HC Gujarat (24.06.2021) in East India Enterprise vs Ministry of Finance Department of Revenue [R/Special Criminal Application No. 8222 of 2019] held that;
Upon the Corporate Debtor being sent to liquidation, it is the procedure prescribed under the IB Code that comes into play and becomes all encompassing for the purpose of realization of all dues and debts by creditors or any other stakeholders from the Corporate Debtor.
On a plain reading of the above provisions of the IB Code, it is clear that statutory dues, which come within the meaning of ‘operational debt’, could be claimed against the Corporate Debtor only under the provisions of the IB Code and not under any other law.
In other words, the dues relatable to the vehicles belonging to the Corporate Debtor can only be recovered under the provisions of the IB Code, i.e. the waterfall mechanism under Section 53 of the IB Code and not from the petitioners, being the auction purchasers.
the petitioners, being the auction purchasers, could not be asked to make payment of the statutory dues claimed against the Corporate Debtor in liquidation in respect of vehicles prior to their date of purchase by the petition.
Excerpts of the order;
# 2. By way of this petition filed under Article 226 of the Constitution of India read with Section 482 of the Code of Criminal Procedure, the petitioners had made prayer in paragraph-10(B) to vacate the Provisional Attachment Order : PAO / MBZO-II / 02 / 2019 dated 18.06.2019 passed by the Deputy Director, Mumbai Zonal Office-II, Directorate of Enforcement, respondent No.2 herein, under sub-Section (1) of Section 5 of the Prevention of Money Laundering Act, 2002 (for short, “the PMLA”) whereby, the movable properties, i.e. 6170 Nos. of commercial vehicles of M/s. Siddhi Vinayak Logistic Limited (Corporate Debtor), have been provisionally attached under the provisions of the PMLA for a period of 180 days from the date of the order with the further condition that the said properties shall not be removed, parted with or otherwise, dealt with, without the prior permission from the said authority.
# 3. The facts, in a nutshell, are as under :-
The Bank Security & Frauds Cell (BS & FC) of C.B.I., Mumbai registered five different FIRs against M/s. Siddhi Vinayak Logistics Ltd. (Corporate Debtor) and its Directors between the years 2015 to 2018 invoking various sections under the Indian Penal Code, 1860 and Sections 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988. Each FIR is based on the complaint filed by five different Banks about cheating and forgery causing wrongful loss to the Banks by the said Corporate Debtor and its Directors. One of the Banks, i.e. Punjab National Bank approached the National Company Law Tribunal, Ahmedabad Bench (for short, “the NCLT”) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for short, “the IB Code”) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a prayer to initiate Corporate Insolvency Resolution Process against the “Corporate Debtor”, which application was numbered as C.P. No. (IB) 89 of 2017. The said application came to be disposed of by the NCLT by order dated 12.09.2017 by which the said Company was admitted under the Corporate Insolvency Resolution Process (CIRP) and (i) Mr. Dushyant C. Dave was appointed as the Insolvency Resolution Professional (IRP) under Section 13(1)(c) of the IB Code and the said IRP was directed to cause public announcement of the initiation of “Corporate Insolvency Resolution Process” and to call for submission of claims under Section 13(1)(b) read with Section 15 of the IB Code and Regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (ii) moratorium was ordered under Section 13(1)(a) of the IB Code prohibiting certain acts, as specified in Section 14 of the IB Code. Thereafter, the Insolvency Resolution Professional filed an application under Section 33 of the IB Code before the NCLT in I.A. No.411 of 2018 in C.P. (IB) No.89 of 2017 seeking liquidation of the Corporate Debtor Company. After hearing both the sides, the NCLT passed the order dated 19.11.2018 by which the Insolvency Resolution Professional was appointed as “Liquidator” under Section 34(1) of the IB Code. The Liquidator took over custody and control of all the assets of the Corporate Debtor under Section 35(1)(b) of the IB Code and thereafter, issued the E-Auction Sale Notice on 08.02.2019. The petitioners herein participated in the auction proceedings and purchased certain number of vehicles, for which the Official Liquidator has issued “Certificate of Sale of Movable Property” in their favour. Pursuant thereto, the Official Liquidator informed the respondent – Regional Transport Offices to initiate and complete the process of transfer of ownership of the vehicles in the name of the buyers – auction purchasers.
