Do all past statutory liabilities get wiped out after the Resolution Order by the NCLT ?
Though the whole idea of the Insolvency & Bankruptcy Code (I&B Code) is based on ‘Yes’ as the answer to the above headline question, the law enforcement agencies, in absence any finality to the interpretation of law on this issue, keep issuing notices, initiate proceedings, making attachments etc in respect of old liabilities. While SEBI issued show cause notice to Monet Ispat & Energy Ltd., the Enforcement Directorate refused to lift its attachment on the properties of Bhusan Power & Steel Ltd. bought by JSW, despite direction by the NCLAT. Only after the Supreme Court finally upheld the constitutional validity of Section 32A of the I&B Code in the case of Manish Kumar vs. Union of India in January 2021 that JSW could close the deal. The Income Tax department as well as GST department have also issued notices to Corporate Debtors not only to enforce existing demands but also reopened completed proceedings on the basis of fresh inputs even though Resolution Orders were passed by the NCLT. Even old VAT demands are being vigorously perused by State GST authorities.
This period of legal confusion has continued from 2017 to 2021 and gave rise to a plethora of frivolous litigation at all levels. Despite clear decisions by some High Courts, the law enforcement officers, in absence of a clear instruction, have carried the litigation further and many cases reached the Hon’ble Supreme Court.
The Supreme Court finally in a landmark judgment dated 13-4-2021 in the case of Ghanshyam Mishra & Sons Pvt. Ltd. vs. Edilwiess Asset Reconstruction Company Ltd. CIVIL APPEAL NO. 8129 OF 2019 has finally settled the controversy to rest. The Hon’ble Supreme Court vide this consolidated order also disposed off under mentioned appeals pending before it on the same issue.
1. CIVIL APPEAL ARISING OUT OF SPECIAL LEAVE
PETITION (CIVIL) NO.11232 OF 2020
[U LTRATECH NATHDWARA CEMENT LIMITED VS. STATE OF UTTAR PRADESH AND OTHERS
2. WRIT PETITION (CIVIL) NO. 1177 OF 2020 M/S
MONNET ISPAT & ENERGY LIMITED AND ANOTHER VS. STATE OF ODISHA AND ANOTHER
3. CIVIL APPEALS ARISING OUT OF SPECIAL LEAVE
PETITION (CIVIL) NOS.71477150OF 2020
[ELECTROSTEEL STEELS LIMITED, BOKARO,
JHARKHAND VS. STATE OF JHARKHAND AND OTHERS]
It is a classic case of silo mindset in Govt. departments. The Ministry of Corporate Affairs which is entrusted with the responsibility of implementing the I&B Code took a clear stand from the very beginning that the Resolution Order by the NCLT shall have an overriding effect on other Acts. The Govt. also made this stand very clear by finally bringing amendment to this effect in the I&B Code in March 2020. The Hon’ble FM unequivocally stated on floor of the Parliament that in case of conflict the provisions of I&B Code shall override other Acts. However, the bureaucracy over the years has acquired a strong propensity to stick to the stand already taken. Despite the amendment, clarifications and a catena of High Court orders, the State Govt. as well as central agencies pursued litigation on the issue. The Enforcement directorate questioned the retrospectivity of Section 32A of the I&B Code in the Supreme Court. The Hon’ble Supreme Court has finally in Ghanshyam Mishra & Sons Pvt. Ltd. vs. Edilwiess Asset Reconstruction Company Ltd (Supra) has settled the issue once and for all and has emphatically pronounced that the answer to the question which is the heading of this article is, ‘Yes’.
The Supreme Court in this landmark judgment considered following questions of law.
“ The short but important questions, that arise for consideration in this batch of matters, are as under:
i) As 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 an adjudicating authority under subsection (1) of Section 31 of the Insolvency and Bankruptcy Code, 2016 ( hereinafter referred to as ‘I&B Code’) ?
ii) As to whether the amendment to Section 31 by Section 7 of Act 26 of 2019 is clarificatory/directory or substantive in nature?
iii) As to whether after approval of resolution plan by the Adjudicating Authority a creditor including the Central Government, State Government or any local authority is entitled to initiate any proceedings for recovery of any dues from the Corporate Debtor, which are not part of the Resolution Plan approved by the adjudicating authority ?”
