Sunday 20 June 2021

Union of India Vs Ruchi Soya Industries Ltd - If the departments of Central or State Governments do not file an application or participate in the resolution process, their claims automatically get extinguished.

HC Karnataka (27.05.2021) in Union of India Vs Ruchi Soya Industries Ltd  [Writ Appeal No. 2575/ 2018 (T-TAR) ] held that;

  • # 75.  . . . . . .As such, if the resolution plan approved by the  National Company Law Tribunal (for short NCLT), does not  comprise all the claims of the Central / State Governments  or the local authority, the said claim shall stand  extinguished and the proceedings relating thereto shall  stand terminated. Hence, the Hon’ble Supreme Court held  that with regard to any claim prior to the approval of the  resolution plan cannot be continued and would stand extinguished, if not made a part of the plan. Thus, claims  which are not part of the resolution plan, shall stand  extinguished.  

  • # 77. . . . . . Further, it is noted that crown debts do not take  precedence even over secured creditors, who are private  persons. This is clear on a reading of Section 238 of “IBC”  which provides for the overriding effect of “IBC”  notwithstanding anything inconsistent contained in other  law for the time being in force or effect by any such law.  Therefore, if the departments of Central or State  Governments do not file an application or participate in the  resolution process, their claims automatically get  extinguished having regard to the judgment of the Hon’ble  Supreme Court in the case of Ghanashym Mishra.  

 

Excerpts of the order; 

This appeal is listed to consider IA No.1/2021  seeking dismissal of the appeal on the basis of Section 31  of the Insolvency and Bankruptcy Code, 2016 (“IBC” for  the sake of convenience) and on the basis of the latest  judgment of the Hon’ble Supreme Court in the case of  Ghanashyam Mishra and Sons Private Limited  through the Authorized Signatory vs. Edelweiss  Asset Reconstruction Company Limited through the  Director [2021 SCC Online SC 313] (Ghanashyam  Mishra) to the effect that the claim of the Revenue as well as the liability of the respondent has stood extinguished  permanently. But, with consent of learned counsel on both  sides, it is heard finally.  

 

# 2. This appeal is filed by the Union of India, the Commissioner and deputy Commissioner of Customs, being aggrieved by the order of the learned  ingle Judge  dated 06.03.2018 passed in writ petition No.41394/2015.  In that petition, respondent herein had sought a  declaration that the reassessment of the subject goods  imported by the respondent on 17.09.2015 and demanding  the higher rate of duty of 12.5% for clearance of the  subject goods was illegal. The learned Single Judge,  accepted the contentions of the respondent-importer and  quashed Annexures – W, X, Y and Z and held that the respondent herein was liable to pay duty only at 7.5%  based on Notification No.12/2012-Cus. dated 17.03.2012.  Consequently, the differential duty as per Notification  No.46/2015-Cus. dated 17.09.2015 at the rate of 12.5%  was not applicable to the respondent herein.  

 

# 3. Succinctly stated, the facts are, the respondent  herein is a public limited Company registered under the  provisions of the Companies Act, 1956. According to the  respondent, it entered into a contract on 27.07.2015 with  ‘M/s.Aavanti Industries Private Limited, Singapore,’ for  import of 10,000 Metric Tons (MTs.) of Crude Palm Oil of  Edible Grade in bulk, as per the terms and conditions  stipulated in the contract. The vessel carrying the aforesaid imported item arrived at Mangalore Port on 17.09.2015 around 1600 hours. The respondent herein had filed four bills of entry bearing Nos.2619662,  2619678, 2619680 and 2619708, dated 16.09.2015,  seeking clearance of the subject goods for home  consumption. According to the respondent herein, as per  Notification No.12/2012-Cus. dated 17.03.2012, it was  liable to pay duty at 7.5%. That the four bills of entry  stipulating duty at 7.5% were assessed on 16.09.2015 and  the respondent herein was required to deposit duty of  Rs.2,64,95,907/- in terms of bills of entry and TR-6  challans generated by Electronic Data Interchange (EDI)  Service Centre, Mangalore. 


# 74. We find that the said contention of the learned counsel for the respondent is in consonance with what has  been opined recently by the Hon’ble Supreme Court in  Ghanashyam Mishra, on which judgment, the respondent  has placed heavy reliance. The relevant paragraphs of the  aforesaid judgment are extracted for immediate reference:  

  • “58. Bare reading of Section 31 of the I&B Code would also make it abundantly clear, that  once the resolution plan is approved by the  Adjudicating Authority, after it is satisfied, that the  resolution plan as approved by CoC meets the  requirements as referred to in sub-section (2) of  Section 30, it shall be binding on the Corporate  Debtor and its employees, members, creditors,  guarantors and other stakeholders. Such a  provision is necessitated since one of the dominant purposes of the I&B Code is, revival of the  Corporate Debtor and to make it a running  concern.  

