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Judgment
Per: Kanthi Narahari Member (T)
Brief Facts of the Case:
The present appeal is filed by the Appellant aggrieved by the order dated 02nd March 2020 passed by the ‘Adjudicating Authority’ (NCLT, Cuttack Bench, Cuttack) in CA No.188 of 2019 in TP No.41 of 2019 whereby the ‘Adjudicating Authority’ approved the Resolution Plan under Section 31 of the Insolvency and Bankruptcy Code, (hereinafter “the Code”) 2016.
APPELLANT’S SUBMISSIONS:
It is submitted that the Adjudicating Authority while approving the Resolution Plan reduced the allocation towards the claims of the Appellant significantly by making an allocation of Rs.1,00,00,000/- whereas the claim made by the Appellant was Rs.2,75,46,497/-. Thus, there is a reduction of the claim of the Appellant to the extent a sum of Rs.1,75,46,497/-.
The brief facts as under:
It is stated that the Appellant on 08.05.2019 issued a letter to the Corporate Debtor to pay the difference in Service Tax payable for the Financial Year 2015-16 followed by a reminder letter dated 28.06.2019. In response to the above, the Respondent No.1 herein vide letter dated 26.07.2019 intimated the Appellant that he has been appointed as the Resolution Professional and the Corporate Debtor is into CIRP. The Appellant on 23.08.2019 submitted its claim before the Respondent No.1 for a sum of Rs.2,75,46,497/-. Thereafter, the Appellant vide letter dated 10.01.2020 sought copy of the Resolution Plan from the Respondent No.1 seeking details of allocation of dues of Operational Creditors. However, the Respondent No.1 refused to share copy of the Resolution Plan for the reason that the Plan is a confidential document. However, on 09.07.2020 the Respondent No.1 informed the Appellant that the Plan submitted by the Respondent No.3 has been approved whereby a sum of Rs.1,00,00,000/- has been provided towards the claim of the Appellant.
On the legal issue it is stated that in the Resolution Plan, if the debts of the Operational Creditors to be complied with in accordance with Section 30(1)(b) of the I&B Code, 2016, if any contravention of the above provision is liable to be rejected.
It is stated that the Learned Adjudicating Authority approved the Resolution Plan whereas the Resolution Plan failed to fulfil the conditions enunciated under Section 30(2) of the Code and Regulation 38(1A) of the Regulations apart from the requirements under law.
The Appellant raises the grounds in the Appeal that the Resolution Plan is not in conformity with the Provisions of the I&B Code, 2016 as the Resolution Professional and the CoC have not followed the extant provisions of the code and failed to safeguard the interest of the statutory dues of the GST and Central Excise Department. Further the Resolution Plan of the Successful Resolution Applicant fails to make adequate allocation towards Operational Creditors and the Statutory dues. It is also stated that the Adjudicating Authority has ignored the ruling of the Hon’ble Apex Court in the matter of Committee of Creditors of Essar Steel India Ltd. v Satish Kumar Gupta and Ors. dated 15.11.2019 held at Para 46 of the Judgment.
It is also stated that the Adjudicating Authority failed to appreciate the decision of this Hon’ble Tribunal in the matter of Binani Industries v Bank of Baroda and Anr. Company Appeal (AT)(INS) No.82 of 2018 dated 14.11.2018 wherein it is held that the Resolution Process under IBC should consider the interests of even those Creditors who are not part of the Resolution Process such as Operational Creditors. (Para 17 of the Judgment).
It is submitted that the Resolution Plan cannot extinguish statutory dues without seeking approval of the concerned Revenue Authority as it does not arise out of a mutual agreement or contract. The dues arise pursuant to a Provision in the respective statute levying such charges or obligations on the payer. As such the statutory dues are different from contractual dues.
The Learned Adjudicating Authority erred in law by waiving off statutory dues and the same will constitute breach of the relevant statute under which such dues arose. Therefore, extinguishment of statutory dues without following adequate procedures and merely seeking resort to liquidation value argument cannot be said to be in due compliance of law.
