An IBBI letter reminds government agencies of their many follies

The Insolvency and Bankruptcy Board of India (IBBI), it seems, has found an indirect way to remind government agencies like the tax departments and Enforcement Directorate that they should not create hindrances in insolvency proceedings. In a letter curiously addressed to the insolvency professionals, insolvency professional agencies, Insolvency professional entities and registered valuers, the IBBI reminds them the ‘role of the government and its agencies in the corporate insolvency resolution and liquidation processes.’

But the message seems indirectly to the government agencies, who despite several orders by the National Company Law Tribunal (NCLT), National Company Law Appellate Tribunal (NCLAT), high courts and Supreme Court (SC) continue to create hindrances in insolvency proceedings.

The IBBI letter talks about how the Central government has been driving the implementation of the Insolvency and Bankruptcy Code (IBC). “It subordinated its dues to claims of even unsecured financial creditors. It encouraged large corporates with high non-performing assets into corporate insolvency resolution process (CIRP) in the early days of implementation of the Code. The Central Government has brought in several changes in laws relating to banking, revenue, company, etc., to facilitate the smooth implementation of processes under the Code,” says the letter.

The IBBI letter also cites many instances where the adjudicating authorities and courts have constantly passed order telling agencies like the commercial tax departments and enforcement agencies that the IBC should prevail over state enactments.

IBC overrides state enactments

It cites the Innoventive Industries Ltd Vs ICICI Bank & Anr, where the Supreme Court held that the Code shall prevail over State enactments, including the Maharashtra Relief Undertakings (Special Provisions Act), 1958.

It also reminded how in the Principal Commissioner of Income Tax Vs Monnet Ispat And Energy Ltd, the apex court held that the IBC would override anything inconsistent contained in any other enactment, including the Income-tax Act, 1961.”

Govt dues are operational debts

The IBBI letter cites examples to further reiterate that the government dues are operational debts and the government is an operational creditor.

It again cites several judgments that have reaffirmed this position. For example, in Principal Director General of Income Tax (Admn. & TPS) Vs Synergies Dooray Automotive Ltd. & Ors, the NCLAT clarified that the statutory dues such as income-tax, sales tax, value added tax and various other taxes fall within the definition of operational debt under section 5(21) of the Code and the statutory authorities claiming the aforesaid dues are operational creditors under the Code.

Similarly, in the Leo Edibles & Fats Ltd Vs The Tax Recovery Officer (Central) Income Tax Department, Hyderabad and others, while deciding upon the nature of security interest of Government dues, the High Court of Telangana and Andhra Pradesh made it clear that the government dues like income-tax dues are unsecured creditors and do not enjoy the status of a secured creditor. The tax dues, being an input to the Consolidated Fund of India and of the States, clearly come within the ambit of section 53(1)(e) of the Code.

Delayed filing of claims

Hinting at the fact that the government agencies and departments do not file their claims on time and later petition the adjudicating authorities to admit their claims at a later stage, delaying the whole process, the IBBI letter

The letter says: “A resolution applicant submits a resolution plan after considering all available relevant information, including the claims. If claims are entertained after approval of resolution plan, this would discourage prospective resolution applicants from submitting resolution plans, leading to liquidation of companies, and defeating the objective of the Code.”

It also reminds the state agencies that non-submission of claims in a CIRP timely may lead to loss to the State Exchequer.

It cites the State of Haryana Vs Uttam Strips Ltd case where the NCLAT observed that the appellant had failed to file the claim before the resolution professional and has no right to claim its dues from the resolution applicant. The NCLAT held that a successful resolution applicant cannot be burdened with past liabilities since this would make it impossible for it to run the business, ultimately defeating the entire purpose and mechanism of the Code.

Similarly in T R Ravichandran, RP Vs The Asst. Commissioner (ST and 12 Ors), the NCLT held that being an operational creditor, the tax authorities are at liberty to make their claims before the resolution professional (RP) instead of insisting upon him to pay the pre-admission dues before accepting the tax liabilities arising during the CIRP period.

Offences and moratorium

The IBBI letter further says that the code insulates the successful resolution applicants against the liability of the corporate debtor for any offence committed prior to commencement of insolvency proceeding.

It also reminds that the law mandates that the liability of the corporate debtor for an offence committed prior to the commencement of the CIRP should cease, and that the corporate debtor should not be prosecuted for such an offence from the date the resolution plan has been approved by the NCLT, if the resolution plan results in the change in the management or control of the CD to an unrelated person.