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THE PROVISIONS OF INSOLOVENCY AND BANKRUPTCY CODE, 2016 OVERRIDE THE GST ACTS

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THE PROVISIONS OF INSOLOVENCY AND BANKRUPTCY CODE, 2016 OVERRIDE THE GST ACTS
By: Mr.M. GOVINDARAJAN
March 24, 2020
All Articles by: Mr.M. GOVINDARAJAN       View Profile
  • Contents

Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 provides for the initiation of corporate insolvency resolution process against a corporate debtor by a financial creditor or operational creditor.  Even some time the corporate applicant itself initiate corporate insolvency resolution process.  The process is initiated by filing an application in the prescribed Form along with the prescribed fee.  Once the application is admitted the Adjudicating Authority appoints interim resolution professional.  A moratorium order has also been passed. 

Moratorium

The moratorium order passed by the Adjudicating Authority prohibits all of the following-

  • the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
  • transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
  • any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
  • The recovery of any property by an owner or less or where such property is occupied by or in the possession of the corporate debtor.

Over riding effect

Section 238 of the Insolvency and Bankruptcy Code provides that the provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

Issue

The issued to be discussed in this article is whether the provisions of Insolvency and Bankruptcy Code overrides by virtue of Section 238 the Goods and Service Tax Act with reference to the decided case law.  Some arguments may be put forth that GST was introduced with effect from 01.07.2017 whereas the Insolvency and Bankruptcy Code has been enacted in year 2016.  Being the latest law the GST Act will prevail the Insolvency and Bankruptcy Code.

Case law

In ‘Ritesh Prakash Adatiya v. Deputy Commissioner of State Tax (Enforcement) Division – 8, Surat; - 2020 (3) TMI 761- NCLT, Ahamedabad,  Balaji Metal & Alloys, the Operational Creditor, initiated corporate insolvency resolution process  under section 9 of the Insolvency and Bankruptcy Code, 2016 against  Electra Accumulators Ltd.,  Sri Ritesh Prakash Adatiya was appointed as interim resolution professional by the Adjudicating Authority. 

The Department of Goods and Service Tax, through the Office of the Deputy Commissioner of State Tax notice dated 07.02.2019 and 31.12.2018 under section 83 of the Central Goods and Services Act 2017 to protect the interests of revenue, attached the properties of the Corporate Debtor in the form of ‘Finished Goods’, raw materials and the machineries kept at their factory located Vapi.  Both the orders put restriction on disposal of inventory and machineries attached by the GST Department.

The Interim Resolution Professional sent intimation to the GST Department on 27.09.2019 informing them about the commencement of CIRP of the Corporate Debtor and declaration of moratorium under section 14 of the IB Code followed by a reminder on 30.09.2019.  Since there is no response the Interim Resolution Professional approached the Adjudicating Authority.  Before the Adjudicating Authority the Interim Resolution Professional contended that-

  • the working of the Corporate Debtor has come to a standstill and that the Applicant would not be in a position to manage the operations of the Corporate Debtor as a going concern as provided under section 20 of the IB Code.
  • it is the duty of the IRP under section 25 of the IB Code to take control and custody of the assets over which the Corporate Debtor has ownership rights as recorded in the Balance Sheet of the Corporate Debtor including the assets that may or not be in the possession of the Corporate Debtor.

The GST Department contended the following before the Adjudicating Authority-

  • Ready stock located at the place of business
  • Current or CC Bank Accounts
  • Punjab National Bank, Kandivali West (Mumbai)
  •  Union Bank of India, Juhu, Vile Parle West (Mumbai); and
  • Plant and Machinery
  • The provisional attachments/creation of charge orders have been passed before beginning of the moratorium period under the Insolvency and Bankruptcy Code  and thus are effective as on date and valid in law.

The Adjudicating Authority heard both the sides.  The Adjudicating Authority analyzed he provisions of section 14 and section 238 of the Insolvency and Bankruptcy Code.  Further the Adjudicating Authority relied the following case laws in which it has been held that the insolvency and bankruptcy Code has overriding effect of the laws for the time being in force-

An application was filed by ICICI as financial creditors against the Innoventive Industries Ltd. On account of a default of payments due on credit availed by Innoventive Industries it is argued that pursuant to relief order passed by the Government of Maharashtra under the Maharashtra Relief Undertaking (Special Provisions Act) 1958 (MRUA), the Corporate Debtor is not liable to pay any due to ICICI. On the basis of the overriding effects of IBC over MRUA, National Company Law Tribunal (NCLT) declared a moratorium and appointed Insolvency Resolution Professional (IRP). In the appeal, NCLAT held that there is no repugnancy between MRUA and IBC as they are enactments of two diverse fields. IBC has an overriding effect over the provisions of MRUA.

