- More
- Back
Between the Lines | Karnataka High Court: If the departments of ‘Central’ or ‘State’ government(s) do not file an application or participate in the corporate insolvency resolution process, their claims automatically get extinguished July 22, 2021
Published in: Between The Lines
Disclaimer: While every care has been taken in the preparation of this Between the Lines to ensure its accuracy at the time of publication, Vaish Associates Advocates assumes no responsibility for any errors which despite all precautions, may be found therein. Neither this bulletin nor the information contained herein constitutes a contract or will form the basis of a contract. The material contained in this document does not constitute / substitute professional advice that may be required before acting on any matter. All logos and trademarks appearing in the newsletter are property of their respective owners.
The High Court of Karnataka (“KHC”) has in its judgment dated May 27, 2021 (“Judgement”), in the matter of Union of India and Others v. M/s. Ruchi Soya Industries Limited [Writ Appeal No.2575/2018 (T-TAR)], held that if the departments of Central or State government(s) do not file an application or participate in the resolution process, their claims automatically get extinguished.
Facts
M/s Ruchi Soya Industries Limited (“Respondent”), is a public limited company registered under the provisions of the Companies Act, 1956. The Respondent entered into a contract on July 27, 2015 with ‘M/s. Aavanti Industries Private Limited, Singapore,’ for import of 10,000 metric tons of ‘Crude Palm Oil of Edible Grade’ in bulk. On September 16, 2015, four bills of entry had received clearance. The Respondent, as per ‘Notification No.12/2012-Cus’ dated March 17, 2012, was liable to pay duty at 7.5% (“Notification”). The goods arrived at Mangalore Port on September 17, 2015. Coincidentally, on the very same day another notification was issued enhancing the customs duty from 7.5% to 12.5% (“Impugned Notification”). Under the aforesaid circumstances, the Commissioner and Deputy Commissioner of Customs, (“Appellants”) sought for payment of differential duty on the subject goods on the basis of Section 15 (Date for determination of rate of duty and tariff valuation of imported goods) of the Customs Act, 1962 (“Act”). The Respondent contended that the Appellants were not right in demanding the enhanced duty at the rate of 12.5% as per the Impugned Notification on September 18, 2015 as that was subsequent to the assessment of the bills of entry already made on September 16, 2015. Therefore, the Respondent had initially filed a petition before KHC, seeking a declaration that the reassessment of the bills of entry on September 18, 2015, consequent to issuance of the Impugned Notification and demanding the higher rate of duty was illegal. The learned ‘Single Judge’ of KHC held that, the Impugned Notification was not applicable to the subject goods and that, the Appellants could not claim the differential rate of duty on the basis of the said Impugned Notification. Consequently, the demand made to pay differential duty was quashed and it was declared that the importer was liable to pay duty at 7.5% based on the Notification only. Being aggrieved by the order of the learned ‘Single Judge’, the Appellants preferred the said appeal before a division bench of KHC.
The matter was listed along with an application (I.A.No.1/2021) seeking dismissal of the said appeal based on Section 31 (Approval of resolution plan) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) on the premise that no proceeding could have been initiated for recovery of the dues from the Respondent, which is a corporate debtor within the meaning of the provisions of the IBC. This was because, the dues were not part of the resolution plan approved by the National Company Law Tribunal (“NCLT”) under Section 31 of the IBC. Moreover, based on the judgement of Hon’ble Supreme Court (“SC”) in the case of Ghanashyam Mishra and Sons Private Limited through the Authorized Signatory v. Edelweiss Asset Reconstruction Company Limited through the Director [2021 SCC Online SC 313], the claims of the Appellants as well as the liability of the Respondent, would stand extinguished permanently.
