Resolution Plan Under IBC Binding Effect and Overriding Provisions Under IBC

Resolution Plan Under IBC Binding Effect and Overriding Provisions Under IBC

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 including the Authorities having any statutory dues on the Corporate Debtor

An analysis is made over an issue on the primacy of the Insolvency & Bankruptcy Code 2016 (IBC) where the Hon'ble Supreme Court and Adjudicating /Appellate authority have held that the claims of all the creditors of a corporate debtor, including any tax claims of statutory authorities, will be settled as per the terms and conditions set out in the Approved Resolution Plan as per section 31 of the IBC.

From the judicial decisions, the primacy has been garnered to the IBC over other enactments by interpreting the provisions of Section 238 of the IBC.

Under section 31(1) of the IBC, once the Adjudicating Authority (i.e. NCLT) passes the resolution plan that had been approved by the COC, it becomes binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders who are involved in such resolution plan.

Section 31 (1) is set out herein below:

31. (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, [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,]¹ creditors, guarantors and other stakeholders involved in the resolution plan.

In August 2019, the IBC was amended by "notification dated 16.08.2019" by which section 31(1) was amended by adding to the original language (after the words "members, creditors") the words "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" in the list of stakeholders who would be bound by the resolution plan.

The amendment to section 31(1) in effect makes the Govt bound by the resolution plan once the resolution plan is approved and passed by the Adjudicating Authority. Thus once a resolution plan is approved, the Government cannot raise any further claims against the Corporate Debtor and will be bound by such a plan.

The another provision is Section 238 of the IBC

238: The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."

According to section 238, the Code shall prevail over any other provision or law contrary or inconsistent with any of its provisions.

In light of the above, two provisions and scheme of the IBC an analysis is made in this Article on the "Binding Effect of the Resolution Plans" once approved by the Adjudicating Authority by referring to the catena of decisions of the Hon'ble Supreme Court and NCLT & NCLAT

A. In the case of of Committee of Creditors of Essar Steels Limited vs Satish Kumar Gupta & ors², the Hon'ble Supreme Court made the following observations while dealing with the Resolution Plan approved by the Adjudicating Authority (NCLT).

i. The decision of Appellate Authority (NCLAT) that claims which exist apart from those decided on merits by the Resolution Professional and by the Adjudicating Authority can now be decided by an appropriate Forum in terms of Section 60(6) of the Code, militates against the rationale of Section 31 of the Code;

ii. A successful Resolution Application cannot be suddenly faced with "un-decided" 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 the prospective Resolution Applicant who successfully took over the business of the Corporate Debtor.

iii. 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 it may then take over and run the business of the Corporate Debtor.

B. In M/s Innovative Industries Limited v. ICICI Bank Limited & Anr³ case, the Hon'ble Supreme Court held that IBC is a parliamentary law and is an exhaustive Code on the subject matter of insolvency in relation to the corporate entities. The Supreme Court held that the non-obstante clause of the IBC will prevail over any State laws. The Hon'ble Court held :

"It is clear that the later non-obstante Clause of the Parliamentary enactment will also prevail over the limited non-obstante Clause contained in Section 4 of the Maharashtra Act. For these reasons, we are of the view that the Maharashtra Act cannot stand in the way of the corporate insolvency resolution process under the Code."

C. In the case of Principal Commissioner of Income Tax v. Monnet Ispat and Energy Limited⁴, the short issue before the Hon'ble Supreme Court in the SLP was whether the Insolvency and Bankruptcy Code, 2016 would override the provisions of the Income Tax Act ?

It was held by the Hon'ble Supreme Court that Section 238 of the IBC shall have an overriding effect including anything inconsistent contained in any other enactment, including the Income Tax Act.

D. In the case of M/s Embassy Properties Development Pvt Limited VS State of Karnataka & Ors⁵, the Hon'ble Supreme Court held that the claim of the Govt. will have to be adjudicated and paid only in the manner prescribed in the Resolution Plan as approved by the Adjudicating Authority namely NCLT. The Hon'ble Supreme Court observed that "if proceedings under statutes like Income Tax Act had attained finality, fastening a liability upon the corporate debtor, since, in such cases, the dues payable to the Government would come within the meaning of the expression "operational debt" under Section 5(21), making the Government an "operational creditor" in terms of Section 5(20). The moment the dues to the Government are crystallized and what remains is only payment, the claim of the Government will have to be adjudicated and paid only in a manner prescribed in the resolution plan as approved by the Adjudicating Authority, namely the NCLT".

E. In the case of Duncans Industries Ltd. Vs A. J. Agrochem⁶ In this case, the proceedings were initiated against the assessee-corporate debtor before the NCLT under Section 9 of IBC.

The initiation of the proceedings under the IBC was opposed by assessee-corporate debtor on the ground that, as provided under Section 16G(1)(c) of the Tea Act, once the management of tea unit had been taken over by the Central Government, then the proceedings for winding up or appointment of receiver could not be initiated without the consent of the Central Government.

NCLT held that in view of the statutory provisions under Section 16G of the Tea Act and as the prior consent of the Central Government had not beJ. Agrochemen obtained, the proceedings under Section 9 of the IBC were not maintainable.

In an appeal by operational creditor before the Appellate Authority, NCLAT held that respondent's application under Section 9 of the IBC would be maintainable even without the consent of the Central Government in terms of Section 16G of the Tea Act.

DECISION BY THE SUPREME COURT

The short question which is posed for consideration before Hon'ble Supreme Court was whether before initiation of the proceedings under Section 9 of the IBC, a consent of the Central Government as provided under Section 16G(1)(c) of the Tea Act, 1953 is required and/or whether in absence of any such consent of the Central Government the proceedings initiated by the respondent operational creditor under Section 9 of the IBC would be maintainable or not ?

