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Ergo Update

15-Apr-2020

The Hon’ble High Court of Rajasthan (Rajasthan HC) delivered its judgment in the matter of Ultra Tech Nathdwara Cement Ltd v Union of India through the Joint Secretary, Department of Revenue, Ministry of Finance and Ors D.B. Civil Writ Petition No. 9480/2019 in terms of which the Hon’ble Rajasthan HC reaffirmed the primacy of the Insolvency and Bankruptcy Code, 2016 (IBC) over any other law for the time being in force and categorically observed that the provisions of a resolution plan which has been approved by the adjudicating authority (Approved Resolution Plan) is binding on all stakeholders of the corporate debtor, including statutory creditors.

BACKGROUND

Binani Cements Limited (Binani) was referred to corporate insolvency resolution process (CIRP) pursuant to the order dated 25 July 2017 passed by the Kolkata bench of the National Company Law Tribunal in Company Petition (IB) No.359/KB/2017 under the terms of Section 7 of the IBC. Mr Vijay Kumar V. Iyer was appointed as the insolvency resolution professional (RP) of Binani. The RP collated and verified the claims filed by the creditors of Binani, including, inter-alia, by Central Goods and Service Tax Department, Govt. of India (Department) to the extent of INR 72.85 Crores.

The committee of creditors (CoC) of Binani approved the resolution plan submitted by Ultratech Cement Limited (Ultratech) (Ultratech Plan). Subsequently, the Ultratech Plan was approved by the Hon’ble National Company Law Appellate Tribunal vide its order dated 14 November 2018 passed in Company Appeal (AT) Insolvency No.188/2018 (Approval Order). The Approval Order attained finality when the same was upheld by the Hon’ble Supreme Court of India (Supreme Court) vide its order dated 19 November 2018 in Civil Appeal No.10998/2018 (SC Order). Pursuant to the SC Order, Ultratech took over the management and operations of Binani, fully implemented the terms of the Ultratech Plan and made payments to all the creditors of Binani (including statutory creditors such as the Department).

Despite the Ultratech Plan having attained finality and having been duly implemented, the Department addressed numerous demand notices (Demand Notices) in relation to the amounts and interest which became due and payable by Binani prior to the date of commencement of its CIRP. Binani, (under the control and management of Ultratech) eventually addressed a letter dated 26 November 2018 to the Department, duly intimating them of the payment of the amounts to the Department in terms of the Ultratech Plan and that the residual debt stood extinguished under the terms thereof. However, the Department failed to withdraw the Demand Notices. Consequently, Binani filed a writ petition before the Hon’ble Rajasthan HC praying for quashing of the Demand Notices and a mandatory injunction restraining the Department from raising any further Demand Notices in relation to the amounts due and payable by Binani prior to its acquisition by Ultratech, pursuant to the Ultratech Plan (Reliefs). 

ARGUMENTS ADVANCED BY BINANI

Some of the key arguments advanced by Binani to seek the Reliefs are as under:

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The claims of all the creditors of Binani, as admitted by the RP were settled under the terms of the Ultratech Plan, which attained finality post the SC Order. Accordingly, the Department does not have the jurisdiction to reagitate its claims and raise Demand Notices in relation to those debts which have already been settled under the terms of the Ultratech Plan.

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Under Section 31 of the IBC, an Approved Resolution Plan is binding on all the stakeholders of the concerned corporate debtor. In fact, Section 31(1) of the IBC was amended on 16 August 2019 (Amendment) in terms of which it was specifically clarified that the terms of an Approved Resolution Plan is binding on all stakeholders, including “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, such as authorities to whom statutory dues are owed…..”

While the Amendment was being adopted in the upper house of the Parliament, the then Hon’ble Finance Minister stated that the intent behind the Amendment is to clarify that: (a) Section 238 of the IBC provides that IBC will prevail any other law for the time being in force in case of inconsistency between 2 (two) laws; and (b) an Approved Resolution Plan is binding on the Government and that the Government will not raise any further claim after resolution plan is approved.

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The Hon’ble Supreme Court in the matter of Committee of Creditors of Essar Steel India Ltd. Through Authorised Signatory v Satish Kumar Gupta & Ors (Essar Steel) made it evident that the terms of an Approved Resolution Plan was binding on all the stakeholders of the Corporate Debtor, notwithstanding whether such stakeholders were heard or given an audience before the CoC or the RP.

