In the World Bank’s Ease of Doing Business Index, the single largest factor behind the improvement of India’s ranking has been enactment of Insolvency and Bankruptcy Code, 2016. Interesting as it may sound, the entire concept has pushed IBC to face situations unknown to Indian Economy.
Let’s elaborate what the conflicts were all about.
Tax authorities are treated on par with operational creditors and are eligible to receive payments with others. However, GST framework currently doesn’t allow a firm to file current tax dues if it has past dues. Penal action has been initiated for non-compliance even in cases where the insolvency resolution process has been initiated or GST registration has been cancelled. This is an obstacle in the process of reviving a company under the IBC process. Trade associations have asked the government to impose a moratorium on past GST dues and accept the current dues.
The Enforcement Directorate (ED), while conducting investigation under PMLA, is free to deal with or attach the personal assets of the erstwhile promoters and other accused persons acquired through ‘proceeds of crime’. However, this is not the case when it comes to the assets of the Corporate Debtor under IBC which have been financed by creditors and acquired by a bona fide third-party Resolution Applicant through the statutory process supervised and approved by the Adjudicating Authority under the IBC. Therefore, upon an acquisition under IBC Process by a Resolution Applicant, the Corporate Debtor and its assets are not derived or obtained through ‘proceeds of crime’ under the Prevention of Money Laundering Act, 2002 (“PMLA) and need not be subject to attachment by the ED after approval of Resolution Plan by the Adjudicating Authorities.
This problem arose in the case of Bhushan Steel where, subsequent to the approval of the resolution plan of JSW Steel by its Committee of Creditors, the ED attached the properties of erstwhile promoters of Bhushan Steel leading to the process of CIRP getting stalled even though JSW was a bonafide Resolution Applicant.
Thus, this gives rise to inter-governmental disputes as to who is the sole adjudicating authority under IBC (i.e. NCLT or ED)
As per section 7 of the IBC, a home buyer, who is now a financial creditor may trigger the insolvency proceedings against the real estate developer. In case of Amrapali Developers, it was held that the Home Buyers have their rightful place on the Committee of Creditors (CoC) when it comes to making important decisions as to the future of the building construction company, which is the execution of the real estate project in which such home buyers are ultimately to be housed.
This was indeed a welcome move, however, MCA recently aired the news of implementing a threshold for application by the Homebuyers under IBC with reference to Companies Act which already provided for a 5% threshold for the initiation of a class action lawsuit and a threshold of 20% of shareholding for the initiation of a case of mismanagement or oppression of minority shareholders.
It was seen in the case of Corporate Insolvency Resolution Process (CIRP) of Binani Cements that even after Dalmia Cements emerged as the successful bidder, the ball stopped in the courts of Ultratech Cement whose application was not even considered by the Committee of Creditors on account of a penalty being slapped by the Competition Commission of India. Later on, Ultratech submitted a letter of comfort to the management of Binani Cement to take it out of IBC and assumed the reign of Binani. Dalmia Cements was thus left stranded even after duly complying with the provisions of IBC and emerging as successful bidder. Its writ petition challenging the Ultratech’s move was even dismissed by NCLT. This shattered the hopes of Dalmia Cements who batted aggressively on increasing its manufacturing capacity in a bid to acquire debt-laden Binani Cements.
No sooner had Arcelor Mittal cleared itself of the strong resistance by the Ruia Family in a bid to acquire Essar Steel, that newly introduced provisions of Section 29A of the Code began to haunt them. As per section 29A, persons who have contributed to the defaults of the corporate debtor or are undesirable due to incapacities as specified in the section or are a ’related party’ to another defaulting party, are prevented from gaining control of the corporate debtor by being declared ineligible to submit a resolution plan under the Code. ArcelorMittal had to first clear off the dues pertaining to Uttam Galva Steels, a Non-performing Asset classified by RBI in respect of which it was a promoter.
Though Financial Service providers are kept out of the scope of the IBC, the operational creditor has nothing to do with the said provision. NCLT in its ruling stated that the operational creditor does not have any claim in respect of contract of insurance. The claim is with respect to the outstanding license fee and the service tax amount. The financial service provider cannot take the blanket cover to claim exclusion from IBC. Thus, the application under IBC was admitted and the moratorium under section 14 was imposed.
Even after complying with the provisions laid down in the Code, the provisions of the Income Tax Act kept haunting both the Resolution Applicant as well as the distressed borrower.
It was laid down by Hon. Supreme Court in CIT v. Mahindra and Mahindra that the waiver of debt being a cash benefit cannot be taxed as business perquisite under section 28(iv) of the Act. Further, the provisions of Section 41(1) of the Act get triggered only when the benefit obtained is due to remission or cessation of trading liability.