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Financial Creditor can't secure its own dues at the cost of govt dues in approving a Resolution Plan


The Supreme Court bench comprising Justices Indira Banerjee and A.S. Bopanna was hearing an Appeal on Tuesday and held that the claim of the Tax Department of the State squarely falls within the definition of “Security Interest” under section 3(31) of the Code and the State becomes a secured creditor under section 3(30) of the Code. Such security interest could be created by the operation of law. The definition of a secured creditor in the Code does not exclude any Government or Governmental Authority. The NCLAT clearly erred in its observation that Section 53 of the IBC overrides Section 48 of the GVAT Act.


These appeals under Section 62 of the Insolvency and Bankruptcy Code, 2016, are against a judgment and order dated 19th December, 2019, passed by the National Company Law Appellate Tribunal, dismissing the Company Appeal filed by the Appellant, against an order dated 27th February 2019 of the Adjudicating Authority, rejecting the application filed by the appellants and holding that the Government cannot claim the first charge over the property of the Corporate Debtor, as Section 48 of the Gujarat Value Added Tax, 2003, which provides for the 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.


The short question raised by the appellant in the appeal was, whether the provisions of the IBC and, in particular, Section 53 thereof, override Section 48 of the GVAT Act, 2003.


Facts:

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, 2003. The claim was filed beyond time. By an order dated 22nd October, 2018, the appellant called upon the RP to confirm the claim of the appellant towards outstanding tax dues. By a letter dated 22nd October, 2018, the Resolution Professional informed the appellant that the entire claim of the appellant had been waived off. The order of the RP was conveyed to the appellant by an email dated 6th November, 2018.


On or about 20th December, 2018, the appellant challenged the Resolution Plan by making an application 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. By an order dated 27th February, the Adjudicating Authority being the Ahmedabad Bench of the NCLT rejected the application made by the appellant as not maintainable.


On or about 8th April, 2019, the appellant filed an appeal before the NCLAT against the aforesaid order dated 27th February 2019 of the Adjudicating Authority, under Section 61 of the IBC. The appeal has been dismissed by the NCLAT by the judgment and order impugned.

In this case, claims were invited well before the 5th October, 2017 which was the last date for submission of claims. Under the unamended provisions of Regulation 12(1), the Appellant was not required to file any claim. Read with Regulation 10, the appellant would only be required to substantiate the claim by the production of such materials as might be called for. The time stipulations are not mandatory as is obvious from Sub-Regulation (2) of Regulation 14 which enables the Interim Resolution Professional or the Resolution Professional, as the case may be, to revise the amounts of claims admitted, including the estimates of claims made under Sub-Regulation (1) of the said Regulation as soon as might be practicable, when he came across additional information warranting such revision.


In the present case, it may be noted that there was no obligation on the part of the State to lodge a claim in respect of dues which are statutory dues for which recovery proceedings have also been initiated. The appellants were never called upon to produce materials in connection with the claim raised by the Appellants towards statutory dues. The Adjudicating Authority as well as the Appellate Authority/ NCLAT misconstrued the Regulations.


Appellant's Submission:

It has been argued that there were proceedings initiated by the State against the respondent-Corporate Debtor to realise its statutory dues. The Books of Accounts of the Corporate Debtor would have reflected the liability of the Corporate Debtor to the State in respect of its statutory dues. In abdication of its mandatory duty, the RP failed to examine the Books of Accounts of the Corporate Debtor, verify and include the same in the information memorandum and make provision for the same in the Resolution Plan. The Resolution Plan does not conform to the statutory requirements of the IBC and is, therefore, not binding on the State.


The learned Solicitor General of India submitted that a reading of Sections 3(30) and 3(31) of the IBC makes it clear that the finding of the NCLAT that the State is not a secured creditor is erroneous and contrary to the clear definition of a secured creditor under the IBC. The term “Secured Creditor” as defined under the IBC is comprehensive and wide enough to cover all types of security interests namely, the right, title, interest or a claim to the property, created in favour 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. The Solicitor General rightly 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 ASG submitted that the Appellate Authority, NCLAT has held that the Tax Department of the State does not fall within the meaning of “Secured Creditor”. The NCLAT has 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”, the learned ASG argued. The mere fact that a creditor might be an operational creditor would not result in the 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, the learned ASG submitted.


