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Statutory and Government Dues Under the IBC- A Pretty Kettle of Fish?

The author is Unnati Sinha, third year student at Narsee Monjee Institute of Management Studies, Hyderabad.

What are Statutory dues under the IBC, 2016?

Statutory debts and dues owing to the Central and State Governments, as well as any municipal authorities, are legally defined as operational debt, and hence such creditors have the designation of operational creditors. Aside from the legislative requirement, this viewpoint has received the backing and acknowledgment of the judiciary as well as the legal fraternity. Countless decisions demonstrate this. Income tax, value added tax, and other statutory dues, for example, are termed operational debt since they are directly related to the Company's operations. Another aspect that the judiciary has questioned multiple times is the assumption that the Insolvency and Bankruptcy Code, 2016 (“IBC”) supersedes all other legislation.The judgement in Pr. Commissioner of Income Tax vs. Monnet Ispat and Energy Ltd., it was decided that the IBC will overrule anything which is in conflict with other statutes, as well as the Income Tax Act of 1961, is an example of this type of approach used by courts.

In terms of government dues, prior even to the introduction of the IBC, obligations owing to secured creditors took precedence over crown debts or debts owed to the government, as established by the Apex Court in Dena Bank vs Bhikhabhai Prabhudas Parekh & Co. With the implementation of the IBC, the order of payouts in the event of liquidation was defined by the waterfall process outlined in Section 53, which gave secured creditors first priority. Furthermore, the settlement process envisioned in the Code takes precedence over statutory dues.The Courts have stated this several times. A remarkable illustration is the judgement in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd., in which the Supreme Court declared that once the resolution plan has been duly approved by the judicial authority in accordance with Section 31(1), the claims formulated in the plan of resolution are valid and binding against the debtors of the company and their employees, members, creditors and the central and state government. In addition, the Karnataka High Court recently ruled that “if departments of the Central or State Governments do not submit an application or participate in the settlement procedure, their rights are immediately extinguished ”. According to the preceding judgments, the State's rights as an operational creditor are limited by the waterfall mechanism and the resolution plan rules.

To summarize the legal picture, the backdrop is that statutory dues are operational obligations and hence have a lower standing than secured debts. However, there has recently been considerable instability in this sector. The following judgments raise questions about how this type of debt should be handled.

Reasons for Concern

Union of India v. Vijaykumar V Iyer was the first judgement that merits consideration. One of the key questions in this case was whether the dues under the Department of Telecom ("DoT") spectrum license may be considered as operational debt. The Court replied in the affirmative, declaring the Central Government to be an operative creditor. However, the Court found that the Spectrum Trading Guidelines could not be replaced under the Corporate Insolvency Resolution Process (“CIRP”) and that the Licensor's dues could not be cleared under a Resolution Plan provision. It was determined that the spectrum could not be used without payment of the required dues, which could not be erased by activating CIRP under the Code. By making this decision, the National Company Law Appellate Tribunal (“NCLAT”) essentially established a new class of creditors within an existing class of creditors, granting the DoT specific powers not accessible to other operational creditors. Another effect of this judgement is that it distinguishes the DoT from other State actors with comparable legal standing under the Code. This violates all IBC precepts and generates a fog of misunderstanding regarding the priority of the waterfall method and the resolution.

In BSE Limited v. Asahi Infrastructure & Projects Limited, the NCLAT, noting that 'listing fees' are nothing more than 'regulatory fees,' affirmed the National Company Law Tribunal’s (“NCLT”) order striking the appellant's CIRP application for failing to pay the listing fee. Though it is impossible to criticize the Court's rationale that the IBC cannot be utilized to recover dues, as the Apex Court has often said, this is not the case with regulatory fees being excluded from the scope of operational debt. When contrasted to the judgement in UOI v. Vijaykumar, it is clear that, on the one hand, an operational debt has been granted precedence over all other debts as well as the resolution plan, while regulatory fees have been refused the protection afforded to an operational debt in the event of default.

The Madras High Court used an altogether separate logic in M/s. Ruchi Soya Industries Limited v. Union of India and Anr., holding that "a tax once ascertained to be paid in compliance with the law is a sovereign debt" and that "tax and duties levied and collected under law can never be treated as operational debt as defined in Section 5(21) of IBC, 2016." This ruling contradicts the interpretation in Section 5(21) of the Code, which specifically states that statutory dues are operational debts.

The preceding judgments highlight the issues about the handling of statutory and government dues under India's bankruptcy framework. While it is commendable that such claims were labeled inferior to secured creditors' claims and unsecured creditors' financial debts in order to foster business and entrepreneurial interest, the current scenario, which results in confusion as to where these dues stand, may be troublesome.

The Road Ahead

The presence of another class of creditors has been recognized under the Code with the creation of Form F, which allows for the presentation of claims of creditors other than financial or operational creditors. In this view, the handling of statutory dues should be revisited. While it is uncontested that the legislature purposefully positioned such claims in a lower category than secured and financial debts, some rulings, as indicated above, show that there is some uncertainty regarding those statutory dues that may constitute as operational debts.

As a result, some clarification is required to solidify the legal position regarding the handling of statutory dues owed by the corporate debtor and/or successful resolution applicant, which can best be accomplished by appropriate revisions to the IBC. This will provide consistency in court/tribunal rulings in India and would encourage the idea of a "clean slate" to ensure that a successful resolution applicant is not saddled with any "undecided claims" in the future.

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