Introduction
In the light of introduction of Insolvency and Bankruptcy Code 2016 (Hereinafter, referred as IBC), there has been reduction in time for the process of carrying out insolvency/restructuring. IBC provides various options to draw resolution plans within a short period of time which renders the business to re-establish being a going concern during the process of resolution. Let us analyse a couple of decisions rendered with respect to the proceedings initiated and treatment of indirect tax Liabilities.
Basic provisions and powers of an operational creditor under IBC
IBC provisions can be invoked by a creditor/financial institution to recover their dues in case of default. Under the IBC such persons are referred as operational creditor and financial creditor according to their transactions carried out. In terms of IBC,2016 an operational creditor is person to whom an operational debt is owned by a company/Person (Corporate Debtor). Financial creditor is a person who has financed/lent loan to the corporate debtor. A corporate debtor is a person who is undergoes the resolution plan under IBC.
IBC provides power for an operational creditor to invoke provisions for recovery of their dues in case of default by the corporate debtor. Once the application made before the adjudicating authority (National Company Law Tribunal) is admitted, the proceedings are under IBC are started with appointment of resolution professional /interim resolution professional (hereinafter referred to as RP/IRP)
Once the proceedings under IBC is initiated, the moratorium period as defined under section 14 of the IBC starts and ends on completion of resolution process.( Hereinafter referred as Corporate Insolvency resolution period in short CIRP period) After commencing of CIRP period, all the proceedings pending, institution of suits against the corporate debtor (Company undergoing IBC) ceases to continue and at the same time the board of the company would also ceases to exist. IBC provides power to RP/IRP to carry on the business as a going concern from the start date of CIRP period. All the liabilities of the corporate debtor before CIRP period are subjected to resolution plan. Therefore RP/IRP has no power individually to deal with the previous Liabilities (i.e Liabilities before CIRP period)
Tax liability prior to CIRP recoverable as per resolution plan
The confusion regard to treatment of GST liability under IBC persisted, until the decision rendered in case of Kiran global chem limited, NCLT, Division bench, Chennai MA/1298/2019 in IBA/130/2019, wherein the following conclusions and observations made;
1. IBC overrides all other laws, hence overrides GST law also;
2. To keep the corporate debtor as a going concern, the board has to come with amendments to allow the corporate debtor to file returns
3. The GST liability is considered as operational creditor.
As a result of this decisions, the board has come up with notification 11/2020 dated 21.03.2020 which provides for fresh registration of corporate debtor after initiation of proceedings under IBC. This allows the RP/IRP to carry out operational transactions.
Tax Liability prior to CIRP period recoverable in full
It is known that, institution of new suit or pending proceedings cannot be initiated/continued after initiation of IBC proceedings with for the period prior to CIRP. Contrary to this, decision rendered in case of Electro Steels Limited Versus State of Jharkhand WP (T) No 6324 of 2019 (Jharkhand HC) wherein following observations were made;
Facts
1. The company (corporate debtor) had dues pending towards Jharkhand VAT department. They had corporate office in West Bengal and operations situated in Jharkhand.
2. They had collected tax from customers but had not deposited to the government. They did not inform the adjudicating authorities that the company had been referred to IBC, 2016. Garnishee proceedings were initiated by the department on the orders passed. (Liability crystalized)
3. After initiation of IBC proceedings, public announcement was made by the RP/IRP for the creditors to claim their dues. Since this was made in the state of West Bengal, Jharkhand VAT Department was not aware of the company was undergoing insolvency proceedings.
4. Resolution plan approved without participation of Jharkhand VAT department.
Decision
1. Initiation of recovery proceedings was not ceased as the Jharkhand Vat department did not involve in the resolution process, hence the resolution plan is not binding on them.
2. The offence being a criminal in nature, i.e. tax collected not paid to the government, recovery proceedings cannot be stopped.
Conclusion
In light of the above two decisions, following can be inferred
1. GST department cannot take shelter under the decision of Electro Steels Limited versus State of Jharkhand as it a special case. Notification for taking fresh registration by the RP/IRP would act as deemed intimation for the revenue confirming the assessee is under insolvency proceedings.
2. However, department has a final chance to assess all the liabilities of the corporate debtor before the CIRP period. Once the CIRP period initiated, it would become infeasible to recover the same.
3. However, Section 89 provides for recovery of GST liability from the directors of a private limited company in case of gross negligence, misfeasance or breach of duty. similar provisions are not provided for a public limited company which can be questioned under Article 14 of the Constitution of India.
4. GST and IBC being fledgling laws, much clarity is required to read both in the law in harmonious way and ensuring the right of revenue to recover the taxes and also facilitate the re-organise and rejuvenate insolvent company.
Special thanks to CA Spudarjunan S for inputs. The author could be reached at rajendra@hiregange.com for any queries/feedback.
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