Resolution Plan Bound To Be Rejected If It Ignores Statutory Demands Payable To State Govt. Or Legal Authority: SC

The Supreme Court has held that the Adjudicating Authority is bound to reject the Resolution Plan, which ignores the statutory demands payable to any State Government or a legal authority.

"If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.", the Bench of Justice Indira Banerjee and Justice AS Bopanna observed.

The Bench emphasized that if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and if there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the Insolvency and Bankruptcy Code 2016.

The Court made this observation while dealing with the question— "whether the provisions of the IBC and, in particular, Section 53 thereof, overrides Section 48 of the Gujarat Value Added Tax, 2003 Act."

The Court held that Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC.

The Court observed that under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman's dues for a period of 24 months preceding the liquidation commencement date.

"..the State is a secured creditor under the GVAT Act. Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.", the Court observed further.

In this case, the appellant had filed a claim before the Resolution Professional (RP) claiming that Rs.47.36 crores (approximately), was due and payable by the respondent-a company engaged in manufacture and sale of Crafts and Oars, to the appellant, towards its dues under the GVAT Act.

After admission of the Corporate Insolvency Resolution Process and appointment of the RP, one Kushal Limited submitted a Resolution Plan. Various Creditors had objected to the Resolution Plan.

The appellant called upon the RP to confirm the claim of the appellant towards outstanding tax dues. The Resolution Professional informed the appellant that the entire claim of the appellant had been waived off.

The appellant challenged the Resolution Plan by making an application being before the Ahmedabad Bench of the National Company Law Tribunal contending that Government dues could not be waived off. The Ahmedabad Bench of the NCLT rejected the application made by the appellant as not maintainable. The appeal before the National Company Law Appellate Tribunal was dismissed.

Aggrieved, Appellants approached Supreme Court.

Tushar Mehta, Solicitor General of India appeared on behalf of the Appellant with Additional Solicitor General of India K.M. Nataraj, and Advocate Aastha Mehta. Respondent was represented by Advocate Rajesh Srivastava.

The Supreme Court observed thus "The learned Solicitor General rightly argued that when a grievance was made before the Adjudicating Authority with regard to a Resolution Plan, the Adjudicating Authority was required to examine if the Resolution Plan met the requirements of Section 30(2) of the IBC. The word "satisfied" used in Section 31(1) contemplates a duty on the Adjudicating Authority to examine the Resolution Plan – The Resolution Plan cannot be approved by way of an empty formality."

The Court emphasized that a Resolution Plan that is not in conformity with the statutory provisions of Section 31(2) of the IBC cannot be accepted. The Court further observed that the condition precedent for approval of a resolution plan is that the resolution plan should meet the requirements of Sub-Section (2) of Section 30 of the IBC.

"A resolution plan which does not meet the requirements of Sub-Section (2) of Section 30 of the IBC, would be invalid and not binding on the Central Government, any State Government, any statutory or other authority, any financial creditor, or other creditor to whom a debt in respect of dues arising under any law for the time being in force is owed. Such a resolution plan would not bind the State when there are outstanding statutory dues of a Corporate Debtor.", the Court held.

The Court observed that the Appellate Authority (NCLAT) and the Adjudicating Authority erred in law in rejecting the application/appeal of the appellant.

Therefore the Court set aside the Resolution plan approved by the Committee of Creditors.

"The Resolution Professional may consider a fresh Resolution Plan in the light of the observations made above. However, this judgment and order will not, prevent the Resolution Applicant from submitting a plan in the light of the observations made above, making provisions for the dues of the statutory creditors like the appellant.", the Court concluded.

Cause Title- State Tax Officer (1) v. Rainbow Papers Limited

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