Category: Corporate Laws

The Union Budget of India for the year 2023-24 (the Budget) has introduced various circumstances in which taxes are to be withheld  / collected by the payer.   Several taxpayers / citizens have approached us to understand the import and application of these amendments from time to time post the Budget speech.  This post seeks to provide an explanation to  such queries.

Tax Collection at Source Amendments

TCS rates on remittances made from India

Effective 1 July 2023, TCS would be required to be effected at the rate of 20% as against the existing rate of 5% for remittances under Liberalised Remittance Scheme (LRS) and overseas tour package. However, the TCS rate on remittances made for medical and education purposes in excess of INR 7 lakh continues to be at 5%. Further, in case remittance in excess of INR 7 lakh is made for educational purpose out of loan obtained from financial institution, the TCS rate of 0.5% remains unchanged.

Tax Deduction at Source (TDS) Amendments:

Benefit of tax treaty rate extended to specified income earned by non-residents

A non-residents in India when earning income from mutual fund units suffers a deduction of tax at source by the payer at the rate of 20%. From 1 April 2023, should the non-resident provide a Tax Residency Certificate to the payer, then the payer may discharge the TDS at the treaty rate.

Tax to be deducted on interest on specified securities

From  1 April 2023,  tax would be deducted on the interest payable on listed securities in dematerialized form.

Income from online Gaming.

From 1 July 2023 a payer needs to deduct tax at the rate of 30% on the ‘net winnings’ in the user account at the end of the Financial Year (FY) or at the time of withdrawal by the user. The method for computing the net winnings is yet to be prescribed.

It appears that treaty benefit for non-residents would not be available and the entire net winnings would be liable for tax deduction.

Clarification for tax deductibility on benefits/ perquisites

It has been clarified that the tax is to be deducted whether the benefit or perquisite is in cash or in kind or partly in cash and partly in kind.

The decision of the Hon’ble Supreme Court in the case of STATE TAX OFFICER (1) v RAINBOW PAPERS LIMITED rendered under the Insolvency and Bankruptcy Code (IBC) has ruled on a significant aspect of priority of Government dues. The Court has held that statutory dues under Gujarat VAT Act (GVAT Act) are secured creditors and would require consideration as such in the resolution plan. It was this held that Sec. 48 of the GVAT Act which states that-

“any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person”

is not contrary to or inconsistent with Sec. 53 or any other provisions of the IBC. The Court further held that a resolution plan which does not confirm to the provisions of Sec. 31(2) of the IBC inter-alia prescribing payment of dues of operational creditors, dissenting financial creditors, etc. would not be binding on the parties to whom a debt in respect of dues arising under any law is owed. Such resolution plan ought to be rejected. The Court has also held that the time period of submitting the claims as prescribed under the IBC are not mandatory but only directory.

The decision of the court has raised considerable apprehensions, and rightly so, on the aspect of priority of settlement of statutory dues under the IBC.

SC Observations

The SC has made certain observation suggesting that if the corporate debtor is unable to pay statutory dues to the government and there is no plan to dissipate the debts, the corporate debtor would need to be liquidated and its assets sold. In this respect, the court observed as under:

“52. If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.

53. In other words, if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.
54. In our considered view, the Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.”

The aforesaid observations, considered in isolation have far reaching implication. However, it would be reasonable to infer that such observation will have to be regarded in the context of the issue before hand. The court having held that statutory dues were secured creditors (by virtue of operation of law), such debts require consideration in the same light as other secured creditors. It is only if the resolution plan does not contemplate dissipation of such debts in the manner specified u/s 53 would the question of liquidation of the company arise. Reading beyond the context would render relevant provisions of the IBC and principles established over time nugatory which cannot be the intent.

Statutory dues are unsecured operational debts unless secured by operation of law

It is settled law that statutory dues are operational debts. This is also clear from the definition contained u/s 5(21) of IBC which defines ‘operational debt’ as under:

 “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the 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;

Such operational debts can however be ‘secured’ if a security interest is created on such debts. Sec. 2(31) of IBC defines “security interest” to means:

 “right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person”:

Security interest in relation to a debt thus implies creating a “right, title or interest or a claim to property”. Generally, assessment of statutory dues by government authorities does not create an automatic interest in the property of the debtor, unless mandated under law as was the case under Gujarat VAT Act under consideration by the SC or by specific action. Though the decision has been rendered in context of Sec. 48 of the Gujarat VAT Act, it has direct bearing on government dues under statutes which similarly create a charge over assets of the taxpayer.