Referring to Section 30(2) of the IBC, the learned ASG 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. Further, Section 29 of the IBC casts a statutory duty and/or obligation on the Resolution Professional to prepare the information memo after following the procedure laid down in the Court. The learned ASG pointed out that under Section 29 of the IBC, the Resolution Professional is required to prepare the Information Memorandum. The Information Memorandum is mandatorily required to contain the details as mentioned in Regulation 36(2) of the Regulations, 2016.


Court's Analysis:

The Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT) have held that the claim of the State is belated. Regulation 12 of the 2016 Regulations 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.


Under the unamended provisions of regulation 12(1) of CIRP Regulations, the State Tax Officer (appellant) was not required to file any claim. Read with regulation 10, the appellant would only be required to substantiate the claim by the production of such materials as might be called for. The time stipulations are not mandatory as is obvious from sub-regulation (2) of regulation 14 which enables the Interim Resolution Professional (IRP) or the RP, as the case may be, to revise the amounts of claims admitted, including the estimates of claims made under the said regulation as soon as might be practicable, when he came across additional information warranting such revision.


There was no obligation on the part of the State to lodge a claim in respect of dues which are statutory dues for which recovery proceedings have also been initiated. They were never called upon to produce materials in connection with the claim raised towards statutory dues.

The Books of Accounts of the Corporate Debtor (CD) would have reflected the liability of the CD to the State in respect of its statutory dues. In abdication of its mandatory duty, the RP failed to examine the Books of Accounts of the CD, verify and include the same in the information memorandum and make provision for the same in the resolution plan. The resolution plan does not conform to the statutory requirements of the Code and is, therefore, not binding on the State.


Section 31 of the IBC which provides for approval of a Resolution Plan by the Adjudicating Authority makes it clear that the Adjudicating Authority can approve the Resolution Plan only upon satisfaction that the Resolution Plan, as approved by the Committee of Creditors (CoC), meets the requirements of Section 30(2) of the IBC. When the Resolution Plan does not meet the requirements of Section 30(2), the same cannot be approved.


The learned Solicitor General rightly argued that when a grievance was made before the Adjudicating Authority with regard to a Resolution Plan, the Adjudicating Authority was required to examine if the Resolution Plan met the requirements of Section 30(2) of the IBC. The word “satisfied” used in Section 31(1) contemplates a duty on the Adjudicating Authority to examine the Resolution Plan – The Resolution Plan cannot be approved by way of an empty formality.


It was rightly argued by the learned Solicitor General that there can be no question of acceptance of a Resolution Plan that is not in conformity with the statutory provisions of Section 31(2) of the IBC. Section 30(2)(b) of the IBC, casts an obligation on the Resolution Professional to examine each resolution plan received by him and to confirm that such resolution plan provides for the payment of dues of operational creditors, as specified by the Board, which shall not be less than the amount to be paid to such creditors, in the event of liquidation of the Corporate Debtor under Section 53 or the amount that would have been paid to such operational creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in Sub-section 2 of Section 53, whichever was higher and provided for the payment of debts of financial creditors, who did not vote in favour of the resolution plan, in such manner as might be specified by the Board.


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.


A resolution plan which does not meet the requirements of Sub- Section (2) of Section 30 of the IBC, would be invalid and not binding on the Central Government, any State Government, any statutory or other authority, any financial creditor, or another creditor to whom a debt in respect of dues arising under any law for the time being in force is owed. Such a resolution plan would not bind the State when there are outstanding statutory dues of a Corporate Debtor.


"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", the Supreme Court bench noted. In other words, if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.


The Bench observed, "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. The NCLAT clearly erred in its observation that Section 53 of the IBC overrides Section 48 of the GVAT Act."


The Court further noted, "Section 48 of the GVAT Act is not contrary to or inconsistent with section 53 or any other provisions of the Code. 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"


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 Code and the State becomes a secured creditor under section 3(30) of the Code. Such security interest could be created by the operation of law. The definition of a secured creditor in the Code does not exclude any Government or Governmental Authority.


The Supreme Court concluded and held that the Appellate Authority (NCLAT) and the Adjudicating Authority erred in law in rejecting the application/appeal of the appellant. As observed above, delay in filing a claim cannot be the sole ground for rejecting the claim. The appeal was allowed and the order of AA, the order of NCLAT and the resolution plan as approved by CoC, were set-aside.


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