The enactment of Insolvency and Bankruptcy Code, 2016 (IBC) is a remarkable and commendable step taken by the central government to provide a regulatory framework by consolidating all previous enactments and providing a time-bound resolution to the financial and operational creditors to recover their debts from corporate debtor effectively. Prior to the enactment of IBC, the resolution time for recovery of debts was 4.3 years but after the said enactment it has significantly reduced to 394 days.
The standing committee on finance 2019 reported that;
“2.3 As per the written post evidence replies submitted by the Ministry of Corporate Affairs, “as on 30th November 2019 around 13,210 cases have been disposed under IBC. Around 190 cases involving claims around ₹3.67 lakh crore were resolved with a realizable amount of around of around ₹1.57 lakh crore. Around 11,366 cases involving claims around ₹4.74 lakh crore were disposed prior to admission. The realizable amount with respect to ₹4.74 lakh crore is not available but even if we make a conservative estimate it would be around ₹2 lakh crore. In other words, out of claims of around ₹8.4 lakh crore (₹4.74 lakh crore + ₹3.67 lakh crore), the realizable amount is around ₹3.57 lakh crore (around 43%)”.
Since, its inception there have been 27 amendments brought into principal act. While bringing a significant amendment in 2019, the finance minister in her speech said that as government is gaining more experience in this field and to bring more clarity in the comprehensive structure, they are bringing amendments to provide robust platform to financial creditors. According to her, the defaulter’s paradise is lost due to the enactment of IBC.
While there were many amendments done in 2019, the amendment which we are concerned with is the one which seeks to modify the text of section 31 which deals with approval of resolution plan where all requirements of Committee of Creditors (CoC) are met, the words “including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed” were inserted which meant that post the approval of resolution plan, all the statutory dues unrecovered will be barred u/s 31 of the IBC.
The Supreme Court’s ruling in Principal Commissioner of Income Tax v. Monet Ispat and Energies Ltd. affirming the view of High Court of Delhi that moratorium issued under section 14 of the IBC will be applicable on all the assessment proceedings of the income tax department; NCLAT’s ruling in Principal Director General of Income Tax v. M/s Synergies Doorat Automotive Ltd. upholding that statutory dues forms part of operation debts under section 5(21) of the IBC and the amendment brought in 2019 puts Income Tax Department in difficult positionto recover its dues from the corporate debtor.
Moratorium u/s 14 of the IBC on Assessment Proceedings
Section 14 of the IBC speaks about moratorium to be declared after initiation of Corporate Insolvency Resolution Proceedings (Hereinafter, “CIRP”) prohibiting the institution and continuation of all the suits against corporate debtor in any court, tribunal, arbitration panel or any other authority.[1] Following the mandate of the section 14 of the IBC, the Hon’ble Supreme Court in Principal Commissioner of Income Tax v. Monet Ispat and Energies Ltd (supra), while affirming the judgement of high court of Delhi declared that;
“2. Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income Tax Act. We may also refer in this connection to Dena Bank v. Bhikhabhai Prabhudas Parekh and Co. [Dena Bank v. Bhikhabhai Prabhudas Parekh and Co., (2000) 5 SCC 694] and its progeny, making it clear that income tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors, who are private persons.”
However, this reasoning of Supreme Court is alarming for Income Tax Department as well as Corporate Debtor for two reasons, firstly, that the moratorium issued under section 14 of IBC will be applicable only over debt-recovery proceedings and secondly, that there lies the difference between tax recovery and tax assessment process wherein assessment proceedings is mere a primary step towards fixing the tax liability which may or may not go in favour of corporate debtor. The decision of the court in Income Tax Appeals might make the department creditor and subsequent proceeding thereon for recovery of tax has been borne by section 14 of the IBC.
The reasoning supporting the first preposition can be traced through the judgement of High Court of Delhi in Power Grid Corporation of India Ltd. v Jyoti Structures Ltd. which is a correct approach adopted by court in interpretation of the said section. The High Court while interpreting opined that the legislative intent of section 14 is to stop only that pending suits or institution of suits that deals with ‘debt-recovery’ of the corporate debtor. The high Court stated that the proceedings of corporate debtor which are beneficial to him in nature will not come under section 14 of the IBC. The court ruled that;
“10. In the light of above purpose or object behind the moratorium, Section 14 of the Code would not apply to the proceedings which are in the benefit of the corporate debtor, like the one before this court in as much these proceedings are not a ‘debt recovery action’ and its conclusion would not endanger, diminish, dissipate or impact the assets of the corporate debtor in any manner whatsoever…..”
12. The learned counsel for the respondent has though argued that once the moratorium comes into effect, no proceedings against the corporate debtor may continue. No doubt to the said proposition of law as stated above, but one need to see the nature of the proceedings; if such proceedings is against the corporate debtor or is in its favour. Stay of proceedings against an award in favour of the corporate debtor would rather be stalking the debtor’s effort to recover its money and hence would not fall in the embargo of Section 14(1)(a) of the Code.”
