[By Preksha Mehndiratta and Anchit Jasuja]
The authors are students at the Gujarat National Law University, Gandhinagar.
The Insolvency and Bankruptcy Code (Amendment Act), 2019 [i] had amended Section 31 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) after many cases had surfaced where governmental authorities had demanded statutory dues from the corporate debtor even after the resolution plan had been approved. Recently, a division bench of the Jharkhand High Court in Electrosteel Steels Limited v. The State Of Jharkhand [ii] has ruled that when the governmental authority had not been afforded an opportunity to file a claim before the Interim Resolution Professional (“IRP”) due to an improper public announcement, then the claim would not be extinguished after the approval of the resolution plan.
This post attempts to question the correctness of the view of the Jharkhand High Court.
Facts of the Case
The corporate debtor, Electrosteel Steels Limited was undergoing Corporate Insolvency Resolution Process (“CIRP”) at the Kolkata bench of the National Company Law Tribunal (“NCLT”) and the resolution plan had gained final approval under Section 31. Meanwhile the Deputy Commissioner of Commercial Tax, Bokaro, Jharkhand issued an order demanding unpaid Value Added Tax dues from the corporate debtor against which a writ petition was filed. The tax authority argued that it was not aware of the initiation of the CIRP because of the improper public announcement, due to which it was unable to file a claim before the IRP and thus the resolution plan would not be binding on it.
The court held that since the public announcement was not made in Jharkhand, where the corporate debtor had its offices, the tax authority was unaware of the imitation of the CIRP, and thus was not afforded the opportunity to file its claims before the IRP. Consequently, it could not be held to be a stakeholder ‘involved’ in resolution plan within the meaning of Section 31 and thus the resolution plan would not be binding on it.
The decision of the court carves out an exception to the binding nature of the resolution plan in cases where the public announcement was not made as per IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 [iii] and this noncompliance caused a tax authority to be unaware of the initiation of the insolvency process. However, in doing so the court has misread Section 31 and created an unnecessary exception to the binding nature of the resolution plan due to three reasons.
Firstly, Section 31, after the Insolvency and Bankruptcy Code (Amendment Act), 2019 [iv] makes the resolution plan binding on the corporate debtor, its employees, creditors, members and all central and state government authorities and other stakeholders ‘involved’ in the resolution plan. According to the rule of last antecedent [v], in a series when a qualifying factor such as the word ‘involved’ is used, then that qualifying factor is only applicable on the last antecedent in the list which would be ‘other stakeholders’ in this context. Thus the qualification of being ‘involved’ in the resolution plan would not apply to creditors and governmental authorities.
The rule of last antecedent does not operate where a contrary intention appears from the statute [vi]. However, that does not seem to be the case, because scheme of the statute especially after the amendment of Section 31 and the insertion of Section 32A has been to ensure that all debts of the corporate debtor are accounted for in the resolution plan.
Secondly, the carving out of the exception to the resolution plan being binding goes against the object of the IBC. The Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [vii] explained that one of the many objectives of the code is to provide the corporate debtor with a ‘fresh slate’ after the insolvency process. For this reason, the court explained that all claims, even disputed ones have to be accounted for within the resolution plan, or otherwise a resolution applicant would be faced with claims being filed against the corporate debtor even after the insolvency process, thus denying the ‘fresh slate’ to the corporate debtor. Further,, the Rajasthan High Court in Binani Cements Ltd. vs. Commissioner, Central Goods And Service Tax and Central Excise Commissionerate [viii] has also held that all claims against the corporate debtor before the initiation of the CIRP would be extinguished after the resolution plan is approved. Thus the Jharkhand High Court’s judgement carves an exception which would deny the corporate debtor a ‘fresh slate’, which militates against the object of the IBC.
Thirdly, the NCLT in State Bank of India v. ARGL Ltd. [ix] while allowing for the admission of a claim of a tax authority observed that the tax dues payable by the corporate debtor would be reflected in its books of accounts which has to be handed over to the IRP who has to first prepare the list of the debts of the corporate debtor using the books of accounts and only then invite claims from the creditors. The NCLT noted that if this procedure is not followed, then the dues reflected in the books of accounts would be rendered meaningless. Thus the creation of an exception to the binding nature of the resolution plan for tax authorities is unnecessary since their dues are already present with the IRP and could be collated.
The judgement of the Jharkhand High Court seems to be attempting to correct the prejudice suffered by the tax authorities due to their claims not being admitted on account of contravention of provisions under the IBC by the IRP. Therefore, the actions of the IRP did lead to prejudice to the tax authority. But by creating an exception to the binding nature of the resolution plan, the judgement sets a dangerous precedent as it might become a tool for tax authorities and creditors to demand their dues even after the resolution plan has been approved because they were not involved in resolution plan on account of the contraventions by the IRP.
Since the contravention of the provisions under the IBC which resulted in the prejudice to the tax authority were attributable to the IRP, the Jharkhand High Court could have rather referred the matter to the Insolvency and Bankruptcy Board of India who has the power to initiate disciplinary action against the IRPs which includes the power to impose a penalty amounting to three times the loss suffered to a person by the actions of the IRP [x]. Further Section 220(5) also allows the Insolvency and Bankruptcy Board of India to direct the IRP to provide restitution to the person who has suffered loss due to contravention by the IRP. This provision could have been used to direct the IRP to provide restitution to the tax authority. Although it would be impractical and excessively harsh for the IRP to provide for the restitution of the entire claim, the carving out of an exception to the binding nature of the resolution plan just to remedy the prejudice suffered by the tax authority would be detrimental to the interest of the stakeholders.
[i] Insolvency and Bankruptcy Code (Amendment Act), 2019, No. 26, Acts of Parliament, 2019 (India).
[ii]W.P.(T). No. 6324 of 2019 (decided on May 1, 2020)
[iii] IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016
[iv] Insolvency and Bankruptcy Code (Amendment Act), 2019, No. 26, Acts of Parliament, 2019 (India).
[v] Anil Chawla Law Associates, Interpretations of Statutes and agreements in India (May 4, 2020, 10:34 AM), available at http://www.indialegalhelp.com/files/interpretation.pdf
[vii] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, 2019 SCC OnLine SC 1478
[viii]  58 taxmann.com 8
[ix] State Bank of India v. ARGL Limited, CA No. 1215 of 2019, Principal Bench NCLT (decided on Mar. 3, 2019)
[x] Section 220(3), Insolvency & Bankruptcy Code, 2016