Abstract
This article is based on the decision given by the hon’ble supreme court on STATE TAX OFFICER ( 1 ) VERSUS RAINBOW PAPERS LIMITED LNIND 2022 SC 596 and it will further dissect the legal question raised in this case along with the previous precedents of the hon’ble SC in similar cases.
The Verdict in this case basically held that the resolution plan proposed by the Committee of Creditors (COC) wouldn’t pass the scrutiny of law if the debtor fails to pay off the tax dues owed by him to the relevant tax authority, in such a case the Debtor is bound to liquidate its assets under section 53 of the IBC.
It goes without saying that the aforementioned judgement has raised worries within the insolvency sector, and as a result, the stakeholders have been considering what has to be done in order to comply with the aforementioned ruling.
Introduction
The controversy brought up in the judgement was outstanding taxes under the Gujarat Value Added Tax Act of 2003 (the “GVAT”) and how they conflicted with the waterfall system under Section 53 of the IBC. The waterfall mechanism, which is covered by Section 53 of the IBC, was only implemented as a legal tool to establish a hierarchy for prioritising the payment of obligations at the time of the corporate debtor’s liquidation. In essence, the dispute in the case is around outstanding claims from governmental bodies and privately secured debts. It is essential to review the ruling at this time and comprehend how it affects the IBC’s goal. Section 48 of the Gujarat Value Added Tax Act, 2003 (“GVAT Act”), according to the Supreme Court (“SC”), is not in conflict with or in contravention of Section 53 of the Insolvency and Bankruptcy Code, 2016 (“the Code”).
Analysis of the Court
In reaching the aforementioned conclusion, the Court made an important ruling by concluding that because the State Government has first charge over the property and is considered a “secured creditor” under the Gujarat Value Added Tax, 1974, it will also be treated as such under Section 53 (1) (b) (ii) of the IBC for liquidation purposes.
The State’s claim has been ruled to be untimely by the adjudicating authority (NCLT) and the appellate authority (NCLAT). Regulation 12 of the 2016 Regulations addresses the deadline for submitting a claim and supporting documentation, which is outlined in the public notification made according to Section 15 of the IBC. However, the time period is merely a guide and not required.
It also observed in the case of Vishal Saxena & Anr. v. Swami Deen Gupta where NCLT held that the time limit under Regulation 12 for submitting a claim is directory and not necessary in the matter of Resolution Professional. In its ruling and decision of June 10, 2021 in Assistant Commissioner of Customs v. Mathur Sabhapathy Vishwanathan, the NCLT adopted a similar stance. Thus, State’s claim cannot be rejected without violating the law.
The Adjudicating Authority may only approve the Resolution Plan, as approved by the Committee of Creditors (CoC), if the Adjudicating Authority is satisfied that the Resolution Plan complies with Section 30(2) of the IBC. This is made clear by Section 31 of the IBC, which governs the approval of a Resolution Plan by the Adjudicating Authority. The Resolution Plan cannot be authorised if it does not adhere to Section 30(2)’s standards.
The hon’ble court also took note of, Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.,
“A simple reading of Section 31 of the I&B Code would also make it abundantly clear that the corporate debtor, as well as its employees, members, creditors, guarantors, and other stakeholders, are bound by the resolution plan once it has been approved by the adjudicating authority and it has determined that the resolution plan as approved by CoC satisfies the requirements referred to in Subsection (2) of Section 30. Such a clause is necessary since one of the main goals of the I&B Code is to revive the corporate debtor and turn it into an operating business.”[1]
“The resolution plan submitted by the successful resolution applicant must include a number of provisions, including a payment provision for the costs of the insolvency resolution process and a payment provision for operational creditors’ debts, which must not be less than the amount that would be paid to those creditors in the event that the corporate debtor was liquidated in accordance with Section 53, or the amount that would have been paid had the amount to be distributed under that section been less. The resolution plan must also include provisions for paying the obligations of financial creditors who reject the resolution plan, which also must not be less than the sum paid to those creditors in accordance with Section 53, subsection (1), in the event that the corporate debtor is liquidated. To dispel confusion, Explanation 1 to Clause (b) of Subsection (2) of Section 30 of the I&B Code specifies that a distribution made in line with the terms of the aforementioned clause must be just and equitable to such creditors. The resolution plan must also include provisions for the administration of the corporate debtor’s affairs following approval, as well as for the execution and oversight of the resolution plan, Clause a(e) of sub-section (2) of Section 30 of the I&B Code also casts a duty on RP to examine that the resolution plan does not contravene any of the provisions of the law for the time being in force.”[2]
A resolution plan approved by the Committee of Creditors in accordance with Subsection (4) of Section 30 of the IBC may, under Section 31 of the IBC, only be approved by the Adjudicating Authority if the Adjudicating Authority is satisfied that the resolution plan meets the conditions outlined in Subsection (2) of Section 30 of the IBC. The fulfilment of Sub-Section (2) of Section 30 of the IBC criteria is a prerequisite for the approval of a resolution plan.
