[By Shalin Ghosh]
The author is a student of Maharashtra National Law University (MNLU), Mumbai.
Introduction
The recovery and treatment of statutory dues has always been a vexatious issue for stakeholders in cases involving a distressed entity facing proceedings under the Insolvency and Bankruptcy Code (“IBC”). The absence of clear guidelines coupled with judicial uncertainty muddied the waters, affecting the adjudication of disputes and hampering the efficiency of the resolution process envisaged under the IBC.
A recent circular released by the Central Board of Indirect Taxes and Customs (“CBIC”), directing tax officials to recover a reduced amount under the Central Goods and Service Act, 2017 (“CGST Act”) from companies against whom insolvency proceedings have been initiated, resolves the quandary surrounding the quantum and the treatment of outstanding GST dues from distressed companies undergoing resolution under the IBC. This article aims to discuss the CBIC’s directive and analyse its legal and commercial significance.
IBC proceedings within the ambit of the CGST Act
The primary concern addressed by the circular mainly hinged on the interpretation of a broad phrase in a provision, Section 84 of the CGST Act, governing the validity and continuation of recovery proceedings regarding outstanding tax obligations. The specific segment of the provision in question, Section 84, stipulates the following: “any recovery proceedings initiated on the basis of the demand served upon them prior to the disposal of such appeal, revision or other proceedings may be continued in relation to the amount so reduced from the stage at which such proceedings stood immediately before such disposal.” This clause suggests that the government dues pending against any entity are reduced due to an appeal, revision or other proceedings connected with such dues, then the quantum of dues to be recovered from that entity shall be reduced. Moreover, the recovery proceedings initiated against such an entity shall be restricted only to the extent of the reduced amount.
The CGST Act does not define the contours of the phrase “other proceedings” as mentioned in Section 84. This legislative ambiguity made it difficult for courts to resolve disputes involving recovery actions initiated by the tax department against companies facing insolvency proceedings. A recent example of this conundrum was the ruling given in the Ultratech Nathdwara Cement Ltd case where the Ahmedabad branch of the Central Excise and Service Tax Appellate Tribunal (“CESTAT”) directed CBIC to frame guidelines regarding the treatment of pending tax liabilities from companies facing IBC proceedings.
In its ruling, the tribunal observed that while the assessee had approached it to quash the appeals considering the orders of the National Company Law Tribunal (“NCLT”), the revenue department (the respondent in the case) was unaware of the future course of action due to the absence of any guidelines by the CBIC. Constituted under the Customs Act, the CESTAT cannot decide whether a pending tax liability can be recovered due to the absence of corresponding provisions in the Customs Act or the Central Excise Act. This problem is not cured despite the non-obstante clause, Section 238, in the IBC which is otherwise applicable in cases of conflict.
The ‘Adjudicating Authority’ dealing with disputes under IBC is NCLT. It is trite law that the tribunal along with its appellate body, the National Company Law Appellate Tribunal (“NCLAT”) are quasi-judicial institutions. Apart from dealing with cases regarding insolvency and the resolution of companies in the red, both NCLT and NCLAT have also adjudicated on several matters concerning the payment of pending government dues under the CGST Act or any other applicable law by the corporate debtor. Since proceedings involving the treatment of statutory dues have been an important part of the NCLT/NCLAT’s scope of adjudication, it may be inferred that they fall within the purview of “other proceedings” as used in Section 84 of the CGST Act. This interpretation has plugged the prevailing legislative ambiguity thereby preventing the unnecessary litigation saddling the concerned stakeholders. It can provide greater clarity to indirect tax officials in dealing with cases involving the interplay of IBC and other indirect tax laws like the CGST Act.
Aligns with established precedents
It can be argued that the CBIC’s circular implicitly suggests that once the NCLT admits an insolvency resolution application, the tax department cannot take any coercive measures to recover pending statutory dues against the corporate debtor for the period prior to the initiation of the Corporate Insolvency Resolution Process (“CIRP”) under IBC. The scope of recovery action is only limited to the reduced amount of statutory dues payable. In restraining the tax department from forcing a corporate debtor to cough up dues in excess of the reduced amount, the circular appears to be consistent with the Supreme Court’s landmark judgment in Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.(2019), where it held that due to the sacrosanct nature of the Resolution Plan which makes it legally binding on every stakeholder having a skin in the CIRP process (the government not being an exception), tax recoveries must also strictly conform to a Plan that has received the legal sanction and approval of the NCLT.
Moreover, the circular’s attempt to curtail the coercive powers of the tax officials is harmonious with the emerging judicial trend of preventing the recovery of statutory dues from a company facing proceedings under the IBC. The closest parallel is the Supreme Court’s recent judgment in Sundaresh Bhat v. Central Board of Indirect Taxes and Customs(2022) where the Court, while ratifying the primacy of IBC over the Customs Act in case of a clash, precluded the custom authorities (CBIC) from initiating actions to recover outstanding dues under the Customs Act against the distressed corporate debtor undergoing CIRP.
It may also be inferred that the circular could potentially allay the confusion stirred up by the recent decision of the Supreme Court in the contentious Rainbow Papers judgment (2022) which, in holding the government as a secured creditor, elevated the status of statutory dues in the liquidation waterfall, resultantly giving the tax department greater powers in recovering outstanding statutory dues from the distressed corporate debtor. The express prohibition on tax authorities from initiating action for any sum exceeding the reduced amount could ease the burden on the corporate debtor and the resolution process which otherwise would have been jeopardized due to the elevated status of government dues and the consequent increase in the government’s power to recover dues, stemming from the contentious verdict.
Furthers the IBC’s objectives and bolsters its underlying principles
One of the primary reasons behind the IBC’s enactment was to provide debtors and creditors with a consolidated insolvency resolution framework which would facilitate expedite the resolution process, maximize asset valuation and putting a distressed corporate entity back on its feet. It posited a paradigm shift from an inefficient regulatory and legal structure that mounted losses for banks and other financial institutions, slackened resolutions and contained weak creditor rights.
Firstly, by bringing IBC proceedings within Section 84 of the CGST Act and clearly spelling out that quantum for which recovery proceedings may be continued, the circular manages to stave off onerous litigation on many fronts. This could reduce the time taken to dispose cases thereby reducing the erosion in the value of the corporate debtor’s assets.
Secondly, in clearly enunciating the treatment and amount of statutory dues, the CBIC’s policy prescription lends support to the clean slate doctrine—one of the fundamental principles of Indian insolvency law—preventing prospective resolution applicants from being burdened by any undecided amount in the future.
Thirdly, in trimming the powers of the tax agencies from initiating recovery actions regarding outstanding statutory dues, the directive aids in creating a more robust insolvency regime which encourages prospective bidders and investors to apply as resolution applicants who, otherwise, would have been apprehensive of stepping in due to the uncertainty surrounding the treatment of pending or potential statutory demands. This would have translated into fewer bidders, relatively smaller valuations, and ultimately larger haircuts for creditors.
Conclusion
The CBIC’s policy shift is another instance of the GST law being modified and altered from time to time, over the past few years, to harmonize potential hostilities with the IBC and to make it a more efficient commercial law. The circular, by resolving a problem which most corporate debtors faced upon the finalization of a workable resolution plan, smoothens the insolvency process and prevents tax officers from delving into fictitious tax demands. The move is a welcome clarification from the administrative authority that will quell fears, further the interests of key stakeholders involved in the process and improve the insolvency regime prevailing in the country.