Insolvency and Bankruptcy Code, 2016: ss. 9, 15, 30, 31&53 – Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 – rr. 4, 4A, 6 to
14 – Gujarat Value Added Tax, 2003 – s. 48 – s. 53 of the IBC, if overrides s. 48 of GVAT – Certain amount due from the respondent to the Sales Tax authorities towards CST and VAT – Recovery proceedings initiated and respondent’s property attached – Petition u/s. 9 for initiation of CIRP and Resolution professional-RP was appointed – Appellant then filed claim before the RP that certain amount was due under the GVAT Act and RP informed the appellant that its entire claim had been waived off – Challenge to, by the appellant –NCLT rejected the application as not maintainable and holding that the Government cannot claim first charge over the property of the Corporate Debtor, as s. 48 which provides for 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 Act, cannot prevail over s. 53 of the IBC – NCLAT dismissed the appeal as also held that the claim of the State is belated – On appeal, held: NCLAT erred in holding that s. 53 of the IBC overrides s. 48 of GVAT – s48 of the GVAT Act 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 – State is a secured creditor under the GVAT Act – s. 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited – Such security interest could be created by operation of law - Definition of secured creditor in the IBC does not exclude any Government or Governmental Authority – Furthermore, delay in filing a claim cannot be the sole ground for rejecting the claim–Impugned orders set aside.
Allowing the appeal, the Court
HELD 1.1 The Regulations have to be read as a whole and not in a truncated manner and interpreted in the light of the statutory provisions of the IBC. The time lines stipulated in the IBC even for completion of proceedings are directory and not mandatory. [Para 23][831-C-D]
1.2 The 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 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. [Para 24][831-D-F]
1.3 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. [Para 25][831-G]
1.4 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. [Para 39][834-G-H]
1.5 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. [Para 41][835-C]
1.6 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. [Para 43][836F-G]
1.7 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. [Para 45][837-D-F]
1.8 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.[Para 46][837-G-H]
1.9 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. [Para 48][838-E-F]
1.10 Section 31(1) of the IBC which empowers the Adjudicating Authority to approve a Resolution Plan uses the expression “it shall by order approve the resolution plan which shall be binding...” subject to the condition that the Resolution Plan meets the requirements of sub- section (2) of Section 30. If a Resolution Plan meets the requirements, the Adjudicating Authority is mandatorily required to approve the Resolution Plan. On the other hand, Sub-section (2) of Section 31, which enables the Adjudicating Authority to reject a Resolution Plan which does not conform to the requirements referred to in sub-section (1) of Section 31, uses the expression “may”.[Para 49][838-F-H]
1.11 Ordinarily, the use of the word “shall” connote a mandate/binding direction, while use of the expression “may” connote discretion. If statute says, a person may do a thing, he may also not do that thing. Even if Section 31(2) is construed to confer discretionary power on the Adjudicating Authority to reject a Resolution Plan, it has to be kept in mind that discretionary power cannot be exercised arbitrarily, whimsically or without proper application of mind to the facts and circumstances which require discretion to be exercised one way or the other. [Para 50][839-A-B]
1.12 If the established facts and circumstances require discretion to be exercised in a particular way, discretion has to be exercised in that way. 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 would have to be rejected. It is also a well settled principle of interpretation that the expression “may”, if circumstances so demand can be construed as “Shall”. [Para 51][839-C]
1.13 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. 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. [Para 52, 53][839-D-E]
1.15 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. [Para 54][839-F]
1.16 NCLAT erred in its observation that s. 53 of the IBC overrides s. 48 of GVAT. Section 48 of the GVAT Act 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. [Paras 55,56][839-G; 840B]
1.17 The State is a secured creditor under the GVAT Act. Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority. [Para 57][840-C]
1.18 The Appellate Authority (NCLAT) and the Adjudicating Authority erred in law in rejecting the application/appeal of the appellant. Delay in filing a claim cannot be the sole ground for rejecting the claim. [Para 58][840-D]
1.19 The impugned orders are set aside. The Resolution plan approved by the CoC is also set aside. [Para 59][840-E] Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC
17 : [2019] 3 SCR 535; Vishal Saxena & Anr. v. Swami Deen Gupta Resolution Professional (2020) SCC Online NCLT 2734; Assistant Commissioner of Customs v. Mathur SabhapathyVishwanathan IBA/578/2019; NCLT, Chennai Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. (2021) 9 SCC 657; Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another (2022) 2 SCC 401 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
This page is for informational and research purposes only and does not constitute legal advice. Consult a qualified advocate for advice specific to your situation.