The High Court of Rajasthan (“RHC”) has, by its order dated April 7, 2020 (“Order”), held that an approved resolution plan under the Insolvency and Bankruptcy Code, 2016 (“IBC”) is binding on government authorities and consequently quashed the notices seeking payment of excise duty and services tax issued by the Goods and Service Tax department to Ultra Tech Nathdwara Cement Limited, for the period before it took over M/s. Binani Cements Limited.

Facts

Brief facts of the case are that a company named M/s. Binani Cements Limited (“Company”) had suffered huge losses and was unable to repay its debts to its financial creditor, Bank of Baroda, who consequently filed an insolvency application under Section 7 (initiation of CIRP by financial creditor) of the IBC before the National Company Law Tribunal, Kolkata bench (“NCLT”). A Corporate Insolvency Resolution Process (“CIRP”) was then initiated by the NCLT in which Ultra Tech Nathdwara Cement Limited (“Petitioner”) was one of the resolution applicants.

After reviewing and comparing the resolution plans received, the Committee of Creditors (“CoC”) came to the conclusion that the resolution plan submitted by the Petitioner was the one that was best equipped to achieve the purposes of the IBC. The resolution plan dealt with the dues of all the creditors equitably and was superior in terms of recovery to the banks and other creditors as compared to the losses which all the creditors would have suffered in the event the Company had gone into liquidation.

The resolution professional collated claims of all operational creditors of the Company and verified the claim of the Central Goods and Service Tax Department (“Respondent”) and others, and earmarked an of INR 72.85 crores towards liabilities of excise duty and service tax. The resolution professional, also determined that the liquidation value of the Company was INR 2,300 crores which was lesser than its outstanding debt and thus, the liquidation value available to the operational creditors, including the Respondent, would be zero.

In a meeting of the CoC held on May 28, 2018, the resolution plan submitted by the Petitioner was approved unanimously and it was declared as being the successful resolution applicant. While considering the resolution plan, the NCLT duly approved the proportion/ distribution of payments to be made by the Petitioner to all the creditors.

Bank of Baroda, being a financial creditor, appealed against the said approved resolution plan before the National Company Law Appellate Tribunal (“NCLAT”). By order dated November 14, 2018, the NCLAT affirmed the aforesaid resolution plan approved by the NCLT. Subsequently, Bank of Baroda challenged the resolution plan affirmed by the NCLAT before the Supreme Court, which in turn affirmed the order of the NCLAT by an order dated November 19, 2018. Pursuant to receiving this final seal of approval of the resolution plan by the Supreme Court, the Petitioner took over the management and operations of the Company and the name of the Company was changed to M/s. Ultra Tech Nathdwara Cement Limited. The resolution plan was fully implemented and payments in the terms therein, were duly made to all the creditors, including the statutory creditors.

Despite the aforesaid, the Respondent raised numerous Goods and Service Tax (“GST”) demands on the Petitioner for the period from April 2012 to June 2017, including payment of interest up to July 25, 2017. Having made the full and final payment as proposed in the resolution plan, the Petitioner addressed a letter dated November 26, 2018 to the Respondent informing it of the payment by the Petitioner of all dues, as admitted by the CIRP, and reiterating that all remaining claims and proceedings stood extinguished in terms of the approved resolution plan.

Failing to get a positive response from the Respondent, the Petitioner approached the RHC through a writ petition filed under Article 226 of the Constitution of India seeking, inter alia, (a) quashing of the demand notices issued by the Respondent towards payment of excise duty and GST by the Petitioner for the period before it took over the Company, and (b) a restraint order against the Respondent from raising any further demands, or from proceeding with any coercive steps so far as dues incurred in relation to the period prior to the transfer date on which the
Petitioner took over the Company pursuant to the CIRP.

Issues

• Whether the approved resolution plan under IBC is binding on government authorities, who did not have a right to vote or right of audience in the resolution plan approved by the COC.
• Whether operational creditors like the Central Government and State Government to whom a debt in respect of the payment of dues arising under any law for the time being in force is owed, can raise claims after the resolution plan is approved by the adjudicating authority.

Arguments

Contentions raised by the Petitioner:

The Petitioner, inter alia, contended that the resolution plan submitted by the resolution professional attained finality only after approval by the CoC and hence, cannot be questioned in a court of law. It was further submitted that the financial creditors are given a precedence in the scheme of the IBC when the resolution plan is being finalized and the statutory and operational creditors have to make a sacrifice.

It was also contended that the approved resolution plan had been affirmed by the NCLAT by its order dated November 14, 2018 and thereafter by the Supreme Court by an order dated November 19, 2018, and thus, the Respondent had no jurisdiction to raise demands from the Petitioner for the period prior to the date on which the Petitioner took over the Company, especially after the resolution plan was finalized and approved.

Also, as per the amended Section 31 of the IBC, the approved resolution plan has to be made binding on the corporate debtor, its employees, members and all creditors 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 is owed. The Petitioner referred to the finance minister of India’s clarification on the said amendment where it was stated that the amendment was evidently binding on the government of India and it is one of the ways in which the government is assuring that it will not raise any further claim after the resolution plan is approved.

The Petitioner also drew the RHC’s attention to the averments made in the Special Leave Petition (“SLP”) filed by the Respondent before the honourable Supreme Court and it was urged that the judgment of the NCLAT approving the resolution plan wherein the Respondent’s claim was curtailed and restricted at INR 72.85 crores was specifically challenged by the Respondent and that the same was rejected by the Supreme Court.