In view of the reasons., it is prayed that the Impugned Order of the Adjudicating Authority dated 02.03.2020 be set aside.
ST 1 RESPONDENT SUBMISSIONS:
It is submitted that the Impugned Order in the present appeal dated 02.03.2020 of the Adjudicating Authority passed under Section 31(1) of the Code affirming the Resolution Plan dated 06.12.2019 submitted by the 3rd Respondent (Arcelor Mittal), which had been approved by the Committee of Creditors of the Corporate Debtor. It is submitted that the Appellant was not a party before the Adjudicating Authority which passed the Impugned Order.
As stated supra, this Respondent vide letter dated 26.07.2019 informed the Appellant that the initiation of CIRP in respect of Corporate Debtor is in pursuance to the Order dated 14.05.2019 of the Adjudicating Authority. The Appellant filed its claim on 23.08.2019 in the prescribed Form-B before this Respondent for an amount of Rs.2,75,46,497/-. The claim of the Appellant was duly verified and admitted and indicated in the list of creditors.
In the 8th meeting of Committee of Creditors held on 06.12.2019, the Resolution Plan submitted by the 3rd Respondent was approved by 100% of the COC members. The Appellant vide letter dated 10.01.2020 requested this Respondent to provide a copy of Resolution Plan approved by COC and for details of allocation of dues of Operational Creditors. This Respondent by his letter dated 13.01.2020 explained that the information relating to the CIRP of the Corporate Debtor is required to be maintained confidential by this Respondent being as the Resolution Professional of the Corporate Debtor. Since the Appellant is an Operational Creditor and not part of the COC the Plan cannot be shared to the Appellant.
The Adjudicating Authority rightly approved the Resolution Plan vide the Order dated 02.03.2020 and the order states that the Resolution Plan shall be binding on the Corporate Debtor and its Creditors “including the Central Government and other stakeholders”. It was expressly recorded by the Hon’ble Adjudicating Authority that the Resolution Plan is payable and equitable and in the interest of all the stakeholders and complied with all mandatory regulations. The Appellant was not party before the Hon’ble Adjudicating Authority.
It is stated that after the approval of the Resolution Plan, the payment of Rs.1 Crore was sanctioned to be made to the Appellant through an Escrew Agent appointed under the implementation Escrew Agreement. This Respondent sent e-mail dated 09.07.2020 to the appellant enclosing a copy of Demand Draft issued in favor of the Government of India Ministry of Finance, Central Board of Direct Taxes and requested for the Bank account details for crediting it to the appropriate account. The grievance of the Appellant that the tax cannot be waived of since the tax liabilities admitted by the tax payer. It is stated that the amount of Rs.1 crore was paid to the Appellant on 18.09.2020.
The main challenge of the Appellant with regard to non-compliance of provisions of the Code specifically Section 30 of the Code read with Regulation 38(1A) of the CIRP Regulations.
This Respondent states that the Service Tax dues claimed by the Appellant before this Respondent is in the nature of statutory dues payable to the Central Government which is covered under ‘Operational Debt’ defined in Section 5(21) of the Code. However, Section 30 sub section 2(b) of the Code provides for payment of debts of Operational Creditors in such a manner as may be specified by the Board as contemplated in the Provisions. The Plan was in accordance with law and the same was approved by the Hon’ble Adjudicating Authority. Even otherwise, the Appellant has been paid a sum of Rs.1 Crore which constitutes 36.30% of the amount claimed by the Appellant.
It is stated that the Plan has been complied with the CIRP Regulations and dealt with the interest of all the stakeholders of the Corporate Debtor including Financial Creditors and Operational Creditors.
It is stated that the statutory dues as claimed by the Appellant are not a separate clause within Operational Debt. There is no Provision under the Code to differentiate between the allocation for statutory and non-statutory dues in a Resolution Plan. All Operational Creditors are categorized together for the purposes of the Code. Further, as per Section 31 of the Code the Resolution Plan approved by the Adjudicating Authority is binding on Creditors including the Central Government in respect of statutory dues. Further Section 238 of the Code mandates that the Provisions of the Code shall have overriding effect over any other law for the time being in force.
