Insolvency and Bankruptcy Code, 2016 (IBC) is one of the
showcase legislations of the Government to consolidate and amend laws relating
to reorganisation and insolvency resolution of distressed corporates in a time
bound manner for maximisation of value of assets and balancing the interests of
all stakeholders, including alteration in the order of priority of payment of
Government dues1. The scheme of the Code marked a paradigm change
from the previous regime.
A substantial issue/ question that lurks in the minds of
the corporate debtor(s) and the acquiring resolution applicant(s) is the fate
of statutory liabilities including income tax liabilities of the corporate
debtor, relating to period prior to resolution.
To get a constructive and logical answer to the
aforesaid question, one would have to understand the scheme of the Code and the
intention behind the statute.
Scheme of IBC
at a glance:
·
The resolution process under IBC involves various
parties, the primary being:
-
Corporate Debtor which is the
corporate defaulter.
-
Resolution
Applicant(s) being the group/ entity filing a resolution plan to
acquire and revive the business of the corporate debtor.
-
Creditors-
the financial and the operational creditors to whom debt is owed by the corporate debtor.
·
Successful resolution process under the IBC involves –
-
Competitive bidding for the corporate debtor.
-
Sacrifice by the financial and operational creditors
(often referred to as haircuts).
-
Takeover and subsequent continuance
of the business of the corporate debtor by the successful resolution applicant/ bidder.
·
Section 5(12) of the IBC defines “insolvency commencement date" as
the date of admission of the insolvency resolution
process by the Adjudicating Authority, being
the National Company Law
Tribunal (“NCLT”).
·
Section 13 mandates that NCLT shall
after admission of the resolution application - declare a moratorium
prohibiting institution of suits or continuation of pending suits or
proceedings pending against the corporate debtor, a public announcement be
made, and call for the submission of claims by various parties under section 15
of IBC.
·
One of the critical steps is
submissions of claims before the Resolution
Professional (RP) by the financial and operational creditors as on the
insolvency commencement date which are, then, verified and is followed by
preparation of an estimate of the amount of claims against the corporate
debtor. Under section 3(6) of the IBC,
the expression “claim" is
defined in its widest form to mean right to payment arising out of breach of
contract or otherwise, whether or not such right is reduced to judgment, fixed,
disputed, undisputed, legal, equitable, secured or unsecured.
The rationale of making of public announcement inviting
claims aims to call every creditor to file all possible claims, even if
disputed, against the corporate debtor, in order for the same to be considered
appropriately.
·
IBC recognizes two types of
creditors: financial creditors and operational creditors. Financial creditors
are primarily parties to whom loans and interest thereon is due. Tax dues are
however categorized as “operational debts” in terms of section 5(21) of IBC and
the Tax Department, accordingly, falls in the category of “operational
creditor”. Therefore, tax dues, despite being a sovereign debt, no longer enjoy
priority over dues of the other operational creditors, which is also in line
with one of the stated legislative intents set out in the preamble to the IBC,
being “alteration in the order of priority of payment of Government Dues…”.
·
As per section 30(2), the plan
provides for repayment of debts of operational creditors such that the same
shall not be less than the amount to be paid in the event of liquidation under
section 53 of IBC. Simply stating, the operational creditors, including the
Government, cannot, as a matter of right, claim any amount in excess of the
liquidation value. Further, section 53 sets the order of priority of payment in
case of liquidation. Pertinently, insolvency resolution process cost is the
first item to be borne out of the insolvency proceeds and Government dues are
considered after payment to the unsecured financial creditors.
Binding nature of approved Resolution Plan
·
The resolution plan once approved
by the committee of creditors, is placed before the NCLT for its approval. As
per section 31(1), once the plan is
approved by NCLT, the same shall be binding on the corporate debtor,
employees, members, creditors, guarantors, and other stakeholders. The
provision has been amended w.e.f 16.08.2019 to specifically include that the
approved Resolution Plan shall be binding
on Central Government/ State Government/
statutory authority to whom a
debt in respect of payment of dues arising under any law is owed.
·
Furthermore, section 238 provides that the provisions of IBC shall have effect
notwithstanding anything inconsistent contained in any other law including
Income- tax Act, 1961 (‘IT Act’).
·
The approved resolution plan
provides the quantum of amount to be paid to the financial and operational
creditors against their respective claims/ dues, which is binding on the creditors who are bound to accept the amount stated in
the plan to be paid against their dues.
