2019 (3) TMI 1238 - AT - Insolvency and Bankruptcy

Statutory dues classified as 'Operational Debt' under Insolvency Code with staggered payment plan approved

The Tribunal held that statutory dues like Income Tax and VAT constitute 'Operational Debt' under the Insolvency and Bankruptcy Code. Entities entitled to ... Operational debt - operational creditor - statutory dues as falling within operational debt - nexus with operation of the company - definition of operational debt under Section 5(21) of the I&B Code - interpretation of 'or' in statutory conjunctionsOperational debt - statutory dues - definition of operational debt under Section 5(21) of the I&B Code - Statutory dues such as Income Tax and Value Added Tax fall within the meaning of 'operational debt' under the I&B Code. - HELD THAT: - The Tribunal examined the text of Section 5(21) and the scheme of the Code and held that statutory dues arise when the corporate debtor is operational; therefore such dues have a direct nexus with the operation of the company. The legislature used the disjunctive 'or' in Section 5(21) but, on a purposive reading and having regard to the ordinary operation of a going concern, statutory liabilities like Income Tax and VAT arise in the course of operation and are accordingly encompassed by the expression 'operational debt'. The Tribunal rejected arguments that taxes are unrelated to provision of goods or services and therefore excluded, observing that statutory dues arise because the company is operational and hence fall within Section 5(21). [Paras 22, 28, 29]All statutory dues including Income Tax and Value Added Tax are 'operational debt' within the meaning of Section 5(21) of the I&B Code.Operational creditor - statutory dues - nexus with operation of the company - Central Government, State Governments and local authorities claiming statutory dues are 'operational creditors' under the I&B Code. - HELD THAT: - Having concluded that statutory dues constitute 'operational debt', the Tribunal held that entities to whom such dues are payable - including the Income Tax Department and Sales Tax/State Tax Departments and local authorities - fall within the statutory definition of 'operational creditor' in Section 5(20). The reasoning rests on the direct nexus between statutory liabilities (which arise when the company is operational) and the definition of operational creditor as a person to whom an operational debt is owed. [Paras 30]Departments of the Central Government, State Governments and local authorities entitled to statutory dues are 'operational creditors' under Section 5(20) of the I&B Code.Resolution plan - approval under Section 31 of the I&B Code - treatment of statutory dues in resolution plans - No interference with the impugned orders approving the respective resolution plans in the listed appeals. - HELD THAT: - In Company Appeal (AT) (Insolvency) No. 205 of 2017 the successful resolution applicant had agreed to pay the outstanding statutory dues in full in a staggered manner, and in the other appeals statutory dues were treated as operational debt and equated with similarly situated operational creditors. Given the Tribunal's conclusions on the nature of statutory dues and operational creditors, there was no ground to interfere with the Adjudicating Authority's approval of the resolution plans under Section 31. [Paras 31, 32, 33]The appeals are dismissed and the impugned orders approving the resolution plans are sustained; no interference is called for.Final Conclusion: Statutory dues (including Income Tax and Value Added Tax) are 'operational debt' and the Central/State/local authorities entitled to such dues are 'operational creditors' under the I&B Code; the appellate challenges to the approval of the resolution plans are accordingly dismissed and the impugned orders are sustained. Issues Involved:1. Whether 'Income Tax', 'Value Added Tax' or other statutory dues, such as 'Municipal Tax', 'Excise Duty', etc., come within the meaning of 'Operational Debt'Rs.2. Whether the Central Government, the State Government, or the legal authority having statutory claims, come within the meaning of 'Operational Creditors'Rs.Issue-wise Detailed Analysis:1. Definition of 'Operational Debt':The primary issue revolves around whether statutory dues like Income Tax, Value Added Tax (VAT), and other similar dues fall under the definition of 'Operational Debt' as per the Insolvency and Bankruptcy Code, 2016 (I&B Code). Section 5(21) of the I&B Code defines 'Operational Debt' as 'a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.'The Tribunal observed that the word 'or' in the definition is disjunctive, meaning that statutory dues arising under any law and payable to the government or local authorities are included within the scope of 'Operational Debt'. This interpretation aligns with the plain reading of the statute, which does not present any ambiguity.The Tribunal also noted that 'Operational Debt' generally refers to debts arising during the operation of a company. Since statutory liabilities like Income Tax and VAT arise when a company is operational, these dues have a direct nexus with the operation of the company. Therefore, statutory dues should be considered 'Operational Debt'.2. Definition of 'Operational Creditors':The second issue concerns whether entities like the Income Tax Department, Sales Tax Department, and other statutory authorities qualify as 'Operational Creditors'. Section 5(20) of the I&B Code defines 'Operational Creditor' as 'a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.'Given the Tribunal's interpretation that statutory dues fall under 'Operational Debt', it follows that the entities entitled to these dues, such as the Income Tax Department and Sales Tax Departments, are 'Operational Creditors'. This interpretation ensures that these statutory authorities are recognized within the insolvency resolution process, and their claims are addressed accordingly.Case-Specific Observations:- In Company Appeal (AT) (Insolvency) No. 205 of 2017, the Tribunal noted that the Resolution Plan included provisions for the full payment of outstanding statutory dues in a staggered manner over three years. This plan was acceptable, and no interference was warranted against the impugned order dated 2nd August 2017.- In Company Appeal (AT) (Insolvency) Nos. 309, 559, 671 & 759 of 2018, the statutory dues were treated as 'Operational Debt' and equated with similarly situated 'Operational Creditors'. The Tribunal found no reason to interfere with the impugned orders in these appeals.Conclusion:The Tribunal concluded that statutory dues, including Income Tax and VAT, come within the meaning of 'Operational Debt', and the respective statutory authorities are 'Operational Creditors'. All appeals were disposed of with these observations, and no costs were awarded.