Illustratively, similar provisions are specified u/s 82 of the CGST Act, 2017 and Sec. 142A of the Customs Act, 1962 which read as under:

Section 82 of the CGST Act, 2017:

“Tax to be first charge on property.- Notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016, any amount payable by a taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be a first charge on the property of such taxable person or such person.”

Section 142A of the Customs Act, 1962

“Liability under Act to be first charge – Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest or any other sum payable by an assessee or any other person under this Act, shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 and the Insolvency and Bankruptcy Code, 2016 be the first charge on the property of the assessee or the person, as the case may be.”

The import of the aforesaid provisions under the GST and Customs laws is the classification of statutory dues as ‘secured debts’, and therefore a priority on distribution of assets as secured debts u/s 53 of IBC. However, the ruling cannot be regarded as laying the general proposition having application to all government and statutory dues. Nature of statutory dues will need to be examined on a case-to-case basis in light of specific legislative act.

Nature of Income tax dues

Income tax dues generally constitute a significant component of claims under a resolution process. Under the Income tax law, manner of recovery of taxes is provided u/s 222 of the Income Tax Act, 1961. As per the provisions, where the assessee is in default in making payment of taxes, the Tax Recovery Officer (TRO) can proceed to recover the taxes by way of attachment and sale of moveable or immovable property of the taxpayer. Such attachment requires positive action of the TRO as per prescribed rules. Till such process is set in motion, there may not be any question with regard to income tax dues being regarded as secured debts. Even where recovery of taxes is secured by attachment of property, it is argued that such act of attachment does not create ‘a right, title or interest or a claim to a property’ and hence income tax dues will stay outside the purview of ‘secured debts’.

The fine distinction between an attachment of property and charge created over the property was explained by the Gujarat High Court in Shree Radhekrushna Ginning and Pressing Pvt. ltd. Versus State of Gujarat (CA no. 5413 of 2022). The court explained as under:

“12 We take this opportunity to explain the effect of attachment and also the effect of charge. In Mulla’s Civil Procedure Code, 8th Edn., the law as applicable in India is thus summarised (p. 187):

“Attachment creates no charge or lien upon the attached property. It merely prevents and avoids private alienations; it does not confer any title on the attaching creditors. There is nothing in any of the provisions of the Code which in terms makes the attaching creditor a secured creditor or creates any charge or lien in his favour over the property attached. But an attaching creditor acquires, by virtue of the attachment, a right to have the attached property kept in custodia legis for the satisfaction of his debt, and an unlawful interference with that right constitutes an actionable wrong.”      

13 The Privy Council in Moti Lal v. Karrabuldin (1897) I.L.R. 25 Cal. 179, p.c. where Lord Hobhouse stated (p. 185):

“Attachment, however, only prevents alienation, it does not confer title.”

14 Similarly, in the Calcutta Full Bench case of Frederick Peacock v. Madan Gopal (1902) I.L.R. 29 Cal. 428, F.B. Sir Francis Maclean, in delivering the judgment of the Full Bench, says (p. 431):

“I think, therefore, it must be taken that the attaching creditor here did not obtain by his attachment any charge or lien upon the attached property, and if so, no question as to the Official Assignee only taking the property of the insolvent subject to any equities affecting it, can arise.”

And Mr. Justice Ghose says (p. 483):

“I am clearly of opinion that the attaching creditor did not acquire any title or charge upon the property by reason of the attachment in question.”

…….”

Thus, upon attachment of a property, the taxpayer is only debarred from dealing with the attached property except with the permission of TRO. It does not create security interest in favour of the income tax authorities. The proposition that income tax is not secured debts also find favor from various judicial pronouncement on the subject. Illustratively, in Bombay Stock Exchange v. V.S. Kandalganonkar & Ors. one of the points in controversy was whether the Income Tax Department can claim priority over the debts vis-a-vis Bombay Stock Exchange, which was a secured creditor. The Hon’ble Supreme Court held that the Income Tax Act does not provide for any paramountcy of dues by way of income-tax. In such background, it held that stock exchange being a secured creditor, will have precedence over the claim of dues made by way of income-tax by the Income Tax Department. Accordingly, the Bombay Stock Exchange being a secured creditor, would have priority over Government dues.

