Resolution Plan That Ignores Statutory Dues Paid To State Government/legal Authority Is Subject To Rejection: Supreme Court

CAUSE TITLE:

STATE TAX OFFICER V RAINBOW PAPERS LIMITED

DATE OF ORDER:  

06-09-2022

JUDGE (S):

INDIRA BANERJEE ,A.S. BOPANNA 

PARTIES:Petitioner:State Tax Officer

Respondent:Rainbow Papers Limited

BRIEF FACTS

The Respondent is a business that has been producing and selling crafts and oars in Gujarat since 1990. Under the Gujarat Value Added Tax, 2003 (hence referred to as the "GVAT Act"), it has been assessed for Value Added Tax and Central Sales Tax.  One of the respondent's operating creditors filed a Company Petition under Section 9 of the IBC before the Ahmedabad Bench of the National Company Law Tribunal (NCLT), requesting the start of the Corporate Insolvency Resolution Process (CIRP) against the respondent. The NCLT had previously acknowledged the Company Petition.

On October 10, 2017, a Committee of Creditors was established. On October 11, the appellant submitted a claim to the Resolution Professional in the required Form B, alleging that the respondent owed the appellant about Rs. 47.36 crores in unpaid debts under the GVAT Act. It was too late to file the claim. The Resolution Professional was contacted later by the appellant to confirm the validity of the appellant's claim regarding unpaid tax obligations, and the Resolution Professional told the appellant that the full claim had been waived off.

Because government dues could not be waived, the appellant claimed in an application to the NCLT's Ahmedabad Bench that the Resolution Plan should be rejected. On the grounds that the Sales Tax Officer was a secured creditor, the appellant requested payment of the complete amount owed for VAT/CST.

ISSUE 

Does Section 48 of the GVAT Act makes the Sales Tax Officer a secured creditor and whether Section 53 of the I & B Code, 2016 will supersede Section 48 of the Act?

NCLT DECISION 

• The adjudicating authority stated that Section 53 of the IBC lists the beneficiaries of the liquidation value of the corporate debtor's assets in order of priority. The language of section 53 makes it abundantly clear that operational creditors come last on the list of beneficiaries because secured financial creditors have priority over them and lack standing to object to the Resolution Plan's approval by the Committee of the Creditor.
• The NCLT said that the IBC's provisions disproved the Appellant-Intervener's belief that they possess an advantage over the other beneficiaries. Instead of liquidating corporate debtor companies, the IBC's primary goal is to resolve insolvent corporate debtor enterprises. The NCLT subsequently rejected the appellant's argument that it could not be maintained, and it mandated that the Resolution Applicant file an amended resolution plan with the COC and be granted one day to submit an amendment to the new plan.

NCLAT DECISION 

•  In accordance with Section 61 of the IBC, the appellant appealed the aforementioned Adjudicating Authority's ruling from February 27, 2019, to the NCLAT. By the ruling and decision in question, which were announced at (2019) ibclaw.in 463 NCLAT, the NCLAT dismissed the appeal. As a result, the NCLAT found that the Adjudicating Authority had noted that the Appellant had submitted a claim to both the Resolution Professional and the Adjudicating Authority at a considerably later date. The appellant missed the deadline for filing his claim. After the Adjudicating Authority accepted the "Resolution Plan," it contacted the "Resolution Professional."
• The government cannot assert first charge over the assets of the "Corporate Debtor" in light of the Statement of Objects and Reasons of the IBC and Section 53 of the IBC. The IBC's Section 53 must take precedence over Section 48 of the GVAT Act. Because of this, the Appellant does not fit the description of a "Secured Creditor" as stated in Section 3(30) of the IBC when read in conjunction with Section 3(31). Additionally, the 'Resolution Professional' lacked jurisdiction to hear the claim because it was made by the 'Sales Tax Department' after the plan had already been accepted by the 'Committee of Creditors,' and it was thus properly rejected.