Finally, in an appeal against NCLAT order, the Supreme Court confirms the interpretation by holding that the non-obstante clause of IBC will prevail over the non-obstante clause in the MRUA, On the issue of suspension of debt on account of the relief order under the MRUA, it held that on account of the non-obstante clause in the IBC, any right of the corporate debtor under any other law cannot come in the way of the IBC.

  • The NCLAT in the matter of Lalit Mishra and Ors v. Sharon Bio Medicine Ltd. [2018 (12) TMI 1730 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI ], held that those proceedings under the IB Code are not recovery proceedings.
  • In ‘Sterling SEZ Infrastructure Ltd’, SREI Infrastructure Financial Ltd initiated the Corporate Insolvency Resolution Process against Sterling SEZ and its holding co Sterling Biotech Limited. The credit facilities availed by the SBL group from the various bank and financial institution to the extent of ₹ 8100 Crores were further declared as fraud account by the concerned Banks. In the fear of arrest, promoters of the SBL Group left the country under suspicious circumstances. In result, proceedings were initiated against the Corporate Debtor by the office of the Enforcement Directorate and attachment of the assets belonging to the Corporate Debtor vide order dated 29.05.2018 under section 2(1) (u) of the PMLA Act was made.

Whereas Petition by creditors for initiating corporate insolvency resolution process was admitted by the Tribunal in July 2018 and moratorium declared an interim resolution professional was appointed.  In the proceedings, Resolution Professional Intimated Directorate of Enforcement about corporate insolvency resolution process and requested for withdrawal of order of attachment of assets order for smooth conduct of his functioning for charge and custody over it. The matter was discussed on the initiation of CIRP u/s 7 of IBC prevails over the provisional attachment of assets order under PMLA 2002. It is contended that during the moratorium period, the institution of suits or proceedings against the Corporate Debtor including the execution of any judgment, decree or order of any court of law, tribunal or any other authority is prohibited. Hence, the order of the Enforcement Directorate cannot be executed and section 238 has a non-obstante clause which has an overriding effect on any law contrary whereas in defence, it is stated that IBC is civil legislation and cannot be given precedence over the PMLA, Act. Thus the NCLT lacks jurisdiction in the matter.

  •  In Abhishek Stock Broking Services (P.) Ltd. v. Shree Ganesh Jewellery House (I) Ltd. 2018 (9) TMI 1952 - NATIONAL COMPANY LAW TRIBUNAL, KOLKATA = [2018] 100 taxmann.com 425 (NCLT - Kol.), the assets of the corporate debtor were under the possession of the enforcement agencies leading to undetermined valuation of the assets of the corporate debtor. The resolution professional was also unable to take over the management of the corporate debtor due to the arrest of one of the promoters of the corporate debtor by the Directorate of Revenue Intelligence ('DRI') during the period of CIRP. Hence, the resolution professional was unable to prepare an information memorandum, being one of the important documents for the purpose of the receipt of resolution plans and the NCLT ordered for liquidation of the corporate debtor by way of its order dated 14 September 2018.

The Adjudicating Authority further noted that during liquidation also, according to section 33(5) of the Code, no legal proceeding can be initiated against the corporate debtor. Accordingly, there is no question of alienating or attaching any of the assets of the corporate debtor. In fact, during liquidation, according to section 35(l)(b) of the Code, the liquidator is expected to take into custody or control all the assets, property, effects and actionable claims of the corporate debtor.

The Adjudicating Authority observed that the period of completion of the corporate insolvency resolution process is restricted to 180 days or 270 days or 330 days from the date of admission of the application. The Code in itself is a time-constrained process; hence, the attachment of assets during such process drastically affects the stakeholders of the Corporate Debtor. It is pertinent that obtaining a release of the assets from such statutory authorities is a task in itself and requires a substantial number of days or months for the final judgment to be pronounced. Hence, the precious time of a resolution professional will be spent in obtaining judgments in such matters. Directly or indirectly, such litigation hampers the whole process of CIRP. Accordingly, such litigation affects the stakeholders of the corporate debtor.

In view of the above the Adjudicating Authority directed to release the assets of Electra Accumulators Ltd., the Corporate Debtor, enabling the IRP of the Corporate Debtor to collate the claims from the creditors and complete the Insolvency Resolution Process of the Corporate Debtor in a time line prescribed by the Insolvency and Bankruptcy Board of India.

Conclusion

The above said discussion leads to confirm the Insolvency and Bankruptcy Code overrides the provisions of the law for the time being in force.  Therefore the Authorities under GST Act have to act accordingly in insolvency cases.

 

By: Mr.M. GOVINDARAJAN - March 24, 2020

 

 

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