It thus seems clear that dues under Income tax Act do not create a charge on the assets of the taxpayer and therefore are outside the debate of being regarded as secured creditors for the purpose of waterfall distribution.

Concluding remarks

The jurisprudence developed over years indicate that tax dues towards the government generally have priority only over debts owed to unsecured creditors and such preferential right is not available over secured creditor. However, where the matter pertains to IBC, the waterfall distribution as regards the government dues is subordinate to even unsecured financial debts, workmen dues and wages. The position clarified by the Supreme Court categorizing government dues (protected by charge over assets of the taxpayer) as ‘secured debts’ has put a spanner bearing significant implication on the priority of stakeholders entitled to waterfall distribution.

While it seems certain that the statutory authorities will now approach with full force to exercise their claim in light of the judgement, it also opens a debate on the fate of numerous corporate resolutions which may have not regarded specific categories of government dues as ‘secured creditors. Perhaps the period of limitation to appeal against the resolution plans may come as a savior.

The variance amongst laws with respect to creation of charge over the property of the taxpayer has created uncertainty. There seems no justification for such differentiation in context of matters under IBC. The preamble to the Insolvency and Bankruptcy Code specifies the objective to include “alteration in the order of priority of payment of Government dues”. However, the categorization of statutory dues as ‘secured creditor’ would appear contrary to such objective necessitating a prompt legislative intervention to settle the debate.

Contributed by Yatin Sharma and Abhishek Dutta. 

Yatin can be reached at yatin.sharma@aureuslaw.com

Has the Supreme Court (SC) in SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS legitimised tax proceedings during the period of moratorium set under the Insolvency & Bankruptcy Code?

Rendered in context of the custom law, in the aforesaid matter, SC has held that IBC would prevail over the Customs Act, to the extent that once moratorium is imposed in terms of sections 14 or 33(5) of the IBC, the respondent authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The respondent authority does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act. The Court observed that issuance of demand notices to seek enforcement of custom dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the demand notices are an initiation of legal proceedings against the Corporate Debtor (CD). Thus, the SC has fairly settled that recovery of tax dues cannot be made, otherwise than in the manner prescribed under IBC.

However, what is noteworthy is further examination of the powers which the tax authority can exercise during the moratorium period under the IBC. The court has importantly observed that authorities could however initiate assessment or re-assessment of the duties and other levies. The Resolution Professional has an obligation to ensure that assessment is legal, and he has sufficient power to question any assessment, if he finds the same to be excessive. The court relied on the ratio of the judgement in S.V. Kondaskar v. V.M. Deshpande, AIR 1972 SC 878, wherein the court had held that the authorities can only take steps to determine the tax, interest, fines or any penalty which is due. However, the authority cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium.

There has been varying positions vis-à-vis initiating or continuing tax proceeding during the period of moratorium. For instance, the Calcutta HC in SREI Equipment Finance Ltd. vs. Additional/Joint/Deputy/Assistant Commissioner of Income Tax and others has held that tax proceeding cannot be continued during moratorium. However, given the ratio of the ruling, moratorium for prohibiting initiation or continuation of tax proceedings will now have limited bearing.

In my personal view, continuation of tax proceedings already initiated against the CD before admission under IBC is rational since this is necessary to quantify the legitimate claim of the authorities under a process which has already been set in motion. However, what it does not address is the practicality of contesting the demand before appellate authorities during the time bound CIRP period. It is not uncommon for the tax authorities to make high pitched demands only to be quashed or revised pursuant to appellate relief, and therefore right quantification for admitting a claim assumes importance. As regards initiation of new proceedings, moratorium is a calm period providing the CD a window to restructure in a financially viable manner. Granting the Revenue Authorities opportunity to initiate new assessment proceedings and raise new claim not contemplated before initiation of CIRP may however not be in the spirit of law. It is desirable that the law be clarified to accommodate such distinction in light of moratorium provisions.

