Section 3(30) of the IBC defines secured creditor to mean a creditor in favor of whom security interest is credited. Such security interest could be created by the operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.”
According to the bench, the NCLAT by erroneously interpreting Section 48 of the GVAT Act, 2003, and Section 53 of IBC, and came to a wrong conclusion that Section 53 of the IBC overrides Section 48 of the GVAT Act.
“55. In our considered view, the NCLAT clearly erred in its observation that Section 53 of the IBC overrides Section 48 of the GVAT Act. Section 53 of the IBC begins with a non-obstante clause.
56. Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman’s dues for a period of 24 months preceding the liquidation commencement date.”
Referring to the argument on the definition of the term “Secured Creditor” as defined under the IBC, the bench observed that it is comprehensive and wide enough to cover all types of security interests namely, the right, title, interest or a claim to property, created in favor of, or provided for a secured creditor by a transaction, which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.
Referring to above stated statutory interpretations put forth and case laws relied, the bench conclusively held that, If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan, inter alia held that, delay in filing a claim cannot be the sole ground for rejecting the claim.
Resultantly, the bench allowed the appeal and the impugned orders were set aside. The Resolution plan approved by the CoC was also set aside.
As is evident from the aforementioned and discussed judgment and in the light of relevant statutory provisions, resolution plans as per IBC must not ignore any statutory demands payable to any Government or statutory authorities. The Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.
Therefore, the following may be concluded as regards statutory dues within a resolution plan –
(i) Regulation 12 of the 2016 Regulations[vii] deals with the time period for submission of a claim along with proof, as stipulated in the public announcement under Section 15 of the IBC. The time period is, however, not mandatory but only directory.
ii) The Resolution Plan which does not conform to the statutory requirements would be invalid and not binding on the Central Government, any State Government, any statutory or other authority, any financial creditor, or other creditor to whom a debt in respect of dues arising under any law for the time being in force is owed.
(iii) Statutory dues payable cannot be extinguished as a whole in a resolution plan.
(iv) The claims of the Tax Department of the State, squarely falls within the definition of “Security Interest” under Section 3(31) of the IBC and the State becomes a ‘secured creditor’ under Section 3(30) of the Code.
[iv] By an order dated 27th February, 2019 in IA No. 224/271/272/337 of 2018 and P-01 of 2019 in CP No.(IB) 88 of 2017
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