Introduction

The Insolvency and Bankruptcy Code 2016(hereinafter “the Code”) was enacted with the objective to bring the insolvency law in India under a single unified umbrella and to speed up the insolvency process. Time and again, the Supreme Court has interpreted various provisions of the Code to fill up the gaps and lacunae, and to explain the true scope and ambit of such provisions.

The Hon’ble Supreme Court in a recent judgment of State Tax Officer V. Rainbow Papers held that 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 other 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.

A question was raised before the Hon’ble Apex Court that whether the provisions of the IBC and, in particular, Section 53 thereof, overrides Section 48 of the Gujrat Value Added Tax Act?

The Hon’ble Supreme Court while answering the above question, held that Section 48 of the Gujrat Value Added Tax Act (hereinafter GVAT Act) which provides the first charge on the property to the government, is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. 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.

The Hon’ble Supreme Court was of the view that 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 provisions of the Code and the State becomes a Secured Creditor under Section 3(30) of the Code

The Term “Secured Creditor” as defined under the Code is comprehensive and wide enough to cover all types of security interests namely, the right, title, interest or a claim to 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 statutory debts and dues payable to the Central and State Governments and any local authorities come under the definition of Operational Debt, and therefore, such creditors enjoy the status of Operational Creditors. For instance income tax, value added tax and other statutory dues are considered to come within the ambit of Operational Debt as they have a direct nexus with the operation of the Company.

The Supreme Court in catena of judgments has laid down that once a Resolution Plan is duly approved by the Adjudicating Authority under sub section (1) of Section 31, the claims as provided in the Resolution Plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central and State Governments or local authorities, guarantors and other stakeholders; and all such claims which are not a part of the Resolution Plan on the date of approval of such plan, shall stand extinguished.

Section 31 of the IBC which provides for approval of a Resolution Plan by the Adjudicating Authority and it makes 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), which shall meet the requirements of Section 30(2) 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 other 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.

A perusal of the objectives and provisions of the Code, particularly Section 53 which deals with distribution of assets of the Corporate Debtor and it thereof signifies the intention of the legislature to place dues of the Central and State Government below the Financial Creditors. This is consistent with the view of Bankruptcy Law Reforms Committee (“BLRC“), in its Report given in November 2015. The rationale behind this was perhaps to promote entrepreneurship and faster economic growth, which will in turn increase the revenues for the Government.

The Code, 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.

If a Resolution Plan is ex facie not in conformity with law and/or the provisions of IBC and/or the Rules and Regulations framed thereunder, the Resolution Plan would have to be rejected.

A Resolution Plan which ignores the statutory demands payable to any State Government or a legal authority, altogether, then the Adjudicating Authority is bound to reject the Resolution Plan.

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.