STATE TAX OFFICER VS RAINBOW PAPERS LTD : CASE SUMMARY
The Supreme Court in State Tax Officer Vs Rainbow Papers Ltd (2022) SCC Online SC 1162 held that (i) State is a secured creditor under Gujarat Value Added Tax, 2003 (GVAT Act), (ii) Time period of filing claim is directory and (iii) If the Resolution Plan ignores statutory dues, the Resolution Plan is bound to be rejected.
FACTS OF THE CASE
Insolvency proceedings were initiated against the Respondent under Section 9 of the Insolvency and Bankruptcy Code, 2016, which was admitted by NCLT vide order dated 12th September, 2017. Public announcement was made and claims were invited by the Interim Resolution Professional. The last date of filing the claim was 5th October, 2017. The Appellant filed claim of Rs. 47.36 Crore beyond last date mentioned in the public announcement. By a letter dated 22nd October, 2018 entire claim of the appellant was waived off.
The Appellant challenged the Resolution Plan before the NCLT on the ground that it was a secured creditor and it should be paid Rs. 47. 36 Crore towards VAT/CST. The NCLT rejected the Application. An appeal was file against the same before NCLAT which was also rejected.
FINDINGS OF THE SUPREME COURT
The Supreme Court observed that Regulation 12 of IBBI (Insolvency Resolution Process ) Regulations, 2016 deals with time period of filing of claim along with proof. The time period is however directory and not mandatory.
The Supreme Court observed that there was no obligation on the part of the State to lodge claim in respect of dues for which recovery proceedings have also been initiated. Appellants were never told to produce materials in respect of claim.
The Supreme Court observe that in view of statutory charge in terms of Section 48 of GVAT Act, claim of the Tax Department of the State squarely falls within definition of “security interest” under Section 3 (31) of the IBC and the State becomes secured creditor under Section 3 (30) of the Code.
Section 31 of IBC provides that NCLT can approve the Resolution Plan only upon satisfaction that the Resolution Plan, as approved by CoC, meets requirements of Section 30 (2) IBC. When Resolution Plan does not meet the requirements of Section 30 (2), the same cannot be approved.
Once grievance is made to the Adjudicating Authority with regard to Resolution Plan, the NCLT is required to examine that if the Resolution Plan met requirements of Section 30 (2) of IBC. The word “satisfied” used in Section 31 (1) imposes a duty on the NCLT to examine the Resolution Plan. The Resolution Plan cannot be approved by an empty formality.
A Resolution Plan which does not meet the requirements of Sub-section (2) of Section 30 IBC would be invalid and not binding on the central Government, any state government, any statutory or other authority, any financial creditor, or other creditor to whom a debt in respect of dues arising under any law for the time being in force is owed. Such a Resolution Plan would not bind the State when there are outstanding statutory dues of a Corporate Debtor.
Even if Section 31 (2) is construed to confer discretionary power on the adjudicating authority to reject a Resolution Plan, it has to be kept in mind that discretionary power cannot be exercised arbitrarily, whimsically, or without proper application of mind to the facts and circumstances which require discretion to used one way or other. If Resolution Plan is not in conformity with law or provisions of IBC or rules and regulations framed thereunder, the Resolution Plan has to be rejected.
If the Resolution Plan ignores the statutory demands payable to the State Government or a legal authority , the Adjudicating Authority is bound to reject the Resolution Plan.
The Supreme Court observed that the NCLAT erred in observing that Section 53 overrides Section 48 of GVAT Act. Section 48 of GVAT Act is not inconsistent with Section 53 of the Code. State is a secured creditor under GVAT Act . Section 3 (30) IBC defines secured creditor to mean a creditor in favour of whom security interest is created. Such security interested can be created by operation of law. The definition of secured creditor does not exclude any Governmental authority.
The Supreme Court held that NCLT and NCLAT erred in law in rejecting the Application on sole ground of delay in filing claim and set aside the Resolution Plan.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.