Madras HC on 2019 IBC Amendment: Legislators never intended to beeline Tax authorities before the National Company Law Tribunal

The Madras High Court while commenting on the  effect of 2019 Insolvency and Bankruptcy Code, 2016 (IBC) amendment said that Legislators never intended to beeline Tax authorities before the National Company Law Tribunal (NCLT) to recover tax dues if proceedings initiated against corporate debtors under IBC, 2016.

The petitioner, M/s.Ruchi Soya Industries Ltd. has challenged the reassessment of the Bill of Entry. It is the case of the petitioner that the amendment to Serial No. 55 to Notification No. 12/2012-Customs dated March 17, 2012 vide Notification No. 46/2015- Customs dated September 17, 2015 which increased the rate of duty from 7.5% to 12.5% cannot be said to have come into force on the date of assessment on March 17, 2012 as per the Section 25 of the Customs Act, 1962 as it stood on the date.

In other words the dispute raised was  over the rate of customs duty to be paid on a bill of entry filed by a company that was undergoing the insolvency resolution process initiated by the NCLT, Mumbai. The petitioner contended that the rights of the Customs Department stood extinguished as it did not come forward with its claims before the Resolution Professional. The petitioner urged that the amendment cited by the Customs Department was not applicable as the date on which the amendment took effect preceded the bill of entry in question.

The petitioner informed the Court that the second condition (offer for sale) had not been satisfied when the Bill of Entry was filed, since the printed gazette of the amendment notification was dispatched for sale from the Government of India on September 21, 2015. The customs department asserted that the amendment had come into force on September 17, 2015, when the Gazette notification was published.

As per the 2019 amendment, once the corporate insolvency process is initiated under IBC and a resolution plan has been approved by the adjudicating authority, such resolution plan would also be binding on the Central/ State government or any local authority to whom a debt or dues are payable, including tax authorities.

The single judge bench of Justice C Saravanan said that the entire tax administration of the country is now in a pell-mell. All the tax authorities will have to make a beeline before the National Company Law Tribunal every time to recover tax dues if under any circumstances proceedings are initiated against the corporate debtor under IBC, 2016. This was not the intention when the Act was enacted. The court opined that “tax” should not be equated to “claim” or “operational debt” under the IBC as it is a compulsory extraction of an amount due under law, which cannot be assigned.

“Such sovereign debts cannot be altered whether increased or decreased by any authority, whether by the Court or under a private arrangement or as the case may be approved by creditor, shareholders or by the committee of creditors under the Companies Act, 2013 or Insolvency & Bankruptcy Code, 2016. Corporate restructuring of financial debt under IBC, 2016 does not mean waiver of extinguishing of sovereign debts”, the court said. The Court held that the customs authority can recover the duty payable together with interest, in accordance with law.