The scheme of Income Tax assessment proceedings is not debt-recovery action solely, it is a proceeding adjudging the interpretation of the taxing statue undertaken by assessee and declaring that whether the approach adopted by assessee is correct in law or not. Various provisions of Income Tax Act necessitate the existence of substantial question of law in assessment proceeding before courts which might go in favour of assessee.Secondly, the income tax department becomes creditor to the corporate debtor once the ruling of income tax proceedings is declared but post the imposition of applicability of section 14 of the IBC over the said proceeding by Hon’ble Supreme Court has curtailed the right of income tax department to participate in CIRP of corporate debtor raising their demand of statutory dues.
The possible outcome of the ruling of income tax proceedings will either go in favour of assessee or vice-versa. The initiation or continuation of the income tax proceedings will not affect the debt position of corporate debtor in anyway. Post-decision of the proceeding, if the order is in favour of income tax department then the department will initiate tax recovery mechanism where the bar under section 14 operates and the consequence would be that tax department will become creditor to the corporate debtor.
Statutory Dues are Operational Debts u/s 5(21) of IBC
The question whether statutory dues are operational debt under section 5(21) of IBC was posed before NCLAT in Principal Director General of Income Tax v. M/s Synergies Doorat Automotive Ltd.(supra) due to the prevalent practice under the scheme of CIRP where tax departments were not made party to it and substantial amounts due from corporate debtor remains uncovered affecting revenue departments adversely. Section 5(21) of IBC states;
(21) “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the 1 [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;
To settle the same NCLAT interpreted section 5(21) harmoniously relying upon Life Insurance Corporation of India vs D. J. Bahadur & Ors.[2] where it was ruled that if there is ambiguity in the statute the court should always stick itself to the interpretation which would conform the constitutionality of the same. The tribunal held that all the statutory dues under Income Tax, Sales Tax, Value Added Tax etc will come under the last head of the section that any debt payable to central or state government in light of law being in force i.e. tax statutes.
The Approach of NCLAT in interpreting section 5(21) is entirely correct and satisfies the legislative intent where it was the mandate of the act under section 53 which is also known as ‘waterfall mechanism’ where the list is being provided that who will take precedence over whom in resolution plan in which operational creditors are fifth in list and this ruling bring more clarity on the approach adopted by the government of giving secured creditors precedence over crown’s debt.
Amendment in Section 31 of the IBC in 2019
Section 31 of the IBC speaks about the approval of resolution plan from the adjudicating authority after passing of the same by CoC. It is a well-settled principle that post the approval of resolution plan by adjudicating authority, there exist a bar on recovery of dues by creditors who were either part of CoC or were not part of CoC from the corporate debtor. The insertion of the name of central or state government in respect of statutory dues gives the indication that the approval of resolution plan will be binding on them also. Hence, post approval of resolution plan if the dues are not revered the bar of section 31 will be operation from thereon.
Conclusion
The above-mentioned law creates a fiction that if an income tax proceeding is pending before the court or tribunal against the corporate debtor and CIRP is initiated against the corporate debtor and moratorium is issued under section 14, the said proceeding will be stayed. According to NCLAT’s ruling the income tax department is operational creditor i.e. majorly who doesn’t have voting power in CoC (exception: if 1/10th debt is owed to operational creditor then they have voting power in limited sense) and the amendment brought in which says the approved resolution will be binding on the government having statutory dues from the corporate debtor puts income tax department in adverse position as it will be impossible for the department to recover its dues from corporate debtor if the assessment proceedings is stayed which will not give the department a right to claim itself operational creditor in resolution plan.
Firstly, the ruling of staying all income tax proceedings post initiation of CIRP under section 14 of IBC by Hon’ble Supreme Court is binding on all the court under article 141 of the Constitution of India. Secondly, declaring Income Tax Department operational creditor creates more difficulty and thirdly, the amendment makes the situation worse for Income Tax Department because of stay of proceedings the assessment remains disputed which cannot be presented in CIRP and due to the same they will not be able to recover its debts and post approval of resolution plan, income tax department will be barred to recover the same under section 31 of IBC.
The reasoning adopted by High Court of Delhi in Power Grid Case is appealing due consideration of Hon’ble Supreme Court to interpret and give broader interpretation to section 14 of the IBC and hold that the income tax proceedings should not be stayed so that income tax department will have fair opportunity to present its dues in CoC and to get it recovered while participating in adoption of resolution plan.
[1]§14 of The Insolvency and Bankruptcy Code Act no. 31 of 2016 (India).
[2] (1981) 1 SCC 315 (India).
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