In the recent judgment of Ultra Tech Nathdwara Cement Ltd. v. Union of India and Ors1, the division bench of the Rajasthan High Court ("High Court"), laid much required emphasis on the amendments to Section 31 (1) of the Insolvency and Bankruptcy Code, 2016 ("IBC")2 which makes the resolution plan approved by the adjudicating authority binding on government authorities. The High Court was compelled to do so in light of the repeated demands by government agencies such as the income tax department, GST department etc., for dues arising prior to the commencement of corporate insolvency resolution process ("CIRP") (despite admission of claims), which has been a cause of concern amongst various resolution applicants in the past.
In the said judgment, the High Court quashed the demands raised by the Goods and Services Tax Department ("GST Department") for dues of Binani Cement Ltd. ("Binani") (renamed as UltraTech Nathdwara Cement Ltd.), which had arisen prior to the approval of the resolution plan submitted by UltraTech Cement Ltd ("UltraTech").
In 2017, a petition under Section 7 of the IBC filed against Binani, was admitted by National Company Law Tribunal, Kolkata ("NCLT"). In the course of the CIRP, the resolution plan submitted by UltraTech was unanimously approved by the Committee of Creditors ("CoC") and subsequently by the NCLT, along with its distribution parameters. The approval of UltraTech's resolution plan stood the test of challenge before the NCLAT and finally before the Supreme Court when it was challenged by one of the financial creditors and the GST Department. Pursuant to the approval of the resolution plan by the Supreme Court, UltraTech took over Binani and changed its name to Ultra Tech Nathdwara Cement Ltd. ("UltraTech NCL").
UltraTech's approved resolution plan included payment of the entire verified dues of the GST Department, whose claim (as on the date of initiation of CIRP) was crystallised at INR 72.80 crores by the resolution professional. In spite of this, the GST Department raised various demands upon UltraTech NCL for dues which had arisen in the period from April 2012 to June 2017 (prior to the initiation of the CIRP), which would have formed part of its claim verified by the resolution professional.
In light of this background, UltraTech NCL filed a writ petition before the High Court to quash the demands made by the GST Department for any dues prior to the approval of the resolution plan, which was allowed by the High Court, by quashing the notices issued by the GST Department.
Arguments of UltraTech NCL
UltraTech NCL based its argument principally on the amended Section 31 of the IBC, which was amended to specifically include that if the resolution plan is approved by the NCLT, it would be binding on all 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, as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan." UltraTech NCL further submitted that since the IBC is a special statute, the resolution plan once approved by the CoC, attains finality and cannot be challenged in a court of law. It also pointed out that UltraTech's resolution plan has been approved even by the Supreme Court without any relief in favour of the GST Department, and thus it had no right to raise further demands from UltraTech NCL. UltraTech NCL relied heavily on the Supreme Court's judgment in Committee of Creditors of Essar Steel India Ltd. through authorised signatory v. Satish Kumar Gupta & Ors3 ("Essar Judgment"), which upholds the 'commercial wisdom' of the CoC while emphasizing on the binding nature of an approved resolution plan on all creditors and stakeholders of a corporate debtor.
Arguments of the GST Department
The GST Department argued that since it was not heard by the CoC before finalising the resolution plan, it is not bound by it. It further contended that the previous summary rejection by the Supreme Court of the Special Leave Petition filed by the GST Department does not foreclose its right to raise valid demands from UltraTech NCL. The GST Department was however unable to dispute the fact that the abovementioned arguments were previously considered and dismissed by the Supreme Court.
High Court's reasoning and judgment
The High Court identified the issue at hand as "whether the resolution plan approved by the CoC is binding on the GST Department or not". It recognised that as per the amended Section 31 of the IBC, any government authority to whom a debt is owed, when brought under the umbrella of the resolution plan approved by the NCLT, is bound by such resolution plan.
The High Court echoed the principle of commercial wisdom of the CoC in determining the feasibility and viability of a resolution plan, including the manner of distribution of funds among the various classes of creditors, as long as the provisions of the IBC are complied with. It reiterated principles laid down in the Essar Judgment, including the necessity of all claims being decided by the resolution professional, so that a prospective resolution applicant knows exactly what has to be paid in order to take over and run the business of the corporate debtor. It further held that the evaluation of all dues and liabilities "as they exist on the date of finalisation of the resolution plan" has been left in the exclusive domain of the resolution professional with the approval of the CoC.
On account of the fact that the GST Department had been paid the verified amount of INR 72 crores by UltraTech NCL as per the resolution plan, the High Court observed that the GST Department "would be acting in a 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 finalised."
While reprimanding the GST Department, the High Court quashed and struck down the demand notices issued against UltraTech NCL.
The judgment rightly evaluates and upholds the principles of the amended Section 31 of the IBC that resolution plans once approved by the NCLT are binding on all stakeholders, including government authorities. This is a welcome relief to the resolution applicants who are burdened by demands of payment of pre-CIRP dues, despite those being paid as per the resolution plan.
On a critical note, the judgment of the High Court repeatedly refers to "the dues as they exist on the date of finalisation/approval of the resolution plan". This gives a false illusion that once the resolution plan is approved by the NCLT, the creditors cannot seek payment of dues arising during the CIRP.
1 Judgment dated April 7, 2020 in D.B.Civil Writ Petition No. 9480/2019
2 Inserted by Insolvency & Bankruptcy Code(Amendment) Act, 2019 (w.e.f. 16-8-2019)
3 2019 SCC Online SC 1478
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