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The IBC envisages that financial creditors of a corporate debtor are given a precedence in the scheme of the IBC. Operational creditors (including statutory creditors) must make a sacrifice to ensure that the corporate debtor continues as a going concern without being subjected to liquidation.

ARGUMENTS ADVANCED BY THE DEPARTMENT

The principal argument in terms of which the Department challenged the Reliefs sought was that it was not heard by the CoC before finalizing the Ultratech Plan. Accordingly, the Department submitted that the Ultratech Plan was not binding on them.

OBSERVATIONS OF THE HON’BLE RAJASTHAN HC

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Approved Resolution Plan Is Binding on The Department Under Section 31 of the IBC.

The Hon’ble Rajasthan HC observed that it is evident that under Section 31 of the IBC (particularly subsequent to the Amendment) the terms of an Approved Resolution Plan is binding on statutory creditors, including the Central Government, State Government or any other local authorities. Accordingly, the Hon’ble Rajasthan HC observed in no uncertain terms that the Ultratech Plan is binding on the Department.

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IBC does not confer right of audience to Operational Creditors before the CoC

The Hon’ble Rajasthan HC observed that in light of the ratio of Hon’ble Supreme Court in Essar Steel and the stance of the then Hon’ble the Finance Minister before the upper house of the Parliament, it is clear that the IBC not only envisages giving precedence to the financial creditors in the ratio of payments when the resolution plan is being finalized but also confers the CoC with the near absolute discretion to negotiate with the resolution applicant and determine the manner of payment to be made to each category of creditors of the corporate debtor. The scheme of the IBC does not envisage conferring right of audience in the resolution proceedings to the operational creditors (including statutory creditors).

Further, the Hon’ble Rajasthan HC observed that it is by the virtue of the amended Section 31 of IBC that the Central Government, State Government  and local authorities have been put under the umbrella purview of the Approved Resolution Plan, which is binding on them and their departments. The object of IBC is to ensure that that an industry under distress does not fade into oblivion and can be revived by virtue of the resolution plan and to secure this objective,  the IBC prescribes that the settlement of statutory dues as prescribed in an Approved Resolution Plan becomes binding on all such authorities to whom such dues are payable by the corporate debtor.

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The Interests of the Department are better protected under the Ultratech Plan

The Hon’ble Rajasthan HC observed that in the event the Binani was resigned to the fate of liquidation, then as per the assessed liquidation value of Binani, the Department would have recovered “Nil” amount as per the distribution waterfall set out in Section 53 of the IBC. However, on account of the Ultratech Plan, the Department was able to recover an amount of approximately INR 72 Crores.

Considering the above, the Hon’ble Rajasthan HC categorically observed that the Department’s action of addressing Demand Notices was illegal, arbitrary and could not be sustained. Further, it is interesting to note that the Hon’ble Rajasthan HC in its obiter has strongly berated the Department for addressing Demand Notices and severely admonished them for engaging in frivolous litigation.

KEY TAKEAWAYS FROM THE JUDGMENT

The Hon’ble Rajasthan HC has reaffirmed the primacy of the IBC and reiterated that the claims of all the creditors of a corporate debtor, including any tax claims of statutory authorities, will be settled as per the terms and conditions set out in the Approved Resolution Plan and the authority to determine the distribution of the proceeds of a resolution plan solely lies with the CoC. Pursuant to this judgment, there is no room for any additional amounts being claimed by the governmental authorities on the ground that no audience has been granted to any operational/ statutory creditors or that the operational/statutory creditors were not heard/consulted by the CoC while determining the distribution in their commercial wisdom.

This judgment goes a long way in ensuring that not only financial and other operational creditors, but even tax and other governmental departments are more forthcoming in submitting their claims. This would also achieve reduction in the frequency of any adverse actions/ litigations being taken/initiated against the corporate debtors once the Approved Resolution Plan is implemented and dues of various creditors are settled as per the distribution approved by the CoC. This infuses more certainty for prospective resolution applicants/ bidders who are looking to acquire distressed business IBC on a “fresh slate” as envisioned by the Hon’ble Supreme Court in Essar Steel.

-       Rajeev Vidhani (Partner) and Ashwij Ramaiah (Associate)

For any queries please contact: editors@khaitanco.com

Rajeev Vidhani (partners)

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