Contributed by Yatin Sharma with Abhishek Dutta. Yatin can be reached at yatin.sharma@aureuslaw.com

Provisions of law

Section 270AA of the Income Tax Act enshrined in the statute effective April 2017 enables a taxpayer to seek immunity from (a) imposition of penalty u/s 270A (in case of under reporting of income other than on account of misreporting) and (b) initiation of prosecution proceedings for wilful attempt to evade taxes (section 276C) or failure to furnish return of income in due time (section 276CC). The immunity is subject to fulfilling the prescribed condition, namely:

• Payment of assessed tax and interest within the stipulated time; and
• Non filing of appeal against the order of assessment.

To avail such immunity, the taxpayer is required to make an application in the specified form (Form 68) within a period of one month from the end of the month in which the order is received. Upon receipt of the waiver application, the Assessing Officer, subject to fulfilment of eligibility condition, and on expiry of period prescribed for filing an appeal, is mandated to grant immunity from imposition of penalty and initiation of prosecution proceedings. The order accepting or rejecting such application is required to be passed within a period of one month from the end of the month in which the application is received. Further no order rejecting the application can be passed without given the taxpayer an opportunity of being heard.

The immunity scheme provides the opportunity to fast-track settlement of tax dispute and serve as an attractive strategy to reduce protracted litigation. The provisions however raise interesting questions some of which have recently been subject to judicial scrutiny.

Where penalty notice does not specify – “underreporting” or “misreporting” of income

One of the basic conditions for availing immunity from penalty and prosecution is that the notice for initiating penalty should be only in respect of under reporting of income other than on account of misreporting. In Schneider Electric South East Asia (HQ) Pte. Ltd vs. ACIT International Taxation Circle 3 (1)(2), New Delhi and Ors., the Hon’ble Delhi HC examined the question whether the taxpayer would be eligible to avail the immunity provisions where the penalty notice did not specify the limb (ie. ‘underreporting’ or ‘misreporting’ of income), under which the penalty proceedings had been initiated. Taking into regard the facts, the Court observed that the notice initiating penalty did not specify the particular limb under which penalty notice was issued. The Court further observed that the mere reference to the word ‘misreporting’ by the Assessing Officer in the assessment order could not form the basis to deny immunity (from imposition of penalty and prosecution) where there was no mention as to how the ingredients of “misreporting” were satisfied. Therefore, the impugned order rejecting application for grant of immunity was manifestly arbitrary. The Court accordingly directed the tax authorities to grant immunity under section 270AA.

The ruling brings to relevance the significance of specifying the particular limb under which penalty proceedings are initiated, non-specification of which can be inferred as a case of mere ‘underreporting’. Whether non-specification of specific limb can be a ground for quashing of the penalty notice itself would also be a point to ponder drawing analogy from the jurisprudence under the erstwhile penalty regime in relation to ‘concealment of income’ or ‘furnishing inaccurate particulars.

Failure to pass order accepting or rejecting the immunity application within stipulated period

Under the immunity scheme, the order accepting or rejecting application seeking immunity is required to be passed by the Assessing Officer within a period of one month from the end of the month in which the application is received. In Nirman Overseas Private Limied v NFAC Delhi, the Hon’ble Delhi High Court examined the question whether non issuance of the order by the Assessing Officer accepting or rejecting the immunity application under Section 270AA within the statutory timeline would be regarded as non-passing of the order granting immunity to the taxpayer or otherwise. The Court observed that under the scheme, there is prohibition for availing the benefit of immunity from penalty and prosecution under Section 270AA only in case where proceedings for levy of penalty have been initiated on account of alleged ‘misreporting’ of income. Further the scheme provides for satisfaction of specified condition i.e. payment of tax demand and non-institution of appeal. Where the aforesaid conditions are satisfied, the taxpayer cannot be prejudiced by the inaction of the assessing officer in passing an order (accepting or rejecting the application) within the statutory time limit considering the settled law that no prejudice can be caused to a taxpayer on account of delay/default on the part of the tax authorities. Consequently, penalty order u/s 270A of the Act was set aside with direction to grant immunity under Section 270AA of the Act. The decision of the Court brings forth the significance of the specified timeframe for passing the order accepting/rejecting the immunity application, non-conformance of which would impliedly mean acceptance of the immunity application.