In response to the Judgment of the Hon’ble Supreme Court in Essar Steel it is stated that the Appellant misplaced the said judgment. The Appellant failed to note that in the same paragraph as relied by the Appellant, it contains the settled law that the ultimate discretion of what and how much is to be paid to each class or sub class of creditors is with the COC. The correct interpretation of the Hon’ble Supreme Court Judgment is that the Learned Adjudicating Authority may interfere with a Resolution Plan wholly if its implementation contravenes any Provision of Law or if it fails to take care of the interest of all stakeholders.
It is stated that the Learned Adjudicating Authority has correctly approved the Resolution Plan and has not contravened any Provisions of Law as held by the Hon’ble Supreme Court. Therefore, there is no illegality in the order and the Appeal is liable to be dismissed.
2nd RESPONDENT SUBMISSIONS:
It is submitted that this Respondent after a detailed evaluation on the Resolution Plan submitted by the Resolution Professional, and in accordance with the Provisions of the Code, the Plan submitted by the 3rd Respondent approved by 100% positive vote by this Respondent at its meeting held on 06th December 2019. The Plan provided a sum of Rs.1 Crore to the Appellant herein in lieu of the Appellants admitted claim of Rs.2,75,46,497/-approximately 36% of the claim which is much higher than the liquidation value due to the Operational Creditors being nil. Thus, the approved Resolution Plan is fully compliant as per the Provisions of the Code having ensured that the interest of all stakeholders are duly taken care of in accordance with the Provisions of the Code.
Further the Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Ltd. v Satish Kumar Gupta and Ors. 2019 (16) SCALE 319 held that the ultimate discretion of what to pay and how much to pay each class or sub class of Creditors is with the Committee of Creditors, but the decision of such Committee must reflect the fact that it has taken into account maximizing the value of the assets of the Corporate Debtor and the fact that it has adequately balanced the interest of all stakeholders including Operational Creditors. Further the Hon’ble Supreme Court held that the Judicial review of the Adjudicating Authority that the Resolution Plan as approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include Judicial review that is mentioned in Section 30(2)(e) as the Provisions of the Code are also Provisions of Law for the time being in force. It is also held that the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors.
It is stated that the Resolution Plan as approved by the Hon’ble Adjudicating Authority is in compliance with the Provisions of the Code as well as the law laid down by the Hon’ble Supreme Court of India in re-Essar Steel supra.
It is also stated that prior approval for extinguishing statutory dues is not required. This Hon’ble Tribunal in the case of State of Harayana v Putham Strips Ltd. and Ors. Company Appeal (AT)(INS) No.319 of 2020 held that the statutory dues or operational debts, and once a resolution plan is approved by the NCLT, the treatment of all stakeholders, including Operational Creditors, is to be determined as per the terms of the approved Resolution Plan. Further the Resolution Plan has been approved by the Hon’ble Adjudicating Authority and it would binding on Government Authorities being Operational Creditors and no beneficial treatment would be accorded to them.
In view of the reasons as stated above, it is stated that the appeal is devoid of merits and liable to be dismissed.
3rd Respondent’s Submissions.
This Respondent takes a preliminary objection on the ground that the Appeal suffers from delay and latches for the reason that the Appellant failed to explain delay and latches and aiming primarily to scuttle an otherwise successfully implemented Resolution Process. Further the Appellant is not a person aggrieved under Section 61 of the Code.
It is submitted that there is no violation of Section 30(2)(d) of the Code as alleged by the Appellant. It is stated that the Appellant has received payments in terms of the approved Resolution Plan to the tune of Rs.1 Crore which is in excess of 36% of its admitted dues despite the liquidation value to Operational Creditors being nil. Therefore, there is no violation of the above Provision of Code. Admittedly the Appellant being the Department of GST and Central Taxes a Statutory Body of the Government of India is an Operational Creditor in terms of the I&B Code. The Plan submitted by this Respondent makes adequate allocation to all the Operational Creditors.
