Rajasthan High Court in UltraTech Cement Case reaffirmed the primacy of Insolvency and Bankruptcy Code (IBC) over all other legislations

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Following the filing of a writ petition, the Hon’ble Rajasthan High Court passed an order in the Ultra Tech Nathdwara Cement Ltd v Union of India, which reaffirmed the precedence of the IBC over all other legislation (including statutory dues).

Facts of the Case

Facts before the tribunals

According to a petition filed before the NCLT (Kolkata bench), Binani Cements Ltd. (Binani) was referred to Corporate Insolvency Resolution Process (CIRP), via an order dated 25 July 2017 (Company Petition (IB) No.359/KB/2017). The Resolution plan submitted by Ultratech Cements Ltd was approved by the Committee of creditors constituted under the provisions of the IBC. The said plan was further approved by the Hon’ble National Company Law Appellate Tribunal (NCLAT), and subsequently by the Hon’ble Supreme Court (SC). According to the approval of this plan by all the creditors, statutory and adjudicating authorities, the Ultratech Ltd took over the management and business of the Binani. In the resolution plan claims of all the creditors were collated, including the claims of Central Goods and Service Tax Department, Govt. of India (department), which were accepted to the extent of Rs. 72.85 Crores.

Facts before the Hon’ble HC

Post the approval of the plan, the department issued notices to the Ultratech Ltd. To repay the debt above the amount settled in the approved resolution plan.

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Ultratech filed a writ petition before the Rajasthan HC, pleading it to pass a mandatory injunction, restraining the department from issuing any further such notices, and to quash the already issued notices concerning the amounts payable by Binani, before its acquisition by the Ultratech.

Issues before the HC

Settlement of claims

It was argued by the petitioners that the claims of the department from the Binani were already settled under the resolution plan. The petitioners cited a set principle of law that amount of claims settled under the resolution plan by the Committee of Creditors (COC) will be given finality, and any subsequent claims, in addition to the amount mentioned under the RP will be unenforceable against the CD.

The petitioners cited the  SC’s order in COC of Essar Steel India Ltd. Through Authorised Signatory v Satish Kumar Gupta & Ors, wherein it was held that the terms of an approved Resolution Plan were binding on all the stakeholders of the Corporate Debtor, notwithstanding whether such stakeholders were heard or given an audience before the COC or not.

Prevalence of the Resolution Professional

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The petitioners claimed that under Section 31 a duly approved becomes binding on the Corporate Debtor, and it’s all other stakeholders including its members, employees, creditors, and the governments. The petitioner furthered it by focusing on the recent amendments to the IBC dated 16 August 2019 (Amendment) which specifically clarified that the terms of an Approved Resolution Plan are binding on all stakeholders, including 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 statutory dues.

The petitioners quoted the speech delivered by the Finance minister (FM) before the upper house of the parliament. While stating the importance of the amendment, the minister stated that the intent behind the Amendment was to clarify the precedence of IBC provided under Section 238,  overall other conflicting legislation (including statutory dues), and over the government. This, according to FM was to prevent the governments from raising any claim which is already settled amongst the creditors under the RP.

Preference of financial creditors over operational creditors

Portioners mentioned that giving precedence to the claims of financial creditors is envisaged as a norm under the scheme of IBC. So the 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.

High Court’s Judgement

The HC, by allowing the petition held that the creditors of a CD will be injuncted from making any claims after the approval of a resolution plan with under provisions of the IBC. These are the facets of the reasoning given by the HC:

The interest of department under the RP

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The Hon’ble HC reiterated the principle propounded under the Essar Steel case, which described that in situations where the COC and a creditor fail to achieve consensus on an amount of claim to be recovered by that creditor, the COC will be obligated to ensure that the creditor receives at least the amount receivable on the occurrence of CD’s liquidation under Section 53.

In the account of this principle, the HC observed that if the Binani resorted to liquidation, then the amount of claim receivable by the department in proportion to its share in the aggregate assets of Binani under Section 53 would be ‘Nil’. Thus, the amount of Rs. 78 Crores, settled by the COC under the Resolution pan was the maximum amount which could be recovered by the department from the CD.

Precedence of RP

The HC observed that in light of the arguments put forth by petitioners, it was clear that the IBC not only gave preference to the Financial creditors over the operational creditors, but it completely injuncted the adjudicating authorities from intervening the commercial wisdom of the COC. Thus, it clarified about complete autonomy of the COC over the settlement of claims made by various creditors of the CD.

It held this to be in furtherance to the objective of the IBC ensuring the revival and continuation of the CD by protecting it from a corporate death through liquidation. In conclusion, concerning this aspect, it mentioned that the settlement of statutory dues as prescribed in an Approved Resolution Plan to be binding on all such authorities to whom such dues are payable by the corporate debtor.

Conclusion

This judgement clears all the ambiguity attached to section 238 concerning the precedence of IBC over subsequent claims made by the creditors and governmental authorities over all the claims which weren’t granted an audience by the COC, during the settlement of claims. It subsequently furthers the independence given to the commercial wisdom of the COC from the judicial intervention.


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