DOES THE RESOLUTION PLAN [INSOLVENCY AND BANKRUPTCY CODE, 2016] OVERRIDE THE SOVEREIGN RIGHT OF TAXATION?

SHORT NOTE:

The waterfall liability under section 53 of the Insolvency and Bankruptcy Code, 2016 (hereinafter ‘IBC’) places government at fifth place in order of priority. Although with the operation of Sec. 53 of the IBC, the statutory dues/government dues merely have been lowered in order of priority from the sale of the liquidation assets, whereby not abolishing the statutory dues. Simply grading down in the priority order from the sale of the liquidation assets does not impede the government’s right, as it does not extinguish the government’s claim. Therefore, it cannot be said that while placing statutory dues/government dues in the lower order of priority from the sale of the liquidation assets, impede government’s right of taxation.

Statutory dues arise pursuant to a provision in the various statute. In taxing statute, the statutory dues get levied from the charging section of the respective statute. There is an enormous difference between employees, members, creditors, guarantors, other stakeholders and government’s right of taxation. That is, the government has a statutory due which is derived from the charging section of a particular statute and on the other hand parties to the resolution plan has contractual due. Statutory dues cannot be said to be forming a part of the estate of the corporate debtor whereby, never dissolves by liquidation and on the other side contractual dues forms a part of the estate which dissolves by liquidation.

The object and reason of the IBC is to shield the contractual dues before statutory dues. The interpretation of the IBC cannot be ascertained in such a way as to defeats the purpose of taxing law and impede the taxing statutes. Hence, the resolution plan will only be binding on the government w.r.t the liquidation process whereby, permitting the government to levy a tax on the corporate debtor. Furthermore, waiving of statutory dues will only amount to transgress the other statutory provisions. Therefore, extinguishment of statutory dues without following adequate procedures (as government authorities aren’t part of CoC) and merely seeking recourse to “liquidation value argument” cannot be said to be in due compliance of the law.

Non-Obstante Clause

The non-obstante clauses contained in 238 of the IBC give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. While interpreting non-obstante clause, the Court is required to find out the extent to which the legislature intended to do so and the context in which the non-obstante clause is used [(1964) 1 SCR 371]. In here, there are two different enactments addressing two different issues i.e., taxing and insolvency. In other words, there is no provision in the taxing enactments which are inconsistent with the IBC. Therefore, the provisions contained in those taxing statute cannot override by the IBC.

See also: Common Law Principle of Priority of Government Debts

Section 53: Distribution of assets- IBC, 2016

53. (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely :—

(a) the insolvency resolution process costs and the liquidation costs paid in full;
(b) the following debts which shall rank equally between and among the following :—

(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and
(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;
(d) financial debts owed to unsecured creditors;
(e) the following dues shall rank equally between and among the following:—

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;
(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners, as the case may be.

(2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator.

(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.

Explanation.—For the purpose of this section—

(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and

(ii) the term “workmen’s dues” shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013.

238A. Limitation – IBC, 2016

238A. The provision of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or appeal before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.

 (for any further information be my guest at lawyer.akt@gmail.com)

- ABHISHEK K TRIPATHI

  ADVOCATE