Assessment order assessing a loss and nil tax liability

One of the eligibility conditions requires the taxpayer to pay the assessed tax and interest within the stipulated time before filing the application for grant of immunity. This raises a question whether immunity waiver can be availed in cases where no tax is assessed as payable, for instance where a loss return, after adjustment of variation proposed in the order still remain a loss. The plausible view in this regard is that such cases should also be eligible for the immunity scheme as any contrary interpretation would result in discrimination.

Take for instance a situation where an X amount is proposed as adjustment in case of 2 distinct taxpayer filing a loss return which results in assessed loss in case of taxpayer 1 and a marginal positive income of say Rs. 1000 (and consequentially tax and interest liability) in case of taxpayer 2. While there is no ambiguity regarding eligibility of taxpayer 2 to avail the immunity benefits, however in case taxpayer 1 is denied similar immunity benefit, this may result in discrimination in respect of same class of taxpayer which is constitutionally impermissible.

Also examining this from the perspective of ‘Doctrine of Impossibility’, it is now widely accepted by the courts that the law does not compel a man to do anything impossible or to do something which he cannot possibly perform. In the circumstances where income is assessed at a loss and there is Nil tax demand, the condition (to pay tax and interest) cannot be fulfilled and is arguably not applicable.

It will be useful to take note that case of Nirman Overseas Private Limited (supra) and similar case of Ultimate Infratech Private Limited v NFaC Delhi & Anr. decided in favour of the taxpayers were examined against the backdrop of the facts where the taxpayer was assessed at a loss and there was Nil tax liability, though this issue was not specifically contested by the parties. 

Immunity does not impact contentions in earlier years

A pertinent question which often arises in evaluating the option of availing the immunity scheme is whether it would have any adverse consequences on the issues assented (in connection with which immunity is sought) in relation to other years. To address any apprehension of adverse consideration by the Tax Authorities, the CBDT vide Circular No. 05/2018 dated 16 August 2018, has clarified that seeking immunity from penalty and prosecution u/s 270AA of the Act will not bar the taxpayer from contesting the same issue in any earlier assessment year. It has further been clarified that the Tax Authority shall not take an adverse view in penalty proceedings for earlier assessment years under old penalty regime merely because the taxpayer has applied for immunity under the new scheme.

Closing note

Tax litigation is time consuming and involves significant costs. The immunity scheme provides an attractive opportunity to stay clear from such litigations specially in cases where the amount of tax involved is not significant or the tax position adopted is less likely to be sustainable in higher litigation. This scheme would also be beneficial for taxpayer incurring losses with limited possibility to benefit from carry forward and setoff of such loss in future years. Taxpayers should therefore evaluate the scheme in interest of mitigating litigation and buying peace of mind.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

An award-holder of an arbitral proceeding is naturally under the impression that she has a rightful  claim to the amounts having been arbitrated upon and awarded to her.  However, what if, before the award has actually been paid out, the opposite contestant to the arbitration (known in technical legal language as ‘award-debtor’) goes into insolvency?  Does the award-holder have any rights to continue to claim the amount due to it (as decided under arbitrations)?  What happens if a resolution plan is accepted by the NCLT, and the award-debtor had never filed its claim before the Resolution Professional (being under the impression that the arbitral award being enforceable in a Court of law need not be claimed before an RP)?

An arbitral award holder is usually considered to be an ‘Operational Creditor’ under the Insolvency & Bankruptcy Code of India (“IBC”).

On May 7, 2021, the Calcutta High Court answered these questions.[1]  Being an important facet impacting both Insolvency and the Arbitration laws, we have brought forward the nuances via this article.

Relevant facts leading to the judgment dated May 7, 2021 being passed by the Calcutta High Court

Sirpur Paper Mills Limited (“Petitioner”) was an award debtor in an arbitration proceeding with I.K. Merchants Pvt. Ltd. (“Respondent”). The Petitioner challenged the said award on October 31, 2008 under section 34 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) before the Calcutta High Court. The impugned award was automatically stayed upon filing of the application under section 34 of the 1996 Act as it stood prior to amendment of 2016, which came into effect from October 23, 2015.