Supreme Court held that:

1. In the present case, it is true that by notification dated 28.01.2016 issued under Section 16E of the Tea Act, the Central Government authorized the Tea Board to take over the management or the control of the seven tea estates mentioned in the said notification.

2. Section 238 of the IBC, which is a subsequent Act to the Tea Act, 1953, shall be applicable and the provisions of the IBC shall have an over¬riding effect on the Tea Act, 1953. Any other view would frustrate the object and purpose of the IBC.

3. If the submission on behalf of the appellant that before initiation of proceedings under Section 9 of the IBC, the consent of the Central Government as provided under Section 16G(1)(c) of the Tea Act is to be obtained, in that case, the main object and purpose of the IBC, namely, to complete the "corporate insolvency resolution process" in a time¬bound manner, shall be frustrated.

4. The provisions of the IBC would have an over¬riding effect on the Tea Act, 1953 and that no prior consent of the Central Government before initiation of proceedings under Section 7 or Section 9 of the IBC would be required and even without such consent of the Central Government, the insolvency proceedings under Section 7 or Section 9 of the IBC initiated by the operational creditor shall be maintainable.

The Hon'ble Supreme Court finally affirmed the order passed by the NCLAT holding that insolvency petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 initiated by the respondent¬ operational creditor shall be maintainable.

F. In the recent judgment of Rajasthan High Court in Ultratech Nathdwara Cement Limited v/s Union Of India & Ors⁷ also dwell upon the similar issue while interpreting amended provision of Section 31 of the IBC. The Hon'ble High Court held that as per the amended provisions, the approved Resolution Plan has been made binding on the Corporate debtor, its employees, members and all creditors including the Central Govt., any State Govt. or any local authority to whom a debt in respect of payment of dues arising under any law for the time being in force is owed.

G. In the case of The Dy. Commissioner of Customs DEEC (Monitoring Cell) Versus Ms. Vandana Garg⁸ NCLAT held that Deputy Commissioner of Customs DEEC (Monitoring Cell) aggrieved of rejection of its application for condonation of delay of 1111 days in submitting proof of claim against the Corporate Debtor – 'M/s Jyoti Structures Ltd.', passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench on the ground that the Resolution Professional failed to check/consider Book of Accounts vis-à-vis Appellant while making the Resolution Plan and the Adjudicating Authority failed to appreciate the important issue and filed Appeal before NCLAT.

NCLAT DISMISSED THE APPEAL AND HELD THAT:

i) The Resolution Plan in the Corporate Insolvency Resolution Process against the Corporate Debtor has been approved by the Committee of Creditors as also by the Adjudicating Authority.

ii) That being the admitted position, Section 31 (1) of the I&B Code would come into play which provides that the Resolution Plan approved by the Committee of Creditors shall be binding on all stakeholders.

iii) After approval of the Resolution Plan by the Adjudicating Authority, the Successful Resolution Applicant could not be allowed to be faced with claims filed or admitted after the Resolution Plan was submitted by such Successful Resolution Applicant.

iv) The Successful Resolution Applicant, before submission of the Prospective Resolution Plan is entitled to know the liability of the Corporate Debtor so that he can tailor his Prospective Resolution Plan accordingly and make provision for satisfaction of the claims and making payments in terms of the approved Resolution Plan

CONCLUSION

From the above decisions, it is clear that IBC has an overriding effect over other laws and enactments. Further by virtue of the amendment in Section 31 of the IBC, the legislative intent has been clarified. Under the code, Section 238 clearly provides that IBC will prevail in any inconsistency between two laws.

Once the Resolution Plan has attained finality, the Tax Authorities will be debarred from raising further demands on the Corporate Debtor for the prior period.

The Scheme of the Act is clear that the role of the Resolution Professional is aimed at for revival of the Corporate Debtor as set out below:

(a) After admitting the application either under Section 7, 9 or 10, ordering a public announcement of the initiation of CIRP together with calling for submission of the claims under Section 15 shall be made under the Code.

(b) For this purpose, Adjudicating Authority appoints an Interim Resolution Professional;

(c) In the public announcement of CRP, the information is given for submission of claims by the last date specified therein and IRP is vested with the management of the Corporate Debtor and is responsible for receiving claims.

(d) The Board of Directors of Corporate Debtor stands suspended by the law and management of the affairs of Corporate Debtor vest with the Interim Resolution Professional.

The constitution of Committee of Creditors (CoC) takes place as per the provisions of the Code and thereafter based on the Information Memorandum, the prospective Resolution Applicants have to present the Resolution Plans to the Committee of Creditors (CoC) for seeking approval.

As per the commercial wisdom of the CoC, the final Resolution Plan is approved and placed before the Adjudicating Authority for final approval as per the provisions of the Code.

Once the Resolution Plan is approved by CoC and later by NCLT, it is binding on all the stakeholders. Therefore, once the Resolution Plan is approved by the appropriate authority, the same is binding on all concerned including the Authorities having any statutory dues on the Corporate Debtor.

The primary object of the IBC is revival of the Corporate Debtor and to secure this objective, the above procedure is followed and it should not be seen as depriving the rights of Govt. Authorities to recover their statutory dues for the period prior to the date of approval of the Resolution Plan.

The issue of revival of Corporate Debtor is the key and the majority decision of Committee of Creditors (CoC) is empowered to see the feasibility and viability of the Resolution Plan including the manner of distribution of funds and once the Resolution Plan has been approved, it attains the binding effect.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.