  • 59. The resolution plan submitted by  successful resolution applicant is required to  contain various provisions, viz., provision for  payment of insolvency resolution process costs,  provision for payment of debts of operational  creditors, which shall not be less than the amount  to be paid to such creditors in the event of  liquidation of the Corporate Debtor under section  53; or the amount that would have been paid to  such creditors, if the amount to be distributed under the resolution plan had been distributed in  accordance with the order of priority in sub-section  (1) of section 53, whichever is higher. The  resolution plan is also required to provide for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, which also  shall not be less than the amount to be paid to  such creditors in accordance with subsection (1) of section 53 in the event of a liquidation of the  Corporate Debtor. Explanation 1 to clause (b) of  subsection (2) of Section 30 of the I&B Code  clarifies for the removal of doubts, that a  distribution in accordance with the provisions of the  said clause shall be fair and equitable to such  creditors. The resolution plan is also required to  provide for the management of the affairs of the  Corporate Debtor after approval of the resolution  plan and also the implementation and supervision  of the resolution plan. Clause (e) of sub-section (2)  of Section 30 of I&B Code also casts a duty on RP  to examine, that the resolution plan does not  contravene any of the provisions of the law for the time being in force.  

  • 60. Perusal of Section 29 of the I&B Code  read with Regulation 36 of the Regulations would  reveal, that it requires RP to prepare an  information memorandum containing various  details of the Corporate Debtor so that the  resolution applicant submitting a plan is aware of  the assets and liabilities of the Corporate Debtor, including the details about the creditors and the  amounts claimed by them. It is also required to  contain the details of guarantees that have been given in relation to the debts of the corporate  debtor by other persons. The details with regard to all material litigation and an ongoing investigation  or proceeding initiated by Government and  statutory authorities are also required to be  contained in the information memorandum. So also  the details regarding the number of workers and  employees and liabilities of the Corporate Debtor  towards them are required to be contained in the  information memorandum.  

  • 61. All these details are required to be  contained in the information memorandum so that  the resolution applicant is aware, as to what are  the liabilities, that he may have to face and provide  for a plan, which apart from satisfying a part of  such liabilities would also ensure, that the  Corporate Debtor is revived and made a running  establishment. The legislative intent of making the resolution plan binding on all the stake-holders  after it gets the seal of approval from the  Adjudicating Authority upon its satisfaction, that  the resolution plan approved by CoC meets the  requirement as referred to in sub-section (2) of  Section 30 is, that after the approval of the  resolution plan, no surprise claims should be flung on the successful resolution applicant. The  dominant purpose is, that he should start with  fresh slate on the basis of the resolution plan  approved.  

  • x x x x x  

  • 66. Vide Section 7 of Act No. 26 of 2019 (vide  S.O. 2953(E), dated 16.8.2019 w.e.f. 16.8.2019), the following words have been inserted in Section  31 of the I&B Code.  “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”  

  • 67. As such, with respect to the proceedings,  which arise after 16.8.2019, there will be no  difficulty. After the amendment, any debt in  respect of the payment of dues arising under any  law for the time being in force including the ones  owed to the Central Government, any State  Government or any local authority, which does not  form a part of the approved resolution plan, shall  stand extinguished.  

  • 68. The only question, which remains is, what  happens to such dues if they pertain to a period  wherein Section 7 petitions have been admitted  prior to 16.8.2019.  

  • 69. To answer the said question, we will have to  consider, as to whether the said amendment is  clarificatory/declaratory in nature or a substantive  one. If it is held, that it is declaratory or  clarificatory in nature, it will have to be held, that  such an amendment is retrospective in nature and  exists on the statute book since inception.  However, if the answer is otherwise, the  amendment will have to be held to be prospective  in nature, having force from the date on which the  amendment is effected in the statute.  

  • x x x x x

  • 77. It is clear, that the mischief, which was  noticed prior to amendment of Section 31 of I&B  Code was, that though the legislative intent was to extinguish all such debts owed to the Central  Government, any State Government or any local  authority, including the tax authorities once an  approval was granted to the resolution plan by  NCLT; on account of there being some ambiguity,  the State/Central Government authorities  continued with the proceedings in respect of the  debts owed to them. In order to remedy the said  mischief, the legislature thought it appropriate to clarify the position, that once such a resolution plan  was approved by the Adjudicating Authority, all  such claims/dues owed to the State/Central  Government or any local authority including tax  authorities, which were not part of the resolution  plan shall stand extinguished.  

  • x x x x x 

  • 86. As discussed hereinabove, one of the  principal objects of I&B Code is, providing for  revival of the Corporate Debtor and to make it a  going concern. I&B Code is a complete Code in  itself. Upon admission of petition under Section 7,  there are various important duties and functions  entrusted to RP and CoC. RP is required to issue a  publication inviting claims from all the  stakeholders. He is required to collate the said  information and submit necessary details in the  information memorandum. The resolution  applicants submit their plans on the basis of the  details provided in the information memorandum. The resolution plans undergo deep scrutiny by RP  as well as CoC. In the negotiations that may be  held between CoC and the resolution applicant,  various modifications may be made so as to  ensure, that while paying part of the dues of  financial creditors as well as operational creditors  and other stakeholders, the Corporate Debtor is  revived and is made an on-going concern. After  CoC approves the plan, the Adjudicating Authority  is required to arrive at a subjective satisfaction, that the plan conforms to the requirements as are  provided in sub-section (2) of Section 30 of the I&B  Code. Only thereafter, the Adjudicating Authority  can grant its approval to the plan. It is at this  stage, that the plan becomes binding on Corporate  Debtor, its employees, members, creditors,  guarantors and other stakeholders involved in the  resolution Plan. The legislative intent behind this is,  to freeze all the claims so that the resolution  applicant starts on a clean slate and is not flung  with any surprise claims. If that is permitted, the very calculations on the basis of which the  resolution applicant submits its plans, would go  haywire and the plan would be unworkable.  

