2022 (9) TMI 317 - SC - VAT / Sales Tax

Resolution plan rejected for failing Section 30(2) IBC requirements regarding operational creditor payments and statutory dues

The SC held that a resolution plan cannot be approved if it fails to meet Section 30(2) requirements of the IBC, including provisions for operational ... Secured creditor - security interest - statutory charge / first charge on property - priority of distribution under Section 53 - resolution plan compliance with Section 30(2) - adjudicating authority's duty under Section 31 - time limits for submission of claims are directory - power to set aside a resolution plan not conforming to statutory requirementsSecured creditor - security interest - statutory charge / first charge on property - The Sales Tax Department (State) is a secured creditor under the IBC by virtue of the statutory first charge created under Section 48 of the GVAT Act. - HELD THAT: - The Court holds that the definition of secured creditor under the IBC (Section 3(30)) and the definition of security interest (Section 3(31)) are wide enough to include rights and charges created by operation of law. The statutory first charge under Section 48 of the GVAT Act constitutes a security interest and therefore the State falls within the definition of a secured creditor under the Code. The IBC's definition does not exclude governmental or statutory authorities from secured creditor status. [Paras 30, 31, 56, 57]State is a secured creditor under the IBC by reason of the statutory first charge under the GVAT Act.Priority of distribution under Section 53 - statutory charge / first charge on property - Section 53 of the IBC does not negate or override the operation of the statutory first charge under Section 48 of the GVAT Act; debts secured by such charge fall to be treated in the order of priority provided by Section 53. - HELD THAT: - Though Section 53 contains a non-obstante clause, the Court finds Section 48 of the GVAT Act is not inconsistent with Section 53. Under Section 53(1)(b)(ii), debts owed to a secured creditor (including the State under GVAT Act) rank equally with specified debts and are to be distributed in accordance with the statutory order of priority. Hence, Section 53 does not operate to extinguish or render nugatory the statutory charge; rather, the secured status and priority under the IBC apply to such statutory charges. [Paras 55, 56]Section 48 GVAT Act and Section 53 IBC operate compatibly; statutory first charge is to be recognised and given priority as per Section 53.Time limits for submission of claims are directory - resolution plan compliance with Section 30(2) - Delay in filing a claim cannot be the sole basis for rejecting a statutory creditor's claim; the time frames in the Regulations are directory and the Resolution Professional and Adjudicating Authority must ensure statutory dues are considered so that a resolution plan meets Section 30(2) requirements. - HELD THAT: - The Court reiterates that the Regulations and timelines under the IBC, including those for submission of claims, are to be read in the context of the Code and have been held to be directory. The RP's duty is to receive, verify and collate claims and the Adjudicating Authority must satisfy itself under Section 31(1) that the resolution plan conforms to the requirements of Section 30(2), including adequate provision for operational creditors not less than what would be received on liquidation under Section 53. Accordingly, mere belated filing cannot alone justify exclusion of statutory dues where the plan fails to provide for them as required by statute. [Paras 40, 41, 45, 46, 58]Belated claim is not an automatic ground for rejection; RP and Adjudicating Authority must ensure statutory dues are provided for in accordance with Section 30(2) and Section 53.Resolution plan compliance with Section 30(2) - adjudicating authority's duty under Section 31 - power to set aside a resolution plan not conforming to statutory requirements - The resolution plan approved by the CoC and sanctioned by the Adjudicating Authority was set aside because it failed to meet the statutory requirements and did not provide for the statutory dues; the matter is remitted for fresh consideration. - HELD THAT: - Section 31(1) mandates that the Adjudicating Authority approve only those resolution plans that satisfy the requirements of Section 30(2). If a resolution plan ignores statutory dues or otherwise is not in conformity with the IBC and the Regulations, the Adjudicating Authority is obliged to reject it. Applying these principles, the Court found that the impugned resolution plan did not adequately provide for the State's statutory dues and therefore cannot bind the State; the impugned orders were set aside and the Resolution Professional is directed to consider a fresh resolution plan in light of the observations made. [Paras 46, 48, 51, 52, 59]Impugned resolution plan set aside; matter remanded for fresh consideration so that statutory dues are provided for in conformity with the IBC.Final Conclusion: The appeals are allowed: the Sales Tax Department is a secured creditor by virtue of the statutory first charge under Section 48 GVAT Act; Section 53 IBC does not negate that charge but prescribes the order of priority for distribution; delay in filing claims is not an automatic bar; the resolution plan and impugned orders are set aside and the Resolution Professional is directed to consider a fresh resolution plan in accordance with the IBC and this judgment. Issues Involved:1. Whether the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC), particularly Section 53, override Section 48 of the Gujarat Value Added Tax Act, 2003 (GVAT Act).2. Whether the State Tax Department qualifies as a 'Secured Creditor' under the IBC.3. Validity of the Resolution Plan approved by the Committee of Creditors (CoC) and the Adjudicating Authority (NCLT).4. Timeliness and admissibility of the State Tax Department's claim.Issue-wise Detailed Analysis:1. Overriding Provisions of IBC Over GVAT Act:The core question was whether Section 53 of the IBC, which outlines the distribution of assets during liquidation, overrides Section 48 of the GVAT Act, which provides for the first charge on the property of a dealer for tax dues. The Supreme Court held that Section 53 of the IBC, which starts with a non-obstante clause, does not override Section 48 of the GVAT Act. It was clarified that Section 48 is not contrary to Section 53 of the IBC. The debts owed to a secured creditor, including the State under the GVAT Act, rank equally with other specified debts under Section 53(1)(b)(ii).2. State Tax Department as a 'Secured Creditor':The court examined whether the State Tax Department qualifies as a 'Secured Creditor' under Sections 3(30) and 3(31) of the IBC. It was determined that the statutory charge under Section 48 of the GVAT Act falls within the definition of 'Security Interest' under Section 3(31) of the IBC, making the State a secured creditor under Section 3(30). The NCLAT's finding that the State is not a secured creditor was deemed erroneous.3. Validity of the Resolution Plan:The Supreme Court scrutinized whether the Resolution Plan met the requirements of Section 30(2) of the IBC, which mandates the inclusion of operational creditors' dues. It was found that the Resolution Plan did not conform to the statutory requirements, as it failed to account for the statutory dues of the State. Consequently, the court held that the Resolution Plan could not be approved, as it did not meet the mandatory conditions of Section 30(2). The court emphasized that a Resolution Plan ignoring statutory dues payable to the Government must be rejected.4. Timeliness and Admissibility of the State Tax Department's Claim:The court addressed the issue of the timeliness of the State's claim, noting that the State had initiated recovery proceedings and that the Books of Accounts of the Corporate Debtor reflected the liability. The court held that the time stipulations for submitting claims under Regulation 12 of the 2016 Regulations are directory, not mandatory. The rejection of the State's claim solely on the ground of delay was found to be unsustainable. The court stated that the Resolution Professional (RP) had a duty to verify and include the State's claim in the Resolution Plan.Conclusion:The Supreme Court allowed the appeals, set aside the impugned orders of the NCLAT and NCLT, and invalidated the approved Resolution Plan. The RP was directed to consider a fresh Resolution Plan that includes provisions for the dues of statutory creditors like the appellant. The judgment emphasized that statutory dues must be accounted for in any Resolution Plan, and the State qualifies as a secured creditor under the IBC.