·
Certain relevant judicial
precedents affirming the supremacy of the approved resolution plan and the IBC
are highlighted hereinbelow:
-
Innoventive
Industries Limited2 (SC), the
Court elaborately explained that the provisions of the IBC overrides any other
law inconsistent therewith.
-
In Monnet Ispat3, the apex Court held that the provisions
of IBC would override anything inconsistent contained in the IT Act.
-
In the case of V. Ventaka Sivakumar4 the NCLT directed the withdrawal/
vacation of attachment under section 178 of the Act treating it to be
inconsistent with IBC.
-
In the case of Leo Edibles5, the Court held that the tax Department
cannot claim any priority in payment from liquidation assets merely because the
IT Department has issued attachment order prior to initiation of liquidation
proceedings.
-
In Synergies Dooray Automotive6 case, it was held that the
statutory dues such as income-tax, sales tax, VAT and other taxes fall within
the definition of ‘operational debt’. Settlement @ 1% of crystalized demands/
claims of taxes was upheld.
-
In the decision of Star Agro Marine Exports7,
the Appellate Tribunal laid down certain important legal principles- (i) In a
situation where assets of corporate debtor are not enough to meet out the
liability of the operational creditors in the event of liquidation, then, no
provision could be made in the resolution plan for payment to such creditors;
(ii) The operational creditors/ statutory authorities may not be getting
anything for satisfaction of their claims under the valid resolution plan; and
(iii) The pending proceedings, suits, claims, disputes in connection with
the corporate debtor pending or threatened, present or future in relation to
any period prior to the plan approval date or arising on account of
implementation of the resolution plan shall stand withdrawn.
·
The aforesaid discussion clearly shows the supremacy and the binding
effect of the approved resolution plan
under the provisions of the IBC, overriding the other applicable provisions.
Having noticed the fundamental/ salient features of the
IBC, there is substantial ongoing debate particularly with regard to the fate
of various statutory dues/ claims as a consequence of approval of the
resolution plan.
For the sake of convenience, the said claims may broadly
fall in either of the following categories:
I. Dues/
claims relating to period upto the
insolvency commencement date, which may
include:
(i)
Crystallized claims, whether disputed or not,
pending payment;
(ii)
Proceedings initiated prior to
insolvency commencement date, but completed subsequently resulting in
crystallization of claims, which may or may not be disputed;
(iii)
Proceedings initiated after the
insolvency commencement date but relating to the period upto that date,
resulting in subsequent crystallization of claims, which may or may not be disputed;
II. Dues/
claims relating to period from insolvency commencement date to the effective date, i.e., date of approval of the
resolution plan;
III.
Dues/ claims relating to period after the effective date.
Re (I):
Claims relating to period prior to insolvency commencement date:
Having regard to the scheme of resolution process, tax
authorities are expected to file complete claim in respect of the categories
referred in para (I)(i) and should ordinarily also refer to pendency of
proceedings in respect of categories referred in para (I)(ii) which may result
in crystallization of further claims on a later date. Insofar as categories
referred in para (I)(iii) is concerned, since the proceedings itself are
initiated after the insolvency commencement date, it would obviously not be possible
for the creditor to make/ lodge claim in prescribed Form.
The related issue that would arise is whether the said
categories of claims can be enforced
subsequently by the creditor against the corporate debtor.
As noticed above, the contents of the resolution plan
are binding on all the stakeholders including the Governments. Being so, if all
the dues related to period prior to insolvency commencement date, whether
crystallized, contingent, raised, disputed, pending, etc., of any creditor
including Revenue Department are settled for a particular amount, the said
settlement is binding on the parties including the revenue authorities.
What is required is that the resolution plan must ensure
that the payment to operational creditor(s) should not be less than the
liquidation value. There is no doubt that in case the
corporate debtor were to be forced into liquidation, the
Income-tax department could, irrespective of the quantum of its claim (whether
known or unknown, crystalized or not, pending or concluded, etc.), at the most
recover the liquidation value and nothing more.
It is thus, clear that the essence and spirit of the IBC
is to attempt insolvency resolution of a corporate debtor whereunder every
stakeholder is expected to make a sacrifice to revive the business of corporate
debtor. There can be no further subsequent claims on the corporate debtor for
that period after the approval of the resolution plan.