# 4. On 18.06.2019 the respondent No.2 issued the Provisional Attachment Order : PAO / MBZO-11 / 02 / 2019 under sub-Section (1) of Section 5 of the PMLA, by which the movable properties, i.e. 6170 numbers of road vehicles of the Corporate Debtor, were ordered to be provisionally attached for a period of 180 days. The petitioners-auction purchasers made representation dated 14.08.2019 to the respondent-Department seeking release of the movable properties from attachment. When no heed was given to the representation made by the petitioners, they preferred the present petition before this Court.
# 11. Before we advert to the merits of the case, it would be useful to refer to certain provisions of the IB Code in order to get a better insight into the issue on hand. Section 5(21) of the IB Code defines the term ‘operational debt’ to mean a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment 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. Section 53 of the IB Code relates to ‘Distribution of assets’. It lays down the mechanism for the distribution of proceeds from the sale of the liquidation assets. Priority is given to secured financial creditors over unsecured financial creditors. In other words, Section 53 provides with a waterfall mechanism, which requires that higher-tiered creditors receive interest and principal payments, while the lower-tiered creditors receive principal payments after the higher-tiered creditors are paid back in full. The dues of the Central and State Government, including that of the respondent-Regional Transport Offices, could be classified as ‘operational debt’ and could be paid / settled in accordance with sub-Sections (e) and (f) of Section 53 of the IB Code. In terms of the waterfall mechanism, the dues of respondent-Regional Transport Office comes much lower in priority.
# 12. At this stage, a reference to Section 238 of IBC would be relevant, which pertains to – “Provisions of this Code to override other laws”. It provides that the provisions of IB Code shall have effect, notwithstanding anything inconsistent therewith contained in any law for the time being in force or any instrument having effect by virtue of any such law. In other words, the IB Code has a overriding effect over any other law for the time being in force, which includes the Motor Vehicles Act and the Rules framed thereunder. Upon the Corporate Debtor being sent to liquidation, it is the procedure prescribed under the IB Code that comes into play and becomes all encompassing for the purpose of realization of all dues and debts by creditors or any other stakeholders from the Corporate Debtor.
# 13. On a plain reading of the above provisions of the IB Code, it is clear that statutory dues, which come within the meaning of ‘operational debt’, could be claimed against the Corporate Debtor only under the provisions of the IB Code and not under any other law. All such claims have to be lodged with the Official Liquidator and are payable under the waterfall mechanism provided in Section 53 of IB Code. The petitioners have produced on record the demand Notice issued against the Corporate Debtor by one of the respondent Regional Transport Offices claiming payment of taxes in respect of some of the subject vehicles. However, the amounts so due from the Corporate Debtor, considering that these are statutory dues in respect of the vehicles which were sold by the Official Liquidator and which belong to the Corporate Debtor, would not be in terms of the provisions of the Motor Vehicles Act and the Rules framed thereunder, but would necessarily have to be under the provisions of the IB Code. In other words, the dues relatable to the vehicles belonging to the Corporate Debtor can only be recovered under the provisions of the IB Code, i.e. the waterfall mechanism under Section 53 of the IB Code and not from the petitioners, being the auction purchasers. The petitioners could be held liable to pay statutory dues in respect of the subject vehicles, which have been claimed by the respondent – Regional Transport Offices after their purchase by the petitioners in April 2019, only from the date when they had purchased the subject vehicles after having exercised their right to raise objections to such claim.
# 14. Considering the overall facts of the case and the provisions of the IB Code, it would be appropriate to direct the petitioners to make payment of the statutory dues from the date of purchase of the subject vehicles by the petitioners, which would be made subject to other proceedings in relation to the said vehicles since the petitioners, being the auction purchasers, could not be asked to make payment of the statutory dues claimed against the Corporate Debtor in liquidation in respect of vehicles prior to their date of purchase by the petition.
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