Nov 08, 2022

Waiver Of Statutory Dues under the Insolvency and Bankruptcy Code, 2016 – Past Dues Vs. Dues Payable for the Implementation of a Resolution Plan

BACKGROUND

As per Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (“IBC”), the term ‘operational debt’ has been defined to inter-alia include a debt relating to payment of dues, arising under any law for the time being in force, payable to the Central Government, State Government or any local authority. In Pr. Director General of Income Tax (Admn. & TPS) vs. Synergies Dooray Automotive Limited & Others[1], the National Company Law Appellate Tribunal (“NCLAT”) has held that all the statutory dues of a corporate debtor, including income tax and value added tax, fall within the ambit of ‘operational debt’ and the Central Government, State Government and local authorities, entitled to dues arising out of any existing law, fall within the ambit of ‘operational creditors’.

It is pertinent to note that the Central Government, State Government and local authorities established under a statute, as ‘operational creditors’ under the IBC, do not form part of the committee of creditors (“CoC”) (unless the corporate debtor does not have any financial creditors or all the financial creditors of the corporate debtor are related parties) and are not entitled to vote in the meetings of the CoC but are bound by a resolution plan approved by the CoC and the National Company Law Tribunal (“NCLT”), incorporating certain provisions relating to waiver of statutory dues.

SECTION 30 OF THE IBC AND THE COMMERCIAL WISDOM OF THE COC

Each resolution plan, prior to approval by the NCLT, is subject to limited scrutiny in terms of Section 30(2) of the IBC. As per Section 30(2) of the IBC, each resolution plan must provide for repayment of the debts of the operational creditors in such manner as may be specified by the Insolvency and Bankruptcy Board of India, which shall not be less than the amount to be paid to the operational creditors in the event of liquidation of the corporate debtor.

The Supreme Court of India (“SC”), in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors.,[2] has held that NCLT and NCLAT can under no circumstance trespass upon the commercial decision of the majority of the CoC. NCLT and NCLAT have been endowed with limited jurisdiction of judicial review to the extent specified in Section 30(2) of the IBC and must not exercise plenary powers or act as a court of equity. If the NCLT finds any shortcomings in the resolution plan approved by the CoC vis-a-vis the specified parameters, it must send the resolution plan back to the CoC for resubmission and must not interfere with its commercial aspects.

It is pertinent to note that the commercial wisdom of CoC has been conferred paramount status by the SC for ensuring completion of the insolvency resolution process within the timelines prescribed in the IBC. Further, there is also an intrinsic assumption that the financial creditors are fully informed about the viability of the corporate debtor and the feasibility of the proposed resolution plan. But, it is also imperative that the resolution plan approved by the CoC complies with Section 30(2) of the IBC.

WAIVER OF PAST STATUTORY DUES OF THE CORPORATE DEBTOR

Despite the limited protection provided to operational creditors under Section 30(2) of the IBC, there have been several instances in the past wherein NCLT has upheld the commercial wisdom of the CoC and disregarded the requirements of Section 30(2) of the IBC to approve resolution plans seeking waiver of past statutory dues of the corporate debtor. In re: Ricoh India Limited[3], NCLT approved a resolution plan seeking waiver of all outstanding statutory dues and other claims of the corporate debtor as on the date of approval of the resolution plan. Further, in State Bank of India vs. MOR Farms Private Limited[4], NCLT approved a resolution plan seeking waiver of all the taxation dues of the corporate debtor for previous periods that may arise in future.

However, in State Tax Officer vs. Rainbow Papers Limited[5], SC has clarified that a resolution plan which does not meet the requirements of Section 30(2) of the IBC would be invalid and shall not be binding on the Central Government, State Government and, or any statutory/ local authority. The SC has also clarified that if a resolution plan altogether ignores the statutory dues payable to the Central Government, State Government or any statutory/ local authority, then the NCLT must reject such resolution plan.

Further, in a recent order passed by the NCLT in Taguda Pte. Limited vs. Subodh Kumar Agrawal, RP of Ushdev International Limited[6], NCLT has clarified that “all the past liabilities arising out of any levies/tax dues to any government authorities, etc. which are not part of the Resolution Plan and pertaining to Corporate Insolvency Process period shall stand extinguished from the date of approval of the Resolution Plan“. The NCLT has also clarified that the “authorities have to file the claim before the RP before the approval of Resolution Plan by the CoC” and that the NCLT “cannot burden the Resolution Applicant with the liabilities that had arisen before the approval of the Resolution Plan”.