It is submitted that Regulation 37(f) of CIRP Regulations, 2016 clearly confers a discretion to offer a reduction in amounts payable to the Creditors as part of Resolution Plan. Therefore, the argument of the Appellant that the dues cannot be extinguished, does not have any merit. Further this Respondent has adequately balanced the interest of all the stakeholders and therefore the Resolution Plan has been rightly approved by the Hon’ble Adjudicating Authority.
It is submitted that the Hon’ble Supreme Court in the matter of Essar Steel makes it clear that the ultimate discretion while deciding the payout is vested with the Committee of Creditors and it has very limited power with regard to judicial review. It is submitted that if the COC rejects the Plan of this Respondent, the COC has no other option except to pass a Resolution to liquidate the Corporate Debtor. To avoid such situation and the liquidation only as a matter of last resort as observed by the Hon’ble Supreme Court, the COC acted in terms of the Judgment of the Hon’ble Supreme Court in Essar Steel and ensured that the Corporate Debtor would revive as a going concern and at the same time ensured that all stakeholders get the maximum recoveries.
It is submitted that the argument of the Appellant that the Resolution Plan cannot extinguish statutory dues without seeking approval of the concerned authority is an argument of desperation by the Appellant. It is submitted that the Hon’ble Supreme Court in Essar Steel clarified the law on extinguishment of claims and the concept of a Resolution Applicant commencing on a clean state after the Resolution Process. (Page 12 Para 67). As per the decision of the Hon’ble Supreme Court, once the payout is made in terms of the approved Resolution Plan by the Resolution Applicant, of the claims admitted by the Resolution Professional then the Resolution Applicant takes over the Corporate Debtor on a fresh slate and cannot be saddled by liability towards the same claim. Therefore, after the Resolution Process, the claims of all creditors gets settled and extinguish by Operation of the I&B Code. Therefore, the argument of the Appellant that there can be no extinguishment is clearly misconceived in view of the Judgment of the Hon’ble Supreme Court.
It is submitted that the argument of the Appellant that the claim of the Appellant is a statutory liability of the Corporate Debtor, stands on a different footing than the claims of other Operational Creditors whose claims have arisen pursuant to a contract. In response to the above argument, this Respondent submits that the claims of statutory dues are nothing but operational debt under the I&B Code. There is no special treatment or category made separately for such dues and ought to be treated as Operational Debt only. Therefore, there is no special treatment that can be accorded to statutory dues under the scheme of the I&B Code.
In view of the aforesaid reasons, the Appellant has not made out any case either on facts or on law, the Appeal is devoid of merits and liable to be dismissed.
Appraisal/Analysis:
Having gone through the pleadings, documents and citations of the respective parties, the following issues felt for consideration in deciding the Appeal.
Whether the Appellant falls under the category of Operational Creditor or not?
ii) Whether any difference is made in the Code with regard to statutory dues and other claims (Operational Creditors) pursuant to a contract? (any prior approval for extinguishing statutory dues is required)
iii) Whether wisdom of the COC can be interfered with?
iv) Whether the COC has complied with the rules and regulations of the Code?
Now we deal with the issues.
The Appellant being Government of India and the statutory dues payable to the Central Government is covered under ‘Operational Debt’ as defined in Section 5(21) of the Code, 2016 therefore, the Appellant fall under the category of Operational Creditor and its statutory dues fall under the category of Operational Debt. Therefore, for all the purposes the claim of the Appellant come within the definition of Section 5 of Sub Section 21 of the I&B Code, 2016. With regard to the second issue the contention of the Appellant that the statutory dues stand on different footing than the Operational Creditors, whose claims have arisen pursuant to a contract, whereas the claim of the Appellant is a statutory liability of the Corporate Debtor i.e. OSPIL. We are not in agreement with this submission. As stated supra, the claim of the Appellant is an Operational Debt and for all purposes the I&B Code, 2016 shall only apply. There is no special treatment or category made separately for such dues and the claim of the Appellant are to be treated as Operational Debt. Even this Tribunal in the matter of Principal Director General of Income Tax v M/s. Synergies Dooray Automotive Ltd. and Ors. in Company Appeal (AT)(INS) No.205 of 2007, held as under:
“Para 29 As Income Tax, value added tax and other statutory dues arising out of existing law, arises when the Company is operational, we hold such statutory dues as direct nexus with operation of the company. For the said reason also we hold that all statutory dues including ‘income tax’ ‘value added tax’ etc. come within the meaning of Operational Debt.”