The Hon’ble Supreme Court analysed in detail the provisions of the I&B Code, 2016; the amendment to it; the legislative intent; the speech of the FM & a host of judicial decisions to arrive at the following answers to the aforementioned three questions before it.
“ In the result, we answer the questions framed by us as under:
i) That once a resolution plan is duly approved by the Adjudicating Authority under subsection (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 Government, any State Government or any local authority, guarantors and other stakeholders. On the date of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim which is not part of the resolution plan.
ii) 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect.
iii) Consequently all dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date when the Adjudicating Authority grants its approval under Section 31could be continued.”
As the Govt. & the judiciary on this issue is on the same page, there is no scope for further controversy and the law as interpreted above is the finally settled law on this issue. Therefore, the ground and the reasoning on which the Hon’ble Supreme Court decided the issues are only of academic interest. Nevertheless, in order to have a clear perspective, it is necessary to briefly mention the aspects of the case considered by the Hon’ble Court in arriving at the aforementioned answers. These aspects are as under:
i) That the dominant object of the I&B Code is to see to it, that an attempt is made to revive the Corporate Debtor and make it a going concern. Any interpretation which negates this objective would be contrary to the legislative intent behind the Code.
ii) That the intention of the legislature is further clarified by the amendment to Section 31 of the code in 2019. The amendment bill inter aliastated as under:
……….. to amend subsection (1) of section 31 of the Code to clarify that the resolution plan approved by the Adjudicating Authority shall also be binding on the Central Government, any State Government or any local authority to whom a debt in respect of payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, including tax authorities;
iii) Section 32A introduced in the I&B Code provided immunity to the Corporate Debtor and its new management against any criminal liability arising from the acts committed prior to the date of Resolution Order by the erstwhile owners
iv) The Hon’ble Finance Minister in the Rajaya Sabha on 29-7-2019 while giving reply to discussion on the amendment stated thus,
“IBC has actually an overriding effect. For instance, you asked whether IBC will override SEBI. Section 238 provides that IBC will prevail in case of inconsistency between two laws. Actually, Indian courts will have to decide, in specific cases, depending upon the material before them, but largely, yes, it is IBC. There is also this question about indemnity for successful resolution applicant. The amendment now is clearly making it binding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. So, that is going to be a major, major sense of assurance for the people who are using the resolution plan. Criminal matters alone would be proceeded against individuals and not company. There will be no criminal proceedings against successful resolution applicant. There will be no criminal proceedings against successful resolution applicant for fraud by previous promoters. So, I hope that is absolutely clear. I would want all the Members to recognize this message and communicate further that this Code, therefore, gives that comfort to all new bidders. So now, they need not be scared that the taxman will come after them for the faults of the earlier promoters. No. Once the resolution plan is accepted, the earlier promoters will be dealt with as individuals for their criminality but not the new bidder who is trying to restore the company. So, that is very clear ……………..(emphasis supplied)”
v) That Judicial decisions, legislative intent & the harmonious interpretation of the provisions of the statute leads to inescapable conclusion that a Corporate Debtor after the resolution order shall begin on a clean slate, free of all old liabilities except those which are part of the order.
After this decision it is settled law now that unless it is part of the resolution order, the law enforcement authorities including tax authorities can neither pursue any existing demand nor initiate any proceeding in respect of any omission or commission relating to a period prior to the date of resolution order. The Corporate Debtor under the new management begins afresh on a clean slate and no past liabilities, not even criminal, can be fastened on it or its new managers, let alone civil liabilities like tax.
Accordingly, all tax demands including demands relating to pending appeals at any level gets automatically extinguished. Besides, no proceeding in future can be initiated against the Corporate Debtor (Assessee) relating to a period prior to the resolution order. In other words, no notice under section 148/148A can be issued for past years. The appeals either of the assessee or the department pending at any stage, should not be withdrawn/dismissed as in fructuous. This would lead to demand remaining in the system and at a later point of time, some other tax officer, unaware of the background, may start pursuing the demand leading unnecessary hardship to the taxpayer.
The need of the hour therefore is, that the Govt. come out with a clear instruction for the field formation on the subject, else there is no dearth of tax officers whose almost compulsive habit of erring on the part of the revenue is so entrenched that despite the law being settled, tax payers may face issues with compliance.