  • 87. We have no hesitation to say, that the word  “other stakeholders” would squarely cover the  Central Government, any State Government or any  local authorities. The legislature, noticing that on  account of obvious omission, certain tax authorities  were not abiding by the mandate of I&B Code and  continuing with the proceedings, has brought out  the 2019 amendment so as to cure the said  mischief. We therefore hold, that the 2019 amendment is declaratory and clarificatory in  nature and therefore retrospective in operation. 

  • x x x x x  

  • 91. It is a cardinal principle of law, that a  statute has to be read as a whole. Harmonious  construction of subsection (10) of Section 3 of the I&B Code read with subsections (20) and (21) of  Section 5 thereof would reveal, that even a claim in  respect 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 would come within the ambit of  ‘operational debt’. The Central Government, any  State Government or any local authority to whom  an operational debt is owed would come within the  ambit of ‘operational creditor’ as defined under  sub-section (20) of Section 5 of the I&B Code.  Consequently, a person to whom a debt is owed  would be covered by the definition of ‘creditor’ as defined under sub-section (10) of Section 3 of the  I&B Code. As such, even without the 2019  amendment, the Central Government, any State  Government or any local authority to whom a debt  is owed, including the statutory dues, would be  covered by the term ‘creditor’ and in any case, by  the term ‘other stakeholders’ as provided in  subsection (1) of Section 31 of the I&B Code.  

  • x x x x x  

  • 94. Therefore, in our considered view, the  aforesaid provisions leave no manner of doubt to  hold, that the 2019 amendment is declaratory and  clarificatory in nature. We also hold, that even if 2019 amendment was not effected, still in light of  the view taken by us, the Central Government, any  State Government or any local authority would be  bound by the resolution plan, once it is approved  by the Adjudicating Authority (i.e. NCLT).  

  • x x x x x 

  • 130. In the foregoing paragraphs, we have held that 2019 amendment to Section 31 of I&B Code is  clarificatory and declaratory in nature and therefore  will have a retrospective operation. As such, when  the resolution plan is approved by NCLT, the  claims, which are not part of the resolution plan,  shall stand extinguished and the proceedings  related thereto shall stand terminated. Since the  subject matter of the petition are the proceedings, which relate to the claims of the respondents prior to the approval of the plan, in the light of the view  taken by us, the same cannot be continued.  Equally the claims, which are not part of the  resolution plan, shall stand extinguished.”   


# 75. In this regard, the learned counsel for the  respondent also relied on the facts on the judgment of the  Rajasthan High Court in the case of Ultra Tech  Nathdwara Cement Limited vs. Union of India in D.B.  Civil Writ Petition No.9480/2019. It was considered in the  said case, and it was observed that since the 2019  amendment to Section 31 of “IBC” is clarificatory and  declaratory in nature it would have a retrospective operation. As such, if the resolution plan approved by the  National Company Law Tribunal (for short NCLT), does not  comprise all the claims of the Central / State Governments  or the local authority, the said claim shall stand  extinguished and the proceedings relating thereto shall  stand terminated. Hence, the Hon’ble Supreme Court held  that with regard to any claim prior to the approval of the  resolution plan cannot be continued and would stand extinguished, if not made a part of the plan. Thus, claims  which are not part of the resolution plan, shall stand  extinguished.  


# 76. Madras High Court has applied the judgment of  the Hon’ble Supreme Court in Ghanashyam Mishra in the  case of the respondent herein. However, the matter was  remanded to the NCLT to give a finding as to whether the  corporate resolution plan filed by the respondent therein  included the customs duty on the import of goods in that  case.  


# 77. The provisions of Section 238 of “IBC” states  that the provisions of “IBC” 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. Further, it is noted that crown debts do not take  precedence even over secured creditors, who are private  persons. This is clear on a reading of Section 238 of “IBC”  which provides for the overriding effect of “IBC”  notwithstanding anything inconsistent contained in other  law for the time being in force or effect by any such law.  Therefore, if the departments of Central or State  Governments do not file an application or participate in the  resolution process, their claims automatically get  extinguished having regard to the judgment of the Hon’ble  Supreme Court in the case of Ghanashym Mishra.  


# 78. We are of the view that this matter does not  require to be remanded to the NCLT, Mumbai, before  which forum the resolution plan was approved. We  however observe that the reasons are two fold: firstly, this  appeal has been dismissed on merits and the respondent  has succeeded on merits in this appeal, secondly, the  appellants have not produced any material before us to  demonstrate that the claim in the instant case was part of  the resolution plan approved by the NCLT, Mumbai. 


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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.