In view of the settled law, there is no special treatment that can be accorded to statutory dues under the scheme of the I&B Code. Further this Tribunal in State of Haryana v Uttam Strips Ltd. and Ors. company Appeal (AT)(INS)No.319 of 2020 wherein it has been categorically held that “the statutory dues are operational debts, and once the resolution plan is approved by the NCLT, the treatment of all stakeholders, including Operational Creditors, it is to be determined as per the terms of the approved Resolution Plan. The present appeal therefore ought to be dismissed on this ground alone.”
The other contention raised by the Appellant that the Resolution Plan cannot extinguish statutory dues without seeking approval of the concerned Revenue Authority as it does not arise out of a mutual agreement or contract and are in the nature of statutory dues. The Appellant also relied on the Judgment of the Hon’ble Supreme Court in Essar Steel India Ltd. Committee of Creditors v Satish Kumar Gupta reported in (2020) 8 SCC 531, to put forth its argument regarding balancing of interest of stakeholders such as Financial and Operational Creditors. However, the Hon’ble Supreme Court clarified the law on extinguishment of claims and concept of resolution applicant commencing on a clean slate after the resolution process held as under:
“For the same reason, the Impugned NCLAT Judgment in holding that claims that may exist apart from those decided on merits by the Resolution Professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of section 16(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with “undecided” claims after the Resolution Plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the Corporate Debtor. All claims must be submitted to and decided by the Resolution Professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the Corporate Debtor. This the Successful Resolution applicant thus on a fresh slate, as has been pointed out by us hereinabove. For these reasons, the NCLAT Judgment must also be set aside on this account.”
From the above Judgment, it is clear that the payments are to be made in terms of approved Resolution Plan by the Resolution Applicant of the claims admitted by the Resolution Professional. Once the Resolution Applicant takes over the Corporate Debtor on a fresh slate, the claims of all creditors get settled and extinguish by operation of the I&B Code.
Section 238 of the I&B Code has overriding effect of other laws. Therefore, the stand of the Appellant that the statutory dues cannot be extinguished has no legs to stand.
From the perusal of correspondence, the Appellant has made its claim before the Resolution Professional and the Resolution Professional has admitted the claim.
The contention of the Appellant that the Adjudicating Authority has ignored the Judgment of the Hon’ble Supreme Court in Essar Steels India Ltd. supra in the Impugned Order. We have carefully examined the Impugned Order and do not find any infirmity or illegality. Further, the contention of the Appellant with regard to the decision of the Hon’ble Supreme Court in Essar Steel India Ltd. to say that the Adjudicating Authority has limited scope to interfere with the Resolution Plan provided if the interests of all the stakeholders are not taken care of and contended that the Adjudicating Authority has not taken care of the claim of the Appellant in toto. The Hon’ble Supreme Court in the above Judgment held that the ultimate discretion of what and how much is to be paid to each class or sub class of Creditors is with the Committee of Creditors held as under.
