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JC - Legal Updates - Resolution plan which ignores the statutory demands payable to any statutory authority is bound to be rejected

Legal Updates

12 Sep 2022

Resolution plan which ignores the statutory demands payable to any statutory authority is bound to be rejected

Brief Facts:

The Supreme Court in State Tax Officer v Rainbow Papers Limited (Civil Appeal No. 1661 of 2020) set aside the Resolution Plan which waived off entire claim of the Gujarat Sales Tax Department (“Department”).

The following are the crucial facts in brief:

(a)   The Department had already initiated recovery proceedings against the Corporate Debtor prior to the commencement of CIRP.

(b)   The Department’s claim was reflected in the Corporate Debtor’s books of account.

(c)   The Department has also filed its claim but at a belated stage. As such, the Department’s claim was rejected.

(d)   The Resolution Plan waived off the entire claim of the Department.

Observations:

 The noteworthy findings of the Apex Court, were inter alia as under:

(a)   There is no obligation on the concerned statutory Authority to file a claim in respect of the statutory dues against which recovery proceedings have already been initiated.

(b)   Delay in filing a claim by a statutory Authority cannot be the sole ground for rejecting its claim.

(c)   CoC cannot secure their own dues at the cost of other dues including statutory dues of the corporate debtor.

(d)   Creditor, in whose favour security interest has been created by operation of law would be considered as a secured creditor under the provisions of Insolvency and Bankruptcy Code, 2016 (“Code”). Accordingly, Gujarat Sales Tax Department is a secured creditor as per Section 48 of the GVAT Act r/w Section 3(30) and (31) of the Code.

(e)   The Supreme Court in the present case, considered the observations of Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss ARC Ltd., however, the Supreme Court set aside the Resolution Plan by observing that when the Resolution Plan does not meet the requirements of Section 30(2), the same cannot be approved.

Conclusion:

Setting aside the Resolution Plan, the Supreme Court held that if a resolution plan ignores the statutory demands payable to any statutory authority, the Adjudicating Authority is bound to reject the resolution plan.

The rational being that the Resolution Professional as a part of his mandatory duty is bound to examine the Corporate Debtor’s books of accounts verify and include such statutory dues in the information memorandum and make provision for the same in the resolution plan. Alternatively, the resolution plan will be liable to rejected as being in non-conformity with Section 30(2) of the Code.

https://main.sci.gov.in/supremecourt/2020/4574/4574_2020_5_1502_38016_Judgement_06-Sep-2022.pdf

For any further information, please contact Mr. Shubhabrata Chakraborti (shubhabrata.chakraborti@jclex.com) or Ms. Smriti Jha (smriti.jha@jclex.com).