The Central Government, any State Government, any statutory or other authority, any financial creditor, or any other creditor to whom a debt in respect of dues arising under any law currently in effect is owed would be bound by a resolution plan that is valid and complies with Sub-Section (2) of Section 30 of the IBC. When there are still unpaid statutory obligations owed by a corporate debtor, such a resolution plan would not be binding on the State.
It also held that a company must be liquidated and its assets sold and distributed in accordance with Section 53 of the IBC if it is unable to pay its debts, which should include any statutory obligations to the government and/or other authorities, and there is no plan that envisages dissipation of those debts in a phased manner, uniform proportional reduction.
In the opinion of the court, the Committee of Creditors—which may include financial institutions and other financial creditors—cannot secure its own obligations at the expense of any other obligations, including statutory obligations to any government or governmental authority. Section 48 of the GVAT Act is not in conflict with Section 53 of the IBC or any other IBC requirements. According to Section 53(1)(b)(ii), debts payable to a secured creditor—which, under the GVAT Act, would include the State—rank equally with other specified obligations, including debts related to workman’s compensation for the 24 months prior to the liquidation beginning date. the GVAT Act designates the State as a secured creditor. A creditor to whom a security interest is credited is referred to as a secured creditor in Section 3(30) of the IBC. Such a security interest might be established legally. Any government or governmental authority is not excluded from the IBC’s definition of secured creditor.
Thus, the Court allowed the appeal of the appellant and set aside the order of the tribunal.
Claims Countering the verdict
The legal position is quite poles apart from this verdict, as the apex court had already stated in its verdict in “PR Commissioner of Income Tax v. Monnet Ispat and Energy Limited”, where it categorically held that “IBC has overriding effect on the every existing law inconsistent to it including the Income tax law. Further, the Apex Court also took a note that because Income Tax debts are in the nature of Crown Debts, they do not take precedence even over secured creditors who are private individuals, citing the case of Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co., reported in 2000 (5) SCC 694 [LNIND 2000 SC 721].”[3]
The Bombay High Court recently held that secured debt shall take priority over “Government” dues/tax dues in the case of M/s Edelweiss Asset Reconstruction v. M/s Tax Recovery Officer, 5 dated July 28, 2021. The court based this decision on the fact that the Income Tax Act makes no reference to the obligations of the Income Tax Department taking precedence over secured debt. The Revenue was not permitted to impede the petitioner’s rights as a secured creditor. The order for attachment was invalid.
“The tax dues, being an input to the Consolidated Fund of India and of the States, clearly come within the ambit of section 53(1)(e) of the Code. If the Legislature, in its wisdom, assigned the fifth position in the order of priority to such dues, it is not for this Court to delve into or belittle the rationale underlying the same”[4]
A secured creditor often falls under the category of financial creditors. However, there may be circumstances in which even an operating debtor qualifies as a “secured creditor.” For instance, the National Company Law Appellate Tribunal recognised an operational creditor as a secured creditor in the Concast Steel & Power Ltd. v. MSTC Limited case because of a pledge agreement that had been made with the corporate debtor.
Conclusion
Thus it is advised that the Supreme Court must review the current ruling and clarify the law in light of this. It is obvious that if the existing legal situation is allowed to continue, it would harm the goal that the Code is meant to accomplish. As a result, the added responsibility of paying current or potential government and legislative dues is likely to deter any prospective resolution application. In the end, it could lead to fewer settlement requests, lower asset valuations, and higher haircuts for creditors.
[1] Para 65 Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.
[2] Para 66 Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.
[3] Para 4, PR Commissioner of Income Tax v. Monnet Ispat and Energy Limited
[4] Leo Edibles & Fats Limited v. Tax Recovery Officer, Writ Petition No. 8560 of 2018.
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Written By – Shreyanshu Gupta