“Thus, it is clear that when the Committee of Creditors exercises its commercial wisdom to arrive at a business decision to revive the Corporate Debtor, it must necessarily take into account these key features of the code before it arises at a commercial decision to pay off the dues of Financial and Operational Creditors. There is not doubt whatsoever that the ultimate discretion f what to pay and how much to pay each class or sub class of creditors is with the Committee of Creditors, but the decision of such committee must reflect the fact that it has taken into account maximising the value of the assets of the Corporate Debtor and the fact that it has adequately balanced the interest of all stakeholders including Operational Creditors. This being the case, judicial review of the Adjudicating Authority that the Resolution Plan has approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include judicial review i.e. mentioned in Section 30(2) (e), as the Provisions of the Code are also provisions of Law for the time being in force. Thus, while the adjudicating Authority cannot interfere on merits with the commercial decisions taken by the Committee of Creditors, the limited Judicial Review available is to see that the Committee of Creditors has taken into account the fact that the Corporate Debtor needs to keep going as a going concern during the insolvency Resolution Process, that it needs to maximise the value of its assets and that the interest of all stakeholders including Operational Creditors has been taken care of. If the Adjudicating Authority points on a given set of facts that the aforesaid parameters have not been kept in view it may sent a Resolution Plan back to the Committee of Creditors to resubmit such plan after satisfying the aforesaid parameters.”
As per the above decision of the Hon’ble Supreme Court the Commercial Wisdom of the Committee of Creditors is paramount and cannot be interfered unless and until it violates the rules and regulations of the Code.
Further the Hon’ble Supreme Court held that it is the Commercial wisdom of the requisite majority of the Committee of Creditors, which may invoke differential payment to different classes of creditors as held under:
“88.By reading para 77 (of Swiss Ribbons) Dehorse the earlier paragraphs, the Appellate Tribunal has fallen into grave error. Para 76 clearly refers to the UNCITRAL legislative guide which makes it clear beyond any doubt that equitable treatment is only of similarly situated creditors. This being so, the observation in Para 77 cannot be read to mean that financial and Operational Creditors must be paid the same amounts in any resolution plan before it can pass muster. On the contrary, para 77 itself makes it clear that there is a difference in payment of the debts of financial and operational Creditors, Operational Creditors having to receive a minimum payment, being not less than liquidation value, the which does not apply to Financial Creditors. The amended regulations 38 set out in para 77 again does not lead to the conclusion that Financial and Operational Creditors, or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the Resolution Plan before it can pass muster. Pay and equitable dealing of Operational Creditors rights under the said Regulation in view of all Resolution Plans stating as to how it has deal with the interest of operational Creditors, which is not the same thing as saying that they must be paid the same amount of the debt proportionately. So long as the Provisions of the Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the Committee of Creditors which is to negotiate and accept a Resolution Plan, which may invoke differential payment to different classes of creditors, together with negotiating with a prospective resolution applicant for better or different terms which may also involve differences in distribution of amounts between different classes of Creditors.”
In the present case, the Committee of Creditors has complied with all the Rules and Regulations and the plan has been Approved by the Adjudicating Authority by 100% of voting in the 8th Committee of Creditors Meeting held on 06.12.2019. From the mandatory contents of the Resolution Plan, it is evident that the rules and regulations and Provisions of Law has been followed by the Committee of Creditors. We are of the view that having complied with all the rules and regulations the Adjudicating Authority rightly approved the plan of the Successful Resolution Applicant.
It is evident that the plan submitted by the SRA was approved as per Section 31(1) of the Code. Further, in the Order of the Adjudicating Authority clearly states that the same shall be binding on the Corporate Debtor, its employees, members, creditors, including the Central Government, State Governments, Local Authority, Guarantors and other Stakeholders. In pursuance of the approved Resolution Plan by the Adjudicating Authority it is evident that the Appellant was paid a sum of Rs.1 Crore towards its dues and there is no denial from the Appellant with regard to payment of Rs.1 Crore. Further, it is also evident that the Appellant was paid to the extent of 36.30% of the amount claimed by the Appellant. As stated supra, the plan has dealt with the interest of all the stakeholders of the Corporate Debtor including Financial Creditors and Operational Creditors in compliance with Regulation 38(1)(A) of the CIRP Regulations.
For the aforesaid reason, we do not find any infirmity or irregularity in the order passed by the Adjudicating Authority which is impugned before this Tribunal. The Appeal is devoid of merits, accordingly the same is dismissed. No orders as to cost.