POSITION OF STATUTORY AND GOVERNMENT DUES UNDER THE IBC-TROUBLED WATERS?

Neena Teresa Varghese, 5th year student at the National University of Advanced Legal Studies (NUALS), Kochi.

Statutory dues under the insolvency and bankruptcy code, 2016

It is an established position of law that statutory debts and dues payable to the Central and State Governments and any local authorities come under the definition of operational debt, and therefore, such creditors enjoy the status of operational creditors. Apart from the statutory provision, this position has enjoyed the support and recognition of the judiciary and the legal fraternity as well. Numerous decisions evidence the same. For instance, income tax, value added tax and other statutory dues are considered to come within the ambit of operational debt as they have a direct nexus with the operation of the Company. Another facet that has seldom been questioned by the judiciary is the assertion that the Insolvency and Bankruptcy Code, 2016 (IBC) overrides all other statutes. This question has been raised multiple times and Section 238 of the Code has been held to triumph over other statutes. The decision in Pr. Commissioner of Income Tax vs Monnet Ispat and Energy Ltd., wherein it was held that the IBC will override anything inconsistent contained in any other enactment, including the Income Tax Act, 1961 is indicative of this kind of interpretation adopted by Courts.

With respect to dues owed to the government, even before the enactment of the IBC, the debts owed to secured creditors enjoyed primacy over the crown debts or debts owed to the government, as has been laid down by the Apex Court in Dena Bank vs Bhikhabhai Prabhudas Parekh & Co. With the coming into force of the IBC , the priority of payouts in case of liquidation was dictated by the waterfall mechanism laid down in Section 53, which afforded secured creditors the first preference. Further, the resolution plan as envisaged in the Code enjoys paramount importance, even over the statutory dues. This has been reiterated by the Courts multiple times. An excellent example is the decision rendered in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Limited, wherein the Supreme Court laid down that once a resolution plan is duly approved by the Adjudicating Authority under sub section (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 and State Governments or local authorities, guarantors and other stakeholders; and all such claims which are not a part of the resolution plan on the date of approval of such plan, shall stand extinguished. Further, the Karnataka High Court has, in a recent decision held that “if the departments of Central or State Governments do not file an application or participate in the resolution process, their claims automatically get extinguished.” From the above decisions, it is clear that the rights of the State as an operational creditor are limited by the waterfall mechanism and the provisions of the resolution plan.

Therefore, to sum up the legal scenario, the setting would be that statutory dues are operational debts and therefore, their status is inferior to that of secured debts. However, recently there has been some turbulence in this area. The following decisions create an air of ambiguity with respect to the treatment of this category of debt.

Causes for concern

The first decision that warrants consideration was delivered in Union of India v. Vijaykumar V Iyer. One of the prime issues in this case was that whether the dues under the spectrum license granted by the Department of Telecomm ( “DoT”) can be classified as operational debt. The Court answered this question in the affirmative and held the Central Government to be an operational creditor. However, the Court ruled that the Spectrum Trading Guidelines cannot be substituted under the CIRP and the dues of the Licensor cannot be subjected to clearance by way of a provision in a Resolution Plan. It was held that the spectrum cannot be utilized without payment of requisite dues which cannot be wiped off by triggering CIRP under the Code. By so deciding, the NCLAT effectively created a new class within an existing class of creditors, i.e., it afforded the DoT with a special set of rights that are unavailable to other operational creditors. Another implication of this decision is that it demarcates the DoT from other State players, who possess a similar standing under the Code. The same goes against all tenets of the IBC and creates a cloud of confusion regarding the primacy of waterfall mechanism and the resolution.

A conflicting approach was adopted by the same court in BSE Limited v. Asahi Infrastructure & Projects Limited, wherein the NCLAT, holding that ‘listing fees’ is nothing but ‘regulatory fees’, upheld the decision of the NCLT dismissing the CIRP application filed by the appellant for defaulting in making payment of the listing fee. Though it is difficult to find fault with the reasoning of the Court that the IBC cannot be used as a mechanism to recover dues, as has been reiterated by the Apex Court on multiple occasions, the same is not the case with regulatory fees being excluded from the ambit of operational debt. When compared with the decision rendered in UOI v. Vijaykumar, it is apparent that on the one hand, an operational debt has been given primacy over all other debts as well as the resolution plan, while on the other hand, regulatory fees has been denied the protection of an operational debt in case of default.

An entirely different reasoning was employed by the Madras High Court in M/s. Ruchi Soya Industries Limited v. Union of India and Anr., wherein the Court held that “a tax once determined to be paid in accordance with law is a sovereign debt” and that “tax and duties levied and collected under law can never be treated as Operational debt as defined in Section 5(21) of IBC, 2016.” This decision is contradictory to the definition contained in Section 5(21) of the Code, which expressly provides that statutory dues are operational debts.

The above-mentioned decisions illustrate the concerns over the treatment of statutory and government dues under the insolvency regime in India. While it is appreciable that such claims were placed inferior to claims of secured creditors and financial debts of unsecured creditors to promote business and entrepreneurial interest, the present situation that results in uncertainty as to where these dues stand, might prove to be problematic.

The way forward

With the introduction of Form F which provides for presentation of claims of creditors other than financial or operational creditors, the existence of another class of creditors has been acknowledged under the Code. In this light, the treatment afforded to statutory dues need to be reconsidered. While it is an undisputed position that the legislature has intentionally placed the position of such claims inferior to that of secured and financial debts, several decisions, as above-mentioned, indicate that there is some ambiguity with respect to those statutory dues that may qualify as operational debts. Therefore, it would not be against the spirit of the IBC to bring about a new classification of debts- statutory debts/ crown debts, provided that it enjoys a similar position under the waterfall mechanism as existing presently.