The National Company Law Appellate Tribunal (NCLAT) has recently adjudged that the dues of Government against Corporate Debtor, particularly in the nature of Income Tax, Value Added Tax or other statutory dues, such as Municipal Tax, Excise Duty, etc. fall within the meaning of Operational Debt; and that the Central Government, State Government or the legal Authority having statutory claim, would fall within the meaning of ‘Operational Creditors’. While finding thus in Pr. Director General of Income Tax v/s Synergies Dooray Automotive Ltd. & Ors. (2019), the NCLAT was called upon to interpret the definition of “Operational Debt” as prescribed under Sub Section (21) of Section 5 of Insolvency and Bankruptcy Code, 2016, defines the term “operational debt” to means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. NCLAT, held that a plain reading of the Section 5(21) does not reflect any ambiguity, which would in any manner necessitate reading of term “or” as “and”, as sought to be pressed upon by the Government in order to limit only such debts of Government as ‘Operational Debt’, which would arise against provision of goods or services. It further observed that ‘operational debt’ in normal course means a debt arising during the operation of the Company. As such, the liability to pay the statutory dues like Income Tax, Sales Tax, VAT, GST, etc. Would arise only if the Company is operational and remains a going concern. Such statutory dues were thus held to have direct nexus with the operation of the Company, and therefore, held to fall within the meaning of ‘Operational Debt’.

It would be relevant to mention that the Government had challenged before the NCLAT the order of NCLT whereby resolution plan, as approved by the Committee of Creditors in relation to respective Corporate Debtor, was confirmed by NCLT and directed to be implemented. Such resolution plans in relation to respective Corporate Debtor were bearing proposals for payment of dues of Corporate Debtor, including the dues in favour of Government towards Income Tax, Sales Tax, GST, Service Tax, VAT, etc. at a reduced value than the actual amount of dues. Further, the resolution plan also inter-alia proposed for deferred payment of the said reduced value of dues, over a period time. It was thus alleged by the Government before NCLAT that reduction of statutory dues of Government is in contravention of various statutes prescribing obligations to pay statutory dues, and therefore, the approval of resolution plan was in conflict with the statutory provisions. Allegation was also made that the Resolution Professional did not issue notice to the concerned department of Government, either with respect to the resolution plan or the process of its approval by the Committee of Creditors; and as a consequence the resolution plan was got confirmed from the NCLT without impleadment of Government to the proceedings before the NCLT. Thus, being aggrieved by the confirmation of resolution plan, the Government approached NCLAT by filing Appeal under Section 32 of IBC.

As a consequence of the Judgment of NCLAT, the statutory dues of Government Departments have been accorded the status of “Operational Debt” and the Government Departments have been adjudged to be at par with “Operational Creditors”. Accordingly, Government Departments can exercise the rights of an Operational Creditor, towards filing of proceedings under Section 9 of IBC, in the event of default in payment of the statutory dues. Such actions of Government shall be, however, subject to the rights of the Corporate Debtor of taking the plea of “existence of dispute” against the claim of Government. Further, upon initiation of the Corporate Insolvency Resolution Process, qua the statutory dues against Corporate Debtor, the Government will not have the right to be part of the Committee of Creditors or conduct in the meetings thereof, so long as the financial creditors of the Corporate Debtor exist. As Operational Creditor, the Government can ask for a copy of the resolution plan being submitted for consideration by the Committee of Creditors; and in the event the resolution plan fails to satisfy the statutory terms of Section 30(2)(b) towards providing for payment of operational debt, the decision of Committee of Creditors towards approving such resolution plan shall be open to challenge by the Government before NCLT. This apart, being adjudged as Operational Debt, the Government dues can share the same priority of payment in the waterfall method, as that of an Operation Debt, in the process of insolvency resolution.

It is noteworthy that holding the status of statutory dues of Government as Operational Debt, would lie inconsistent to the provisions of Section 53 of IBC wherein amount due to Government has been given priority of payment in the waterfall method, as against the Operational Creditor. As per Section 30 of IBC a resolution plan is required to bear the provision for payment of debts of operational creditors in such manner that it is not less than the amount to be paid to operational creditor in the event of liquidation of corporate debtor under Section 53. Section 53 of IBC otherwise prescribes for the order of distribution of assets of Corporate Debtor in the event of its liquidation, wherein dues payable to Government has been placed under category (e) whereas the dues payable to Operational Creditor would lie under category (f). Should we expect the Government to now seek disassociation from the status of operational creditors in an appeal to the Supreme Court under Section 62 of IBC against the judgment of NCLAT, within 45 days of the judgment.