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Trending: Call for Papers Volume 3 | Issue 2: International Journal of Advanced Legal Research [ISSN: 2582-7340]

POSITION OF STATUTORY DUES BEFORE AND AFTER THE AMENDMENT IN SECTION 31(1) OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016


Before the enactment of the Insolvency and Bankruptcy Code, 2016[1](IBC), the legislative framework in India relating to the legal basis of the Insolvency and Restructuring conduct of the corporate persons, limited liability partnership firms, individuals and partnership firms was very disintegrated. The existence of multiple laws and complexities resulted in delays in the timely resolution of the distressed entities, individuals, partnership firms and companies.

But after the enactment of IBC by the assent of the President on the 28thMay, 2016 a cumulative mechanism or a one stop solutionwas given in resolving the issues related to the re-organization and insolvency resolution of corporate persons, limited liability partnership firms and individuals and in maximization of value of assets of such persons in the country which was previously a very time consuming and a long processhas now turned into a time bound manner andthereby maintaining a balance in the interest for all small investors, including the Government.

 

What are Statutory Dues?

Statutory dues shall mean taxes including the income tax, sales tax, value added tax, charges, duties, levies etc. owed to Government whether it is Central or State or any other local authority. There has been an ongoing dispute from a long timeon the law point that, ‘Whether the Statutory dues can be claimed after the approval of the Resolution Plan or not?’ To resolve this dispute there are some relevantSupreme Court and High Court judgementswhich givesus a clear picture of the current position of law.

 

A thorough study of Section 31(1) of IBC, 2016 before the Amendment:

Section 31(1) of the Code before the (Amendment) Act, 2019talks about the binding effect of the Resolution Plan on the corporate debtors and its employees, members, guarantors, creditors, stakeholders and etc. involved in the Resolution Plan, satisfied by the Adjudicating Authority as per the requirements mentioned in this section after its approval by the Committee of the Creditors(CoC) under the sub-section (4) of Section 30 meets all the sufficient requirement as mentioned in sub-section (2) of Section 30.

Before the 2019 Amendment the issue related to the unclaimed statutory dues was not mentioned that whether the Central Government, State Government or any local authority is bound by the Resolution Plan or not or we can say are they in a legal capacity to claim their dues once the Resolution Planhas been passed? Prior to the Amendment the position related to the statutory dues wastotally different and unclear. The legislative intent was that once the Resolution Plan has been granted approval and the statutory dues which are not includedin it shall remain frozenbut State/Central Government authorities continued asking for their dues owed by them even after the passing of the Resolution Plan.This ledto immense need of amending the Code and it became necessary for the legislature to clarify this position and to remove all the ambiguity related to this.

 

Position after passing ofthe Amendment to Section 31(1) of the IBC, 2016

Soon after the 2019 Amendment[2]came into effect on 16th August 2019, it has drawn out a crystal-clearpicture related to the statutory dues. It has inserted, ‘Central Government, any State Government or any local authority as well’. The Hon’ble Finance Minister has clearly stated in his speech[3] in the Rajya Sabhawhen the bill for amending the Code came up for discussion that,Amendment is clearly binding on the Government.The Government fromnow on cannot raise their further statutory duesif they are not included in the approved Resolution Plan.ThisAmendment was brought by the legislature in order to provide the remedy to the above mischief. The sole objective of this Amendment was to protect the bidders from these taxmen. There are some relevant judgementswhich have laid down the fact that even if the State/Central Government Authorities are not included in the Section 31(1) of the Code still they are bound by this legislative intent and the statutory dues which are owed to them shall stand extinguished once the Resolution Plan has been granted approval. This should be the exact position of law.

Relevant Judgements

The Hon’ble High Court of Rajasthan in Ultratech Nathdwara Cement Limited v. State of Uttar Pradesh and Ors.[4]has finally dealt with the issue of pendency of claims from statutory dues once the approval has been granted to the Resolution Plan. In this case, the Court rejected the claim of the GST department by clearly stating that, once the Resolution Plan has been approved by the Adjudicating Authority all the outstanding statutory dues and liabilities shall stand frozen. The Hon’ble High Court relied upon the amended Section 31 ofthe IBC, 2016.Soon after the Resolution Plan gets approval, it will be binding on all the stakeholders irrespective of the fact that whether they areGovernment authorities or private authorities. This significant judgmenthas helped to achieve the purpose of this Code where the sole aimof this Code is to revive the stressed industry.

 

The Hon’ble Supreme Court inGhanshyam Mishra and Sons Pvt Limited vs Edelweiss Asset Reconstruction Company Ltd.[5]mainly discussed 3 issues, the first issue is ‘Whether the creditors, including statutory authorities such as State Government, Central Government or and local authority are bound by the Resolution Plan once it is approved by the Adjudicating Authority under section 31(1) of the Code?

It can be easily understood by reading the section 31(1) of the Code which equivocally states that once the Resolution Plan has been granted approval by the Adjudicating Authority it will be binding on the Corporate Debtors and its employees, members, creditors including the statutory authorities as well.Furthermore, it was held by the Supreme Court that other claims or dues which are not mentioned in the Resolution Planshall stand frozen and other creditors will be barred from recovering any dues from the corporate debtors.

Second issue is, ‘Whether any creditor including Government authorities can initiate proceedings against the Corporate Debtor in respect of those claims which are not duly mentioned in the Resolution Plan before its approval?’

The Supreme Court held the dues which are not the part of an approval ResolutionPlan shall remain forfeited and no proceedings against these dues can be initiated.

 

The third issue is ‘Whether the Amendment made to Section 31(1) of the IBC, 2016 is clarificatory/delegatory?

The Supreme Court held that the Amendment made to the Section 31(1) of the Codewhich came into effect from the date 16 August 2019 hasfounded delegatory in nature.

 

Conclusion

The amendment and the judgements mentioned above have removed all the legal hurdles and ambiguities in Section 31(1) of the Insolvency and Bankruptcy Code, 2016 with respect to the statutory dues claimed after passing of the Resolution Plan.Thus, the claims which are not a part of the approved Resolution Plan will not survive and no proceedings in respect of these dues can be initiated.

AUTHORED BY: DIYA RASTOGI, A STUDENT AT FACULTY OF LAW, BANASTHALI UNIVERSITY


[1] The Insolvency and Bankruptcy Code, 2016, No. 31 of 2016, available at: https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf.                             

[2] Section 31(1), The Insolvency and Bankruptcy Code (Amendment) Act, 2019, 16.08.2019.

[3] Insolvency and Bankruptcy Regime in India: A Narrative, available at: https://www.ibbi.gov.in/uploads/whatsnew/2020-10-01-210733-43cms-9224c9b668aac0d6149a5d866bfb4c79.pdf.

[4]Ultratech Nathdwara Cement Limited v. State of Uttar Pradesh and Ors, Civil Appeal Arising out of Special Leave Petition (Civil) No. 11232 of 2020.

[5]Ghanshyam Mishra and Sons Pvt Limited vs Edelweiss Asset Reconstruction Company Limited, 2021(3)RCR(Civil)79.

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