Rajasthan High Court on Prior-period Claims in Resolution Plans

[Megha Mittal and Shreya Jain are Associates at Vinod Kothari & Co.]

A resolution plan under the Insolvency and Bankruptcy Cody, 2016 is the revival route for a corporate debtor, free of its past liabilities and dues, paid in accordance with the approved plan. Having said so, it might be noted that resolution plans assume the status of a statutory binding contract once approved by the adjudicating authority. Recently, the Rajasthan High Court in Ultra Tech Nathdwara Cement Ltd. v. Commissioner, Central Goods and Service Tax and Central Excise Commissionerate held that no demands can be raised by any statutory body for a period prior to the approval and finalization of resolution plan, after the resolution plan is successfully implemented. 

Facts of the Case

The instant matter arises out of claims made by a statutory body (GST authorities) towards dues pertaining to the period prior to the resolution plan and the corporate insolvency resolution process (CIRP), despite the fact that resolution plan was implemented in full. In the given case, a resolution plan was duly approved by the committee of creditors of the corporate debtor and was also accorded approval by the National Company Law Tribunal (NCLT). However, the resolution plan could not be immediately executed, as what followed was a series of appeals filed by one of the financial creditors against such approval. Nevertheless, the resolution plan approved by the NCLT was upheld by both National Company Law Appellate Tribunal (NCLAT) as well as the Supreme Court, thereby leaving no room for doubts regarding the plan’s tenability or validity.

Therefore, after obtaining the order of the Supreme Court, and receiving its final seal of approval, the resolution applicant acquired the corporate debtor, simultaneously implementing the resolution plan and accordingly made payments to the creditors, including the statutory authorities, who are the respondents in the instant writ petition, in the manner ascribed in plan. However, despite implementation of the plan without any deviation whatsoever, the statutory authorities started sending out several demand notices and orders to the revived corporate debtor, regarding the payment of various dues pertaining to years prior to the approval of resolution plan. Hence, pestered by the continuous demand orders and the lack of response to replies submitted, the revived corporate debtor filed this writ petition seeking relief from such statutory notices and also for restraining the authorities from serving any further notices pertaining to the period prior to the plan.

In view of the facts stated above and in line with the spirit of the Code, the Rajasthan High Court held that the demand notices given by the statutory authorities are “totally illegal and arbitrary manner while pressing for demands raised vide the notices which are impugned in this writ petition and any other demands which they may contemplate for the period prior to the resolution plan being finalized. The demand notices are ex-facie illegal, arbitrary and per-se and cannot be sustained and therefore the demands pending as on the date of finalization of the resolution plan issued/raised by the respondents Central Goods and Service Tax Department, Govt. of India are quashed and struck down”

Analysis

In this post, the authors seek to analyse the order of the High Court in light of two essential questions: (a) the treatment of prior-period liabilities; and (b) the beneficial position of financial creditors vis-à-vis operational creditors.

Treatment of liabilities pertaining to the period prior to the approval of resolution plan

The immediate question that crops on a mere reading of the High Court order is: once the resolution plan has been approved and the same is in operation thereof, what would happen to the liabilities pertaining to a period prior to that? The answer to this question lies in section 31 of the Code, wherein it has been provided that the resolution plan “shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,guarantors and other stakeholders involved in the resolution plan”. [Emphasis supplied].

It must be noted that the explicit inclusion of government dues, which did not originally form part of the Code, further gives an indication that such inclusion was a result of practical situations that cropped up while approving resolution plans. The same must also be read in line and spirit of the presentation made by the Finance Minister: “There is also this question about indemnity for successful resolution applicant. The amendment now is clearly making it binding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. So, that is going to be a major, major sense of assurance for the people who are using the resolution plan.”

From the above provision and representation, it is clear that the very concept of a resolution plans has it that, once approved, the plan shall be binding upon all stakeholders involved and their dues or claims as on the insolvency commencement date shall be treated in the manner laid down in the plan. Thus, the fact that the plan deals with the total claims of parties outstanding as on insolvency commencement date leaves no room for doubt that no creditor can later on make claims or demand any sum pertaining to a period prior to passing of resolution plan. It must be appreciated that the very purpose of inviting claims under the insolvency resolution process, specifically as on the insolvency commencement date, is to freeze the claims as on a fixed date so as to rule out the possibility of dispute with respect to the amount of claims at the time of distribution to creditors. Hence, where the claims submitted by the creditors (here, statutory bodies) have been considered and dealt with in the resolution plans, with haircuts or otherwise, the creditor shall not be in position to re-claim the sum or a part of the sum that pertains to a period prior to commencement of insolvency.

It might also be relevant to note the newly inserted section 32A of the Code which immunizes a corporate debtor from liability or for prosecution for an offence committed prior insolvency commencement once a resolution plan is approved. Hence, drawing an analogy, it would be safe to say that the revamped company shall not be obligated to pay liabilities or dues pertaining to the period prior to the resolution which have already been dealt with in the plan. A possible justification here is that a company is resolved or revived so that it can run efficiently and seamlessly from that point on, without the baggage of the past (in the nature of liabilities) looming over the re-furbished company. The company will not be able to operate unless the path is clear.

Besides, it may also be noted that pursuant to the recent notification dated 21 March 2020 (discussed here), in case CIRP commencing after 21 March 2020, the resolution professional shall be required to obtain a fresh registration within 30 days of commencement of CIRP and, on and from such date, all returns, filings on and from commencement of CIRP shall pertain to the new registration. The authors are of the view that fresh registration will embolden the demarcation between the pre- and post-CIRP periods and, as such, will reduce the litigation similar to the matter in the given case.

Position of financial creditors vis-à-vis operational creditors

The past few years have evidenced the persistent struggle between financial and operational creditors, especially in case of resolution plans, that too from the very inception of the Code. If we may say so, the crux of this constant struggle lies in the fact that, despite their claims being determined and decided upon in the resolution plans, the operational creditors have no rights to vote or decide upon approval of the plan, in view of section 21 of the Code.

According to section 21, the committee of creditors comprises only financial creditors and, as such, appeals or objections by operational creditors against approval of resolution plans were a common phenomenon. However, such contentions have now been laid to rest by the Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta 2019(16) SCALE 319, wherein was held:

“57. Indeed, by vesting the Committee of Creditors with the discretion of accepting resolution plans only with financial creditors, operational creditors having no vote, the Code itself differentiates between the two types of creditors. Quite clearly, secured and unsecured financial creditors are differentiated when it comes to amounts to be paid under a resolution plan, together with what dissenting secured or unsecured financial creditors are to be paid. And, most importantly, operational creditors are separately viewed from these secured and unsecured financial creditors in S. No. 5 of paragraph 7 of statutory Form H. Thus, it can be seen that the Code and the Regulations, read as a whole, together with the observations of expert bodies and this Court’s judgment, all lead to the conclusion that the equality principle cannot be stretched to treating unequals equally, as that will destroy the very objective of the Code-to resolve stressed assets. Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational.”

Hence, the fact that operational creditors are not entitled to vote upon resolution plans and yet are bound by it is now to be accepted as is, and the order of the Supreme Court in Essar Steel does not leave an iota of doubt regarding the tenability and validity of such resolution plans, once approved by the adjudicatory authorities.

Conclusion

It is true that the purpose of the enactment of the Code is salutary to ensure that the companies under severe distress do not fade into oblivion and can be brought back to life with the help of a resolution plan. One cannot create a hindrance by demanding some prior payments time and again when the same have been settled, and the company successfully resolved. Further, it would only defeat the purpose of the Code if the creditors start approaching the company yet again.

Megha Mittal & Shreya Jain

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