During the pendency of section 34 application, an application for commencement of corporate insolvency resolution process (“CIRP”) came to be filed against the Petitioner before the jurisdictional NCLT in the year 2017. Subsequently, CIRP was admitted on September 18, 2017 and a RP was appointed on the same day. RP made the public announcement on September 25, 2017 inviting claims from the creditors of the Petitioner company. The Respondent i.e. the award holder did not submit its claim with RP within the time granted under the public announcement. Pursuant to collation of claims received from various creditors, RP invited resolution plans from eligible resolution applicants, which came to be finally approved by NCLT on July 19, 2018. This order of the NCLT came to be further challenged before the appellate tribunal in multiple proceedings, and was only later confirmed by the National Company Law Appellate Tribunal, Delhi.

In the midst of the above, the Petitioner prayed before the Calcutta High Court that the pending section 34 application should not be kept in abeyance as IBC proceedings have been invoked and are in the process of completion. To this, the Court vide its order dated January 10, 2020 held that CIRP cannot be used to defeat a dispute which existed prior to initiation of the CIRP and rejected the Petitioner’s prayer. It further held that the Respondent (the award-holder) could not have filed a claim before the NCLT since there was no final or adjudicated claim on the date of initiation of the CIRP against the Petitioner (the award-debtor).

With the resolution plan having been confirmed by the NCLAT, the successful resolution applicant commenced the process of taking over the Petitioner company as per the provisions of IBC.

Present proceedings

The Petitioner again approached the Court praying that the present proceeding under section 34 of the A&C Act, has become infructuous by reason of its management (the award-debtor) being taken over by a new entity following the approval of a resolution plan by NCLT under IBC.

Petitioner’s arguments

Petitioner relied on the section 31 of IBC to contend that an approved resolution plan is binding on the corporate debtor and its employees, members and other stakeholders. In this regard, reliance was place on a decision of the Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta[2]. It was further contended that a successful resolution applicant cannot be faced with undecided claims after the resolution plan has been accepted.

The Petitioner also argued that its debts stand extinguished except to the extent of the debts which have been taken over by the resolution applicant under the approved resolution plan.[3]

Respondent’s arguments

Respondent raised the issue of res judicata by highlighting that the same arguments were made by the Petitioner earlier as well on two occasions, which came to be decided by the court, and such orders were not under challenge.

It submitted that as per the law prevailing prior to 2016 amendment to the A&C Act. upon filing of the application under section 34 of the A&C Act in October 2008, the award was automatically stayed and the Respondent could not submit its claim[4] under IBC.

Court’s observation & findings

On the issue of res judicata

The Court observed that Supreme Court’s decision in Essar and more recently in Edelweiss[5], constitutes a significant and subsequent development of the law in relation to the fate of existing claims during and after CIRP. This would clearly constitute a sufficient reason for the Court to revisit its earlier judgment of January 10, 2020. In Essar and in Edelweiss, the Supreme Court had held that once a resolution plan is approved, a creditor cannot initiate proceedings for recovery of claims which are not part such resolution plan. Basis the same, the Court rejected the Respondent’s argument on res judicata by observing the following:

“12. A decision-making process must be attuned to a dynamic legal landscape shaped by legislative intervention and judicial pronouncements. The most predictable aspect of law is its constant evolution. It would hence be judicial short-sightedness, even stubbornness, to hold on to a view when the law, in the meantime, has transformed into a different avatar.”

In view of the aforesaid, the Court recorded that question of maintainability of the application under Section 34 of the A&C Act can be considered at any point of time on the legal aspect and particularly on the pronouncement of a decision relevant to the matter.

Law laid down by Supreme Court in Essar

In the aforesaid decision, the Supreme Court had considered questions relating to the role of resolution applicants, RPs and committee of creditors constituted under IBC as well as the jurisdiction of NCLT and the NCLAT with regard to resolution plans that have been approved by the Committee of Creditors.

The view of the Supreme Court was that the successful resolution applicant who takes over the business of the corporate debtor must start running the business of the corporate debtor on a “fresh slate”. This was reiterated in the Edelweiss, where the Supreme Court while considering section 31 of IBC, held that once the Resolution Plan is approved by the NCLT, it shall be binding on the corporate debtor and its employees, members etc. Since revival of the corporate debtor is one of the dominant purposes of IBC, the Supreme Court was of the view that any debt which does not form a part of the approved Resolution Plan shall stand extinguished and no person will be entitled to initiate or continue any proceeding in respect of such claim.