In an affidavit in support of the application, the Respondent stated that, by an order dated December 08, 2017 read with an order dated December 15, 2017, the NCLT had admitted the petition filed and the corporate insolvency resolution process had commenced. Thereafter, a public notice inviting claims from all the creditors of the respondent was issued by the interim resolution professional on December 21, 2017. No claim was filed by the Appellants. In terms of the provisions of IBC, a resolution plan was submitted by the consortium of Patanjali Ayurved Limited, Divya Yog Mandir Trust (through its business undertaking, Divya Pharmacy), Patanjali Parivahan Private Limited and Patanjali Gramudhyog Nyas with the resolution professional. The resolution plan was approved by the committee of creditors of the Respondent on April 30, 2019 as per Section 30(4) of the IBC and the orders dated July 24, 2019 and September 04, 2019 were passed by the NCLT in terms of Section 31 of the IBC.
Issue
Arguments
Contentions raised by the Appellants:
It was submitted by the Appellants that it was not known, whether, the claim of the Appellants was a part of the resolution plan vis-à-vis the Respondent. It was further submitted that, if the said claim, which was in the nature of an operational debt, was covered under the resolution plan and if the Appellants succeeded on merits, they could initiate proceedings for recovery of the dues from the Respondent.
Contentions raised by the Respondent:
The Respondent contended that the Appellants had not produced any evidence to establish the fact that the dues to the Appellants were part of the resolution plan. The Respondent relied on the judgement of Ghanashyam Mishra (supra) wherein the issue raised in the instant case had been answered in favour of the Respondent, in as much as a creditor, including the Central Government and State Government or any local authority, is bound by the plan under Section 31(1) of the IBC. The SC in Ghanashyam Mishra (supra) laid down that the said authorities are not entitled to initiate any proceeding for recovery of any of the dues from the corporate debtor, if the operational debt is not a part of the resolution plan approved by the adjudicating authority. It was submitted that, in Ghanashyam Mishra (supra) it has also been held that, the amended Section 31 of the IBC is clarificatory, declaratory and substantive in nature. Therefore, it was submitted that, the claim of the Appellants be held to have abated.
It was further submitted that the resolution plan was successfully implemented on December 18, 2019, and there was a change in the control and ownership of the present Respondent with effect from that date. It was further submitted that as per Section 32A (Liability for prior offences) of the IBC, upon completion of the corporate insolvency resolution process, the liability of the corporate debtor would cease as the said provision has a non-obstante clause. It was further submitted that the present proceedings concerning the subject import leading to demand of the duty relates to the year 2015, that is, a period prior to the commencement of the corporate insolvency resolution process and in any case, the same relates to the period prior to the effective date under the resolution plan and therefore, the same shall stand extinguished. It was further submitted that, therefore, the prayer in the application to dismiss this appeal was infructuous.
It was contended that since the dues claimed by the Appellants was within the scope of ‘operational debt’, the Central Government would be the ‘operational creditor’ as defined under Section 5(20) of the IBC. The dues to the Central Government including the statutory dues would be covered within the definition of “operational debt” owed to a creditor, in terms of Section 3(10) of the IBC. Unless the statutory dues owed to the Central Government are covered or made part of the resolution plan, it would stand extinguished.
Observations of the Karnataka High Court
The KHC noted that, the SC in the case of Ghanashyam Mishra (supra) answered the key issues, pertaining to whether any creditor including the Central Government, State Government or any local authority is bound by the resolution plan once it is approved by NCLT under Section 31(1) of the IBC and whether, after the approval of the resolution plan by the NCLT, is a creditor including the Central Government, State Government or any local authority entitled to initiate any proceedings for the recovery of any of the dues from the corporate debtor, which are not a part of such an approved resolution plan.
The KHC noted that the objective of the IBC was to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of government dues and for matters connected therewith or incidental thereto. The KHC noted that Section 2 (Application) deals with the application of the IBC to the entities mentioned under the IBC. The KHC noted the submissions made by the Respondent that since the dues claimed by the Appellants were within the scope of ‘operational debt’, the Central Government would be the ‘operational creditor’, and unless the said statutory dues owed to the Central Government is covered in the resolution plan, it would stand extinguished. The KHC affirmed that this contention of the Respondent was in consonance with the judgement passed in Ghanashyam Mishra (supra).