Contentions raised by the Respondent:

The Respondent contended that it was not heard by the CoC before finalizing the resolution plan and as such, it was not bound by the same. It was further contended that the mere summary rejection of the SLP preferred by the Respondent against the resolution plan would not foreclose the right of the department to raise its valid demands from the successful resolution applicant.

Observations of Rajasthan High Court

The RHC observed that, it was trite to note that as per the amended Section 31 of the IBC, the Central Government, State Government or any other local authority to whom a debt in respect of payment of dues arising under any law for the time being in force are owed, have been brought under the umbrella of the resolution plan approved by the adjudicating officer, which has been made binding on such government and local authorities.

The purpose of the IBC was salutary as it had been enacted to ensure that an industry under distress does not fade into oblivion and can be revived by virtue of the resolution plan. Once the offer of the resolution applicant is accepted and the resolution plan is approved by the appropriate authority, the same is binding on all concerned to whom the industry may be having statutory dues.

No right of audience is given in the resolution proceedings to the operational creditors, that is, the Central Government or the State Government, as the case may be. The reply given by the Finance Minister of India emphatically conveys that the revival of the dying industry is of primacy concern and to secure this objective, the government would be ready to sacrifice, leaving its interest finally in the hands of the resolution professional and the CoC, as the case may be.

The RHC also referred to the case of Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Others [2019(16) SCALE 319], where it was observed by the Supreme Court that: “Section 31(1) of IBC makes it clear that once a resolution plan is approved by the Committee of Creditors it shall be binding on all stakeholders, including guarantors. This is for the reason that this provision ensures that the successful resolution applicant starts running the business of the corporate debtor on a fresh slate as it were. A successful resolution applicant cannot suddenly be faced with ‘undecided’ claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully takes over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor.”- emphasis supplied.

The RHC observed that in light of the ratio of the above judgment and the stance of the finance minister before the upper house of the Parliament it was clear that the financial creditors have to be given a precedence in the ratio of payments when the resolution plan is being finalized. It is the financial creditors who are given the right to vote in the CoC whereas, the operational creditors, which are, commercial taxes department of the Central Government or the State Government, as the case may be, have no right of audience.

The purpose of the statute is clear that it intends to revive the dying industry by providing an opportunity to a resolution applicant to take over the same and begin the operation on a clean slate. Towards that purpose the evaluation of all dues and liabilities, as they exist on the date of finalization of the resolution plan, have been left in the exclusive domain of the resolution professional with the approval of the CoC.

In addition, from the two possible situations, one being liquidation and the other being revival, the Respondent would gain significantly in case of the latter since as per the assessed liquidity value, their dues have been assessed as nil, whereas as per the resolution plan with revival of the industry at the instance of the resolution applicant, their rights have been secured to the extent of INR 72 crores. Also, the amount of INR 72 crores assessed by the resolution professional in favour of the Respondent has already been deposited by the Petitioner.

Decision of the Rajasthan High Court

In disposing off the writ petition, the RHC held the view that the Respondent would be acting in a completely illegal and arbitrary manner while pressing for demands raised by the notices which are impugned in the aforesaid writ petition and any other demands which they may contemplate for the period prior to the resolution plan being finalized. The demand notices issued by the Respondent were ex-facie illegal, arbitrary and per-se could not be sustained. Accordingly, the impugned demand notices and any further demands pending as on the date of finalization of the resolution plan issued/ raised by the Respondent were to be quashed and struck down.

Vaish Associates Advocates View:

While the High Court of Rajasthan has, in the present case, clearly held that a resolution plan approved by the CoC would be binding on all concerned parties, including government departments to whom statutory dues are payable by the corporate debtor, its view has not been upheld by some other courts.

A case in point in this regard is the matter of Electrosteel Steels Limited v. The State of Jharkhand [W.P.(T). No. 6324 of 2019 and analogous matters] that was subsequently decided by the High Court of Jharkhand (on May 1, 2020), in which it was held that a resolution plan, although approved by the adjudicating authority in favour of a resolution applicant, but not brought to the knowledge of the concerned government stakeholders, would run contrary to Section 31 of the IBC which provides that the approved resolution plan would be binding only on those stakeholders that were involved in the resolution plan.

Per contra, as per to the judgment of the Rajasthan High Court, Section 31 of the IBC clearly emphasizes that government authorities will be bound by the resolution plan approved by the CoC under the IBC, irrespective of whether they were involved in the resolution plan or had an audience before the CoC. This has further been buttressed by the finance minister’s statement before the upper house of the Parliament, mentioning that the government is to make no further claim after a resolution plan has been approved. This principle has also been sustained by the Supreme Court in the form of dismissal of the special leave petition filed by the GST Department challenging the order of the NCLAT upholding the approved resolution plan.

Considering that the interpretation of Section 31 of the IBC in its current form is leading to divergent views on the requirement of resolution plans being binding on stakeholders who have not been informed of and involved in the resolution process,it is therefore imperative that necessary clarifications in this regard be introduced in the IBC itself to reduce the possibilities of contentious litigation arising as a consequence of divergent views taken by various High Courts.

For more information please write to Mr. Bomi Daruwala at [email protected]

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