The National Company Law Appellate Tribunal (NCLAT) on 20 March 2019 brushed off a batch of appeals inside the be counted of PR Director General of Income Tax (Admn & TPS) v Synergies Dooray Automotive Ltd & Ors, which claimed taxes to be an exception to the definition of operational debt underneath segment five(21) of the Insolvency and Bankruptcy Code, 2016 (IBC).
The NCLAT held that taxes had been subsumed inside the definition of operational debt and tax authorities were operational lenders under IBC.
Section five(21) of IBC: The appellants challenged segment 5(21) of the IBC declaring that the word “or” earlier than the sentence “…a debt in admire of the charge of dues bobbing up below any regulation at the moment in force payable to the Central Government…” should be interpreted as “and”. Therefore, they argued that: (i) debt would be related most effective to deliver of products or offerings rendered to the company debtor; and (ii) tax does now not qualify as both, and could no longer be an operational debt.
Discussing the scope and nature of the time period operational debt, the NCLAT, primarily based at the precedents in statutory interpretation, considered the site of the words “or” as well as “and” in the provision. It located that there has been no ambiguity inside the IBC and that the legislature has intentionally used the words “or” and “and” at one-of-a-kind places inside the provision.
The NCLAT, counting on the judgment inside the Swiss Ribbons Pvt Ltd & Anr v Union of India & Ors (2018) case, held that “and” needed to be read conjunctively at the same time as “or” needed to be read disjunctively inside the stated provision. On the premise of this, the NCLAT held that statutory dues had been operational debt.
The appellants argued that due to the fact the corporate borrowers’ operation did no longer depend on statutory dues, the query of tax being an operational debt could not get up. The NCLAT, as a substitute, found that taxes had a right away nexus with the company debtor’s operation as they would not get up if the company debtor changed into not in operation.
Based at the above, it held that statutory dues such as taxes have been an operational debt; and tax authorities as such could qualify as operational creditors.
What the NCLAT did no longer discuss: Another argument made by way of one of the appellants became that liability beneath the tax statute is the first charge and therefore can not be part of the resolution plan. Although the NCLAT did now not talk this point, the case of Pr Commissioner of Income Tax v Monnet Ispat And Energy Ltd, is seminal on this regard, wherein the Supreme Court categorically adjudged that phase 238 of the IBC overrides any statute inconsistent with it, which includes the Income Tax Act, 1961. Therefore, it might seem that having a first charge (underneath some other statute) may end up immaterial if an organization enters the ambit of insolvency beneath IBC.
Ambiguity over tax statutes and IBC: This choice increases vast questions concerning the reputation of the tax government’ claims in light of the overriding impact of the IBC provisions.
In August 2018, High Court of Andhra Pradesh and Telangana, in Leo Edibles and Fats Limited v The Tax Recovery Officer case, authorized liquidation of belongings of a company present process liquidation beneath IBC in spite of ongoing healing court cases via the earnings tax authorities.
The excessive court said in no uncertain phrases that the earnings tax government couldn’t be considered at par with secured creditors. The court additionally said that due to the fact the income tax government aren’t secured creditors, they have to take recourse under section fifty-three of the IBC as regards to the distribution of belongings and they would come 5th within the order of the disbursal of claims as taxes are a contribution to the Consolidated Fund of India. It is thrilling to observe right here that section 53 of the IBC does not point out the term operational creditor.
With the NCAA’s selection declaring the tax government as operational lenders, the ambiguity exists within the interplay among tax (dues) and the IBC. The tax branch in October 2018 was mentioned to have prepared an offer looking for the intervention of the Ministry of Finance to remedy the problem.
Recently, the Insolvency and Bankruptcy Board of India has reconstituted the Insolvency Law Committee as the Standing Committee to check the implementation of the IBC. It may be exciting to see what recommendations the committee will make on the issue of the paradox concerning tax and the IBC.