ANALYSIS BY SUPREME COURT

• The appeal was filed in opposition to the impugned judgement and order dated December 19, 2019, issued by the National Company Law Tribunal (NCLAT), which dismissed the company appeal filed by the appellant against the order of the adjudicating authority dismissing the appellant's application and holding that the Government cannot claim first charge over the corporate debtor's property because Section 48 of the Gujarat Value Added Tax provides for first charge on the property of a dealer in goods. The question was whether Section 48 of the GVAT Act supersedes IBC regulations, notably Section 53.
• However, the Regulations must be read in their entirety and not in truncated form, and they must be interpreted in light of the legislative requirements of the IBC, as interpreted by this Court. The Court stated that the amendment to Regulation 12 states that creditors must submit proof of claim on or before the last date specified in the public announcement. The timetables outlined in the IBC, even for the conclusion of proceedings, have been ruled by this Court to be merely directory and not obligatory.It should be highlighted that in this case, neither the adjudicating nor the appellate authorities correctly interpreted the relevant law, and the state was under no need to file a claim in respect of dues that are of statutory concern and for which the recovery proceedings have also been launched.
• On behalf of the appellant, it has been argued that the State instituted legal action against the respondent-Corporate Debtor to recoup its statutory debts. The Corporate Debtor's Books of Accounts would have documented its obligation to pay the State's statutory dues. The Resolution Professional breached its legal duty by failing to look into the Corporate Debtor's Books of Accounts, verify and include them in the information memoranda, and include provisions for them in the Resolution Plan.
• The Resolution Plan is not enforceable against the State since it does not adhere to the IBC's statutory criteria. The IBC's definition of "Secured Creditor" is extensive and broad enough to cover all types of security interests. The State becomes a secured creditor under Section 3(30) of the IBC due to the statutory charge under Section 48 of the GVAT Act, the claim of the State Tax Department, which completely complies with the definition of "Security Interest" under Section 3(31) of the IBC. It is not necessary for a creditor to lose their status as a secured creditor just because they are an operational creditor. The Appellate Authority's ruling is illegal and cannot be upheld since it violates the law.
• Before submitting claims to the Adjudicating Authority for approval, the Resolution Professional was required to gather, verify, and collect them. The court further decided in Swiss Ribbons (P) Ltd. v. Union of India [2019] ibclaw.in 03 SC that the Resolution Professional lacks the authority to accept or reject the claim.
• There was no deadline for presenting a claim with supporting evidence, thus the State's claim was delayed. The NCLT determined that the time limit for submitting a claim in Regulation 12 is simply directory and not necessary in Vishal Saxena & Anr. v. Swami Deen Gupta Resolution Professional.
• A Resolution Plan can be approved by the Adjudicating Authority only if it complies with Section 30(2) of the IBC, and the Resolution Professional must provide proof for the fact that the Resolution Plan provides for the payment of operational creditors' dues that cannot be less than the amount that would be paid to those creditors if the Corporate Debtor was liquidated according to with Section 53, or the amount that would have been paid to such operational creditors if the Corporate Debtor was liquidated in accordance with Section 53
• Before it can accept the resolution plan, the Adjudicating Authority must be satisfied that it meets the requirements of Sub-Section (2) of Section 30 of the IBC. Any resolution plan that does not meet the requirements of Section 30 of the IBC is illegal and will not bind the State.
• Section 31(2) uses the term "shall" to signify a mandate/binding command, whereas "may" denotes discretion. The Adjudicating Authority's discretion may not be exercised arbitrarily or capriciously. If the proved facts and circumstances demand that discretion be employed in a particular way, discretion must be exercised in that manner. If a Resolution Plan appears to be in disagreement with the law, the requirements of the IBC, and/or the Rules and Regulations established under the IBC, the Resolution must be rejected.
• If a company is unable to pay its debts, including statutory dues to the government and/or other authorities, and there is no mechanism in place to discharge those debts, the company must be liquidated and its assets sold and divided in accordance with Section 53 of the International Business Code. The court further said that the committee of creditors cannot secure its own dues at the expense of any Government or Governmental Authority's statutory dues.
• Section 48 of the GVAT Act does not contradict Section 53 of the IBC, which says that the debts of secured creditors rank equally with other defined debts. The State is a secured creditor under the GVAT Act. A secured creditor is one to whom a security interest is credited, according to Section 3(30) of the IBC. Such a security interest could be created by operation of law, and any Government or Governmental Authority is not excluded from the definition of secured creditor under the IBC.
• The Supreme Court ruled that the Appellate Authority (NCLAT) and Adjudicating Authority (NCLT) both made legal errors in rejecting the appellant's claim. As previously stated, failure to file a claim on time cannot be the primary basis for its denial. In light of the aforementioned findings, the Resolution Professional may propose a new Resolution Plan. This verdict and order, however, will not prevent the Resolution Applicant from submitting a plan in light of the aforementioned statements, including provisions for the statutory creditors' dues, such as the appellant.

Click here to download the original copy of the judgement