1. The Insolvency and Bankruptcy Code, 2016 sought to resolve the past dues of an insolvent Company to keep it as a going
2. The letter and spirit of the Corporate Insolvency Resolution Plan was that a Resolution Applicant shall have clear and crystallized liability to pay the amount specified in its resolution plan and “a Resolution Plan approved by the
Committee of Creditors shall lead to extinguishment of all past liabilities”.
3. The Resolution Applicant(s) accordingly had full clarity regarding the funds to be infused towards the cost of the Resolution Plan and an approved Resolution Plan was thus expected to give a clean slate and fresh start to the
Corporate Debtor.
STO Vs. Rainbow Papers Ltd.
4. However, with the latest Judgments, a situation of uncertainty has emerged regarding the status of statutory liability to be discharged by the Resolution Applicant in order to take over the Insolvent Company.
5. More particularly, this problem emerged with the Judgment of the Supreme Court in the matter of State Tax Officer Vs. Rainbow Papers Ltd. 2022 SCC OnLine SC 1162 wherein it has held that the first charge created by a Statute in favour of any Statutory Authority viz. Sales Tax Authority shall in effect imply that the said Statutory Authority shall be treated as a
“Secured Creditor” in terms of Section 3(30) of the Code in the Resolution Plan.
6. The Rainbow Paper Judgment (supra) is a marked departure and holds that the Committee of Creditors, which might include Financial Institutions and Financial Creditors cannot secure their dues at the cost of the statutory dues owed to any
Government or Governmental Authority or for that matter any other dues especially when the “first charge” is available with the statutory authority in question by law.
7. The Hon’ble Supreme Court has resultantly held that if the Resolution Plan ignores the statutory demands altogether, who had the charge created by the statute, the Adjudicating Authority is bound to reject the said Resolution Plan in
terms of Section 30(2)(e) of the Code.
8. This Judgment has substantially enhanced the status of the Government Authorities who as operational creditors, don’t even have voting right in the Committee of Creditors. The Judgment has raised a situation of concern qua the Resolution Applicants, who have submitted the Resolution Plans on an assumption that the Plan is final in all regards and no further financial liability shall be casted upon them.
9. Failure to provide payment of statutory dues in a resolution plan can now lead to rejection of the said plan by the Adjudicating Authority.
Effect on Approved Resolution Plans
10. But, a matter of greater concern is that in some instances, statutory authorities have started initiating legal proceedings to claim their dues even for resolution plans which have already been approved in the past and in some cases, have also been substantially implemented.
11. The State Electricity Department has been particularly aggressive in claiming electricity dues as first charge for approved resolution plans which have been implemented many years in the past.
NCLAT Judgment in Jet matter.
12. Quick in succession, the National Company Law Appellate Tribunal (‘NCLAT’) in the matter of ‘Jet Aircraft Maintenance
Engineers Welfare Association Vs Ashish Chhawchharia RPF Jet Airways India Ltd. & Ors. Comp.
App. (AT) (Ins) No.643 of 2021 & Ors.’ has held that any Resolution Plan which fails to incorporate Employees’ Provident Fund and Gratuity dues to workmen and employees of the Company shall not be valid in terms of Section 30(2)(e)
of the Code and had passed the Judgment directing that the Employees Provident Fund and Gratuity dues of the
workmen/employees has to be given emphasis and paid in priority in the Resolution Plan.
13. In the matter of Jet Airways (supra), the Resolution Applicant has been directed to make additional payments and in view of nonpayment by the Resolution Applicant, as on date the Application for liquidation has been filed before
the Adjudicating Authority.
14. The aforementioned Judgments of Rainbow Paper (supra) and Jet Airways (supra) bring in an alarming situation, where
the past Resolution Plans or Resolution Plans pending adjudication, might be re-opened, re- agitated, even rejected due to the widening of the scope of Section 30(2)(e) of IBC and re-interpretation of the waterfall in Section 53.
15. The Government Authorities and the Workmen/Employees, who being operational creditors, had no voting rights or say in a Resolution Plan as per the provisions of the Insolvency Code have suddenly become the significant players in the
approval or successful implementation of any Resolution Plan.
Lawyers’ Paradise
16. A bigger problem is that statutory authorities and workmen are not a part of CoC and hence, the Resolution Plans will suffer complicated litigation as these dues will be agitated before the Tribunals at the time of approval.
17. In effect, any Resolution Plan even though approved by the Committee of Creditors can be reopened at any stage thereby adding unforeseen liabilities on the successful Resolution Applicant.
Change in Judicial View?
18. The same runs contrary to the law laid down by the Hon’ble Supreme Court in the matter of Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531, which clearly states that the successful Resolution
Applicant has to proceed from a clean slate and cannot be saddled with any past liability.
19. The judgments of the Supreme Court in the matters of CIT v. Monnet Ispat & Energy Ltd., (2018) 18 SCC 786 and
Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657 which entailed that the
approval of Resolution Plan leads to extinguishment of all past debts seem to have been revisited without thorough consideration and discussion.
Economic consequences
20. It is pertinent to state this new trend of judicial precedents is likely to disincentivize the Resolution Applicants since a window has been created for interfering with the Resolution Plans which will lead to complicated and prolonged litigation regarding past, present and future resolution plans.