SC: A resolution plan in which there is no provision for statutory dues cannot be approved by NCLT

STATE TAX OFFICER (1) VS RAINBOW PAPERS LIMITED
DATED 6TH SEPTEMBER 2022
IN THE SUPREME COURT OF INDIA
CIVIL APPEAL NO. 1661 OF 2020

HELD THAT

A RESOLUTION PLAN IN WHICH THERE IS NO PROVISION FOR STATUTORY DUES CANNOT BE APPROVED BY THE NCLT.

BRIEF FACTS

1. The respondent, a company within the meaning of the Companies Act, 2013 is engaged in the business of manufacture and sale of Crafts and Oars within and outside the State of Gujarat since 16th April, 1990.

2. The appellant 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.

3. On or about 8th July 2016, recovery proceedings were initiated against the respondent, in respect of its dues for the year 2011-2012, and the appellant attached the property of the respondent being land at Survey No.2379 and 2381 situated at Rajpur, Taluka Kadi on 8th October 2018.

4. One Neeraj Papers Private Limited, as operational creditor of the respondent filed Company Petition (IB) No.88 of 2017 under Section 9 of the IBC before Ahmedabad Bench of the National Company Law Tribunal (NCLT), for initiation of the Corporate Insolvency Resolution Process (CIRP) against the respondent.

5. By an order dated 12th September 2017, the said Company Petition [Company Petition (IB) No. 88 of 2017] filed by the said Neeraj Papers Private Limited was admitted.

6. One George Samuel was appointed Interim Resolution Professional (IRP) on 22 nd September 2017.

7. After appointment of the said George Samuel as IRP, claims were invited from Creditors under Section 15 of the IBC by issuance of newspaper publications. The last date for submission of claims was 5th October 2017.

8. After receipt of claims, a Committee of Creditors (CoC) was constituted on 10th October 2017. At its first meeting, the CoC passed a resolution to replace the IRP. Accordingly, Ramachandra D. Choudhary, a Chartered Accountant, was appointed as Resolution Professional (RP).

9. The appointment of Mr. Choudhary was approved by the NCLT by an order dated 6th November 2017.

10. The appellant filed a claim before the RP in the requisite Form B, 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.

11. After admission of the CIRP and appointment of the RP, one Kushal Limited submitted a Resolution Plan. Various Creditors had objected to the Resolution Plan.

12. The Tourism Finance Corporation of India Limited, a financial creditor of the Respondent-Corporate Debtor moved an interlocutory application No.273 of 2018 contending that the Tourism Finance Corporation of India Limited had wrongly been categorised as an unsecured financial creditor.

13. By an order Sr. No.JCCT/Div-4/Mahesana/NCLT/case/ O.W.No.3090 dated 22nd October 2018, the appellant called upon the RP to confirm the claim of the appellant towards outstanding tax dues.

14. By a letter dated 22nd October 2018, the Resolution Professional informed the appellant that the entire claim of the appellant had been waived off.

15. The order of the RP was conveyed to the appellant by an email dated 6th November 2018.

16. On or about 20th December 2018, the appellant challenged the Resolution Plan by making an application being I.A No. P-01 of 2019 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.

17. 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, the Adjudicating Authority being the Ahmedabad Bench of the NCLT rejected the application made by the appellant as not maintainable.

THE APPELLANT BEFORE NCLAT

18. The NCLAT held:-

"34. The Adjudicating Authority noticed that the Appellant approached the 'Resolution Professional' on 22nd October 2018 whereas the 'Resolution Plan' dated 26thMay 2018 along with Addendum dated 5th June 2018 was approved by the 'Committee of Creditors' with voting majority of 72.79 per cent in favour of the 'Resolution Plan'. Thus, the claim was made by the Appellant at a much belated stage not only before the 'Resolution Professional' but also before the Adjudicating Authority.

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'.

39. Further, as 'Sales Tax Department' filed its claim at belated stage after the plan had been approved by the 'Committee of Creditors', the 'Resolution Professional' had no jurisdiction to entertain the same and rightly not entertained.

An appeal to the NCLAT was also dismissed, inter alia, since:

i) The email of 22 October 2018 was sent well after the submission and approval of the resolution plan in June 2018 and therefore was belated.
ii) The claim of the Sales Tax Department does not fall within the fold of a secured creditor under Section 3(30) r/w Section 3(31) of the IBC.
iii) Considering the scheme of the IBC, the Sales Tax Department cannot claim first charge over the assets of the Corporate Debtor and "section 48 [GVAT Act] cannot prevail over Section 53" of the IBC.

APPEAL BEFORE SUPREME COURT

An appeal was made to the Supreme Court and the Supreme Court set aside the decisions of the NCLT and the NCLAT, inter alia, since:

1. As per the unamended Regulation 12(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016, read with the IBC, the Sales Tax Department "was not required to file any claim". When read with Regulation 10, the Sales Tax Department "would only be required to substantiate the claim by production of such materials as might be called for".

2. The time stipulations for filing of claim are not mandatory, which is also evident from Regulation 14(2) of the IBC.

3. The Sales Tax Department had, in any event, filed a claim on 28 February 2018, which was before the approval of the plan by the CoC.

4. The Sales Tax Department would be a "secured creditor" as per Section 3(30) and 3(31) of the IBC r/w Section 48 of the GVAT Act.

5. The IRP/RP had access to the books of the corporate Debtor and should have included all liabilities featured therein in the information memorandum. Further, Section 30(2)(b) of the IBC casts an obligation on the IRP to ensure that a proposed plan confirms with the requirements of Section 30(2), which includes provisions for payments to operational creditors and which amount cannot be lower than what would be receivable in the case of a liquidation and per the waterfall mechanism in Section 53 of the IBC.

6. A plan can be approved by the NCLT under Section 31 only if the requirements under Section 30(2) have been satisfied and a plan which does not account for statutory dues will fall foul of Section 30(2); and

7. The committee of 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".

CONCLUSION

From the above judgement it is clear that ,it is duty of IRP/IP to include all liabilities in the books of account of the Corporate Debtor, while preparing Information Memorandum and produce the same while putting before COC for approval. Any resolution plan which contravenes provisions of Section 30(2) should not be approved by NCLT.

DISCLAIMER: The case law presented here is only for sharing information and knowledge with readers. The views are personal shall not be considered as professional advice. in case of necessity do consult with professionals.

SECTION 30 (2) OF IBC,2016

The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan—

(a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the repayment payment of other debts of the corporate debtor.
(b) provides for the payment of debts of Operational Creditors in such manner as may be specified by the Board which shall not be less than- -

(i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or
(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53, whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.

Explanation 1.- For the removal of doubts, it is hereby clarified that distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.
Explanation 2. - For the purposes of this clause, it is hereby declared that on and from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the provisions of this clause shall also apply to the corporate insolvency resolution process of a corporate debtor- -

(i) where a resolution plan has not been approved or rejected by the Adjudicating Authority.
(ii) where an appeal has been preferred under section 61 or section 62 or such an appeal is not time-barred under any provision of law for the time being in force; or
(iii) where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a resolution plan.

(b) provides for the repayment payment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53;

(c) provides for the management of the affairs of the corporate debtor after approval of the resolution plan.

(d) the implementation and supervision of the resolution plan.

(e) does not contravene any of the provisions of the law for the time being in force.

(f) conforms to such other requirements as may be specified by the Board.

Explanation.- For the purposes of clause (e), if any approval of shareholders is required under the Companies Act, 2013 or any other law for the time being in force for the implementation of actions under the resolution plan, such approval shall be deemed to have been given and it shall not be a contravention of that Act or law."