MANAGING STUCK TAX REVENUE & IBC CODE

[Dr. Sanjiv Agarwal]

Insolvency & Bankruptcy Code, 2016 (in short, IBC) is a relatively new law dealing with insolvency resolution of corporate persons and other entities in a time bound manner and maximization of value of assets of such entities. It also aims at balancing the interests of all stakeholders including alteration in the order of priority of payment of government dues.

Under IBC the tax dues and related debts payable towards any tax dues including indirect taxes etc are treated as operational debts :

Section 5(21) of IBC defines ‘operational debt’ as a claim in respect of the provision of goods or services including employment or a debt in respect of the re-payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. Operational debtor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) stipulates that after 10 days have passed from the date of delivery of notice or invoice that demands payment under section 8 of IBC, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under section 8(2).

In terms of Section 53 of IBC, all unpaid dues would have to be settled before the asset could be transferred, without taking into account the debts of any other operational or financial creditors. Under Section 53, the IBC expressly prioritizes the interests of financial creditors over the interests of operational creditors.

Insolvency resolution by operational creditor under section 8 of IBC provides that:

8. (1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in section 8(1) bring to the notice of the operational creditor:

1. existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
2. the repayment of unpaid operational debt:

1. by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or
2. by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under section 8(1), if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under section 8(2), the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

It has been noticed by CBIC that in many cases, claims could not be filed or not filed timely by the revenue authorities or the representatives leading to loss of recovery of debts or tax dues as the corporate debtor was under IBC proceedings. Taking note of substantial revenue at stake in cases covered under IBC and pending before NCLAT or NCLT, the CBIC had recently sensitized standing counsels to efficaciously deal with the revenue cases.

CBIC had issued Instruction (Instruction No. F.No. 278A/38/2021-Legal dated 15.02.2023) to emphasizing that all orders of empanelment of standing counsels (junior and senior, both) shall specifically mention that counsels are appointed for ‘high court and other fora’ which includes NCLT and NCLAT. It is generally observed that counsels are reluctant to defend revenue cases before such forums, particularly when Commissionerate / Directorate / Tribunal / Appellate Tribunal are situated at different locations.

The instruction also suggested that such appointment of counsels may be done from locally available counsels, i.e., counsels stationed where the bench of NCLT / NCLAT is located. It may be noted that ‘other fora’ word necessarily include NCLT and NCLAT.

It is hoped that with such a direction, cases in NCLAT / NCLT will also get due attention like cases before tax Tribunals.