The KHC noted that by an amendment to the IBC in 2019 (“2019 Amendment”), the following words were inserted in Section 31 of the IBC, that is, “including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed.”
The KHC noted that, the SC in the case of Ghanashyam Mishra (supra) had arrived at the following conclusions that:
The KHC noted that a bare reading of Section 31 of the IBC made it abundantly clear, that once a resolution plan is approved by the NCLT, on being satisfied, that the resolution plan, as approved by the committee of creditors, meets the requirements, as referred to in Section 30(2) of the IBC, it would be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders. Further, the SC, in Ghanashyam Mishra (supra), deemed such a provision as necessary since one of the dominant purposes of the IBC is the revival of the corporate debtor and to make it a running concern.
The KHC noted the reliance placed by the Respondent on the case of Ultra Tech Nathdwara Cement Limited vs. Union of India in D.B. [Civil Writ Petition No.9480/2019], wherein it was observed that since the 2019 Amendment was clarificatory and declaratory in nature, it would have a retrospective operation. The KHC further noted the observation of the SC in Ultra Tech (supra), that, if the resolution plan, approved by the NCLT, does not comprise all the claims of the Central or State Governments or the local authority, all claims shall stand extinguished and the proceedings relating thereto shall stand terminated. Hence, the SC in Ultra Tech (supra) held that, with regard to any claim prior to the approval of the resolution plan cannot be continued and would stand extinguished, if not made a part of the plan. Thus, the claims which are not part of the resolution plan, shall stand extinguished.
The KHC noted, that it was clear, that the mischief, which was noticed prior to amendment of Section 31 of the IBC was, that though the legislative intent was to extinguish all such debts owed to the Central Government, any State Government or any local authority, including the tax authorities, once an approval was granted to the resolution plan by NCLT, on account of there being some ambiguity, the State/Central Government authorities continued with the proceedings in respect of the debts owed to them. In order to remedy the said mischief, the legislature thought it appropriate to clarify the position, that once such a resolution plan was approved by the adjudicating authority, all such claims/dues owed to the State/Central Government or any local authority including tax authorities, which were not part of the resolution plan, shall stand extinguished. The KHC noted that, the legislative intent behind allowing such extinguishment of claims was, to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. Further that if, such extinguishment of claims was not permitted, the very calculations on the basis of which the resolution applicant submits its resolution plan, would go haywire and the plan would be unworkable.
The KHC noted that the provisions of Section 238 (Provision of this code to override other laws) of the IBC states that the provisions of the IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Further, it was noted that crown debts do not take precedence even over secured creditors, who are private persons. This was clear on a reading of Section 238 of the IBC, which provides for the overriding effect of the IBC, notwithstanding anything inconsistent contained in any other law for the time being in force or effect by any such law.
Decision of the Karnataka High Court
The KHC held that, if the departments of the Central or State Governments do not file an application or participate in the resolution process, their claims automatically get extinguished having regard to the judgment of the SC in the case of Ghanashyam Mishra (supra). Therefore, the appeal was dismissed on merit and the application in I.A.No.1/2021 was allowed.
VA View:
The KHC in this Judgement has rightly observed that, the legislative intent of making the resolution plan binding on all the stake-holders on approval from the NCLT, which depends upon NCLT’s satisfaction, that the resolution plan as approved by committee of creditors meets the requirement as referred to in Section 30(2) of the IBC. In other words, as per the scheme of IBC, after the approval of the resolution plan, no surprise claims should be flung on the successful resolution applicant. The legislature, noted that on account of an obvious omission, that is, since governmental authorities were not mentioned in Section 31 of the IBC, certain tax authorities were not abiding by the mandate/scheme of IBC and were continuing to pursue recovery proceedings against the corporate debtor. Consequently, the legislature brought out the 2019 amendment so as to cure the said mischief.
The dominant purpose is, that a resolution applicant should start with a fresh slate on the basis of the approved resolution plan. Consequently, the corporate debtor should be revived and made to function as a running establishment in the form of a going concern.
For more information please write to Mr. Bomi Daruwala at [email protected]
DOWNLOAD PDF FILE