In this context, it may be pertinent to mention, that
the amendments made in the IBC in the
year 2019 were subject matter of substantial debate in Rajya Sabha, on 29th
July, 2019, wherein various questions/ issues were raised, which were duly
addressed by the Hon’ble Finance Minister8. From the said debate,
the intent of the statute appears to be clear that the successful resolution
applicant is given a clean slate to revive the corporate debtor, with the
Government not raising any further claim after the approval of the plan.
Attention is also invited to the decision in the case of Essar Steel India Limited9
wherein the Apex Court while recognising the supremacy/ binding nature of the
Resolution Plan and Scheme of IBC held, “……………A
successful resolution applicant cannot suddenly
be faced with “undecided” claims after the resolution plan submitted by
him has been accepted as this would amount to a hydra head popping up which
would throw into uncertainty amounts payable by a prospective resolution
applicant who successfully take over the business of the corporate debtor. All
claims must be submitted to and decided by the resolution professional so that
a prospective resolution applicant knows exactly what has to be paid in order
that it may then take over and run
the business of the corporate debtor. This the successful resolution applicant
does on a fresh slate, as has been pointed out by us hereinabove.”
Recently, the Rajasthan
High Court in the case of Ultra Tech
Nathdwara Cement10, considering the aforesaid intent and the
legal position, has been pleased to allow the writ petition of the Company
quashing/ setting aside the action of the Revenue Authorities in seeking to
recover GST demands for period prior to Insolvency Commencement Date. The Hon’ble Court held that once the
liabilities have been settled in terms of approved resolution plan which is
binding on all stakeholders including the Governments, no further demand was
recoverable in respect of outstanding dues which stands settled under the
resolution plan.
Re (II) &
(III): Claims relating to period post insolvency commencement date:
Settlement of claims in categories II and III are,
however, not recovered by the resolution plan and thus are not settled
thereunder. In relation to period post insolvency commencement date, till the
approval/ implementation of the plan, the management of the corporate debtor is
ousted, and the company is run by the RP. The claims relating to such period
are fully enforceable against the corporate debtor run by the RP. Further,
claims
relating to period post effective date, when the
successful resolution applicant takes over the corporate debtor for revival,
the claims for that period are fully enforceable against the company and the
same is not governed by the provisions of IBC.
Conclusion
To conclude, the liabilities of the corporate debtor
relating to the period prior to insolvency commencement date stands settled in
terms of the binding approved resolution plan and no further amounts, other
than the amount provided in the scheme, can be recovered from the resolution
applicant subsequently. Undoubtedly, the same would result in a huge impact/
hit to the Revenues, but the Department must recognise that the very genesis of
the IBC law is to give a fresh slate to the new investor to revive the
corporate debtor, which would ultimately
result in betterment of the economy, saving of employment and also generation
of tax revenues in long term. What is therefore lost in short run, shall get
recouped by the huge benefits that shall come with a revived corporate debtor.
1 ‘Statement of Objects and Reasons’ for introduction
of IBC
2 of Innoventive
Industries Limited Vs. ICICI Bank in Civil Appeal Nos. 8337-8338 of 2017 (SC)
dated 31.08.2017
3 PCIT vs. Monnet Ispat
and Synergy Limited SLP (C) No.6483/2018 (SC)
4 V. Ventaka Sivakumar
(Liquidator) (Rathna Stores Pvt. Ltd.) v. Velavan Stores in M.A./875/2019
(NCLAT Del)
5 Leo Edibles and Fats
Limited vs. TRO: [2018] 259 Taxman 387 (AP HC)
6 Pr. DGIT vs. Synergies Dooray Automotive Ltd.:
Company Appeal (AT) (Insolvency) No. 205 of 2017 (NCLAT Del)
7 Union Bank of India
Ltd. v. Star Agro Marine Exports Pvt. Ltd: MA/520/ 2018 in CP/668/IB/2017
(NCLAT Chn)8
https://rajyasabha.nic.in/ http://164.100.47.5/ newsite/ debatenew/ newshow.aspx
9 COC of Essar Steel
India Limited v. Satish Kumar Gupta & Ors.: Civil Appeal No. 8766-67 OF
2019 dated 15.11.2019
10 Ultra Tech Nathdwara Cement Ltd., (formerly known
as Binani Cements Ltd.) v. UOI and Ors: D.B. Civil Writ Petition No. 9480/2019
dated 7.4.2020
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