STATUTORY DUES PAYABLE PURSUANT TO THE ACTIONS PROPOSED UNDER THE RESOLUTION PLAN

It is common for the resolution applicants to include a provision in their resolution plan, claiming waiver of the statutory dues payable as a consequence of the actions proposed to be undertaken for the implementation of their resolution plan. In Taguda Pte. Limited vs. Subodh Kumar Agrawal, RP of Ushdev International Limited[7], NCLT waived the income tax liability on notional income arising on the implementation of the resolution plan owing to the process of ‘writing-back’ of the unpaid dues payable to the creditors of the corporate debtor. Further, In re: Ricoh India Limited[8], NCLT approved a resolution plan seeking waiver of the stamp duty and the registration fees payable for undertaking the various actions contemplated under the resolution plan (including capital reduction, issuance of shares, reconstitution of share capital, transfer of shares/ non-convertible debentures/ securities). Furthermore, in Indian Opportunities Private Limited & Vistra ITCL (India) Limited vs. Sai Wardha Power Generation Limited[9], NCLT approved a resolution plan seeking waiver of the stamp duty and the other fees applicable in relation to the implementation of the resolution plan.

However, in Antanium Holdings Pte. Limited vs. Sujana Universal Industries Limited[10], NCLT challenged the ‘commercial wisdom’ of the CoC and observed that the approval of the resolution plan shall not be construed as a waiver of any statutory dues sought in the resolution plan and that the same shall be subject to approval by the appropriate authorities. The NCLAT upheld the NCLT order and observed that NCLT can go through the reasoning provided by CoC to either accept or reject a resolution plan or provide any other suggestion or objection with respect to such resolution plan, while granting approval under Section 31 of the IBC.

THE WAY FORWARD

Owing to the conflicting orders/ judgments passed by tribunals/ courts in India over the past few years, there is uncertainty with respect to the treatment of statutory dues under the IBC. Further, the recent judgment of the SC in State Tax Officer vs. Rainbow Papers Limited has stirred up another debate with respect to the treatment of statutory dues vis-à-vis the commercial wisdom of the CoC as the SC has held that the financial institutions and other financial creditors of a corporate debtor cannot secure their own dues at the cost of the statutory dues or any other dues of the corporate debtor. In such instances, the commercial wisdom of the CoC is likely to become subservient to the dues owed by the corporate debtor to its other creditors.

Therefore, some clarity must be brought to crystallize the legal position with respect to the treatment of statutory dues payable by the corporate debtor and, or successful resolution applicant; and that can best be done through suitable amendments to the IBC. This would ensure uniformity in the decisions of the courts/ tribunals in India and will promote the doctrine of ‘clean slate’ to ensure that a successful resolution applicant is not burdened with any ‘undecided claims’ in the future.

Footnotes:

[1] Pr. Director General of Income Tax (Admn. & TPS) vs. Synergies Dooray Automotive Limited & Ors., Company Appeal (AT) (Insolvency) No. 205/2017.

[2] Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors., (2020) 8 SCC 531.

[3] In re: Ricoh India Limited, CP (IB) No. 156/I & BC/MB/MAH/2017.

[4] State Bank of India vs. MOR Farms Private Limited, CP (IB) No. 51/CHD/HRY/2017.

[5] State Tax Officer vs. Rainbow Papers Limited, Civil Appeal No. 1661/ 2020.

[6] Taguda Pte. Limited vs. Subodh Kumar Agrawal, RP of Ushdev International Limited, CP (IB) No. 1790/MB/2017.

[7] Taguda Pte. Limited vs. Subodh Kumar Agrawal, RP of Ushdev International Limited, CP (IB) No. 1790/MB/2017.

[8] In re: Ricoh India Limited, CP (IB) No. 156/I & BC/MB/MAH/2017.

[9] Indian Opportunities Private Limited & Vistra ITCL (India) Limited vs. Sai Wardha Power Generation Limited, CP (IB) No. 275/7/HDB/2018.

[10] Antanium Holdings Pte. Limited vs. Sujana Universal Industries Limited, CP (IB) No. 186/HDB/2019.

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