Whether the Respondent could have lodged and pursued its claim before the NCLT pending section 34 proceedings

The Respondent had contended that there was no scope for the it to approach NCLT since the impugned award was automatically stayed upon filing of the application under section 34 of the 1996 Act as it stood prior to amendment of 2016, which came into effect from 23^rd October, 2015.

In this regard, the Court cited the law laid down by the Board of Control for Cricket in India vs. Kochi Cricket Private Limited[6], to observe that Section 34 applications which were pending at the time of the judgment in Kochi Cricket would also be governed by the new section 36 of the A&C Act, as amended. Hence, the Respondent was not rendered immobile in pursuing its claim under IBC by virtue of pendency of section 34 application.

It observed that the facts of the case would show that the Respondent had ample opportunity to approach NCLT for appropriate relief, and hence was under an obligation to take active steps under IBC instead of waiting for adjudication of section 34 application under the A&C Act.

Final order

The Court followed the law as crystallised by the Supreme Court in Essar and Edelweiss to hold that pre-existing and undecided claims which have not featured in the collation of claims by RP shall be treated as extinguished upon approval of the resolution plan under section 31 of IBC. In relation to the same, the Court observed as under:

“This can be seen as a necessary and an inevitable fallout of the IBC in order to prevent, in the words of the Supreme Court, a “hydra head popping up” and rendering uncertain the running of the business of a corporate debtor by a successful resolution applicant. In essence, an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus for chasing the fruits of an Award even where a challenge to the Award is pending in a Civil Court.”

In view of the aforesaid discussions, the Court ordered the pending application under section 34 of the A&C Act to be rendered infructuous upon approval of resolution plan under section 31 of IBC.

Conclusion

As is evident from facts of the present case, the Petitioner company as a corporate debtor was successfully revived by way of CIRP and was handed over to another entity as a ‘going concern’. Taking note of the same, the Court upheld the principle imbibed under IBC that the prime objective of CIRP is revival of the corporate debtor and a successful resolution applicant should not be saddled with legacy claims or debts. This holds true in view of the new law relating to challenge to arbitral awards, where the award is not automatically stayed upon filing of section 34 application, it would be advisable for the award holders to file their claims with RP within stipulated time. The law relating to challenge to an arbitral award (as it stands today) stipulates that the court may only grant stay upon filing of a separate application. In this regard, the court has the discretion to fasten a condition while granting stay of an award or grant an unconditional stay. In such a case, the award holder would be constrained to file its claim before RP. Accordingly, the claims shall stand extinguished where either the claims have not been submitted to RP or the same have been held to be non-admissible before resolution plan is approved.

However, where the CIRP fails and order for liquidation of the corporate debtor is passed, the principle that corporate debtor should have a ‘fresh start’ as is in the case of successful resolution, may not hold true. This is because of the fact that in liquidation, the assets of corporate debtor are monetised in order to meet the outstanding claims of creditors and business of the corporate debtor is not transferred as a ‘going concern’. Hence, the fate of pending challenge to arbitral awards as claim(s) against a company under liquidation under IBC remains to be seen.

Contributed by Manish Parmar. Manish can be reached at manish.parmar@aureuslaw.com.

Views are personal.

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[1] Sirpur Paper Mills Limited vs. I.K. Merchants Pvt. Ltd.; A.P. 550 of 2008

[2] 2020) 8 SCC 531

[3] Cases relied on – Gaurav Dalmia vs. Reserve Bank of India & Ors.; 2020 SCC Online Cal 668, Axis Bank Limited vs. Gaurav Dalmia MANU/WB/0739/2020; Sumitra Devi Shah & Ors. vs. Tata Steel BSL Limited; 2021 SCC Online Cal 114

[4] Relied on Board of Control for Cricket in India vs. Kochi Cricket Private Limited; (2018) 6 SCC 287 and Government of India vs. Vedanta Limited (Formerly Cairn India Limited); (2020) 10 SCC 1 for the proposition that amendments will only have prospective application.

[5] Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited; 2021 SCC OnLine SC 313

[6] (2018) 6 SCC 287