A separate task force committee needs to be constituted by the CBIC, specifically for dealing with that class of assessees who are undergoing CIRP.
Raghavan Ramabadran & Krithika Jaganathan
A moratorium is automatically triggered upon the initiation of the Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 (’IBC’). Section 14(1)(a) of the IBC prohibits the institution of suits or the continuation of pending suits or proceedings against the corporate debtor (including the execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority). The scope and applicability of Section 14(1)(a) of the IBC to disputes under various statutes have been deliberated several times over, with specific reference to whether the bar on institution or continuation of proceedings is absolute.
The following broad propositions have been evolved by Indian Courts:
- Writ Jurisdiction remains untouched by Moratorium. The moratorium will not affect the power exercised by the Hon’ble Apex Court under Articles 32 or 136 of the Constitution of India or by the Hon’ble High Courts under Article 226 and 227 of the Constitution of India. Be that as it may, a money suit or a suit for recovery filed against a Corporate Debtor before a Hon’ble High Court exercising original jurisdiction would still be hit by the prohibition under Section 14.
- Moratorium will not press pause on Criminal Proceedings: Section 14(1)(a) of the IBC is not applicable to criminal proceedings or to any penal action taken pursuant to said criminal proceedings or to any act having the essence of a crime.
- Moratorium may affect arbitration matters depending on whether the award would deplete or add to the corpus of the Corporate Debtor: Though Section 14(1)(a) expressly references to an arbitration panel, Courts have preferred the view that any proceedings that may revitalise the financial corpus of a Corporate Debtor must not be barred keeping in mind the dual objective of the IBC in offering a Moratorium- to prevent the Corporate Debtor’s assets from dissipation as also in enabling maximisation of value of its assets.
- Disputed Debts owed to the Government Exchequer: Courts have not specifically addressed the issue of whether initiation or continuation of proceedings in respect of disputed taxation debts will be hit by moratorium. When the Hon’ble High Court of Guwahati was faced with this query in a challenge (Writ Petition) against the adjudication order, the matter was remanded with a direction to examine whether institution or continuation of proceedings under the Central Goods and Services Tax Act, 2017 would be barred by Section 14(1)(a) during the moratorium period.
From a conspectus of the above-referred decisions, it is clear that any dispute which has the potential of resulting in a liability to the Corporate Debtor is prohibited under Section 14(1)(a) of the IBC. Even if moratorium does not operate over a dispute which carries a potential outflow of moneys to the Corporate Debtor, the losing party will be disabled from pursuing appellate remedies in light of the moratorium. Hence, the only practicable approach seems to be for creditors to abide by moratorium and file their claim(s) before the Interim Resolution Professional (‘IRP’)/ Resolution Professional (‘RP’).
To compound the discussions concerning the bar on initiating or continuing pending proceedings during moratorium period, it is necessary to refer to the decision of the Hon’ble High Court of Rajasthan in ‘Ultra Tech Nathdwara Cement Ltd vs. UoI- 2020-VIL-169-RAJ’. It was held that since a resolution plan devised by the IRP/RP and submitted for approval to the Hon’ble National Company Law Tribunal (‘NCLT’) under Section 31(1) of the IBC was binding on all creditors, any debts that do not already form part of the resolution plan submitted by the IRP/RP to the NCLT will stand invalidated.
This article seeks to examine the implications emerging from a conjoint reading of the decision in Ultra Tech (supra) and the prohibition in Section 14(1)(a) of the IBC.
To begin with, Section 14(1)(a) of the IBC bars tax authorities (being ‘operational creditors’ under the IBC) from initiating demands or from continuing pending proceedings once Corporate Insolvency Resolution Process (‘CIRP’) is initiated against the Corporate Debtor (being the assessee). We have already analysed how no proceedings concerning disputed debts owed to the Government Exchequer can be taken up against the corporate debtor/assessee during the pendency of moratorium.
Next, Section 31(1) of the IBC makes the resolution plan [as approved by the Committee of Creditors (‘CoC’)] binding on the corporate debtor, its employees, members and all creditors including the Central Government, any State Government or any local authority to whom a debt is owed. The Hon’ble Supreme Court has observed that any dues that are not already approved by the CoC and forming part of the resolution plan will be invalidated because, “a successful resolution applicant cannot suddenly be faced with ‘undecided’ claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor.”
A concerted analysis of the above provisions implies that Tax Authorities must walk a veritable tightrope in respect of Corporate Debtors that are undergoing CIRP –
- the Department must keep close watch over all proceedings relating to said Corporate Debtor before the Hon’ble NCLT to remain informed of the commencement and cessation of moratorium period under Section 14 of the IBC.
- Immediately upon completion of moratorium period, all alleged debts must be collated for filing claims within the last date for submission of claims as will be announced by the IRP/RP under Section 15(1)(c) of the IBC.
- Ensure that their claims are accurately captured/updated in the list of claims as must be maintained by the IRP/RP under Section 18(b) and Section 25(2)(e) of the IBC.
- Participate in all CoC meetings under Section 24(3)(c) of the IBC (provided the amount of aggregate debt is not less than 10% of the overall debt).
The Way Forward
Considering the spate of applications under the IBC and the consequences of not having disputed tax dues added to the list of claims maintained by the IRP/RP, it is highly recommended that a separate task force committee be constituted by the Central Board of Indirect Taxes (‘CBIC’) specifically for dealing with that class of assessees who are undergoing CIRP. This committee may be entrusted with updating records of all assessees undergoing CIRP to ensure that:
- The litigation cell is acquainted with those assessees against whom disputes must not be initiated or continued for the duration of moratorium period;
- The recovery cell is familiarised with the process of submitting and updating all debts believed to be owed to the Ex-chequer which must form part of the list of claims maintained by the IRP/RP.
The above steps would go a long way in enabling alignment and synchronicity between Tax Enactments and the IBC.
Raghavan Ramabadran is Partner & Krithika Jaganathan is Principal Associate at Lakshmikumaran & Sridharan Attorneys, Chennai. Views expressed are the authors’ personal.