As pointed out in Ghanashyam Mishra & Sons Private Ltd. (supra); after the approval of the Resolution Plan, no surprise claim should be flung on the successful resolution of the applicant. (Emphasized)
Further the resolution Applicant “should start with fresh slate on the basis of the resolution plan approved”.
Regulation 32-A of the Liquidation Process Regulations clearly specifies that "liabilities" for the purpose of going concern sales in liquidation are only those liabilities which have been identified and earmarked for the going concern sale by the Committee of Creditors, if not, by the liquidator.
Section 53 of the I&B Code which, again, is preceded by a non obstante clause, can be attributed to the expression "going concern sale", as contemplated in Rule 32 of the Liquidation Process Regulations.
Hence, the sale of the Corporate Debtor and the business(es) of the Corporate Debtor as a going concern, as envisaged in Regulation 32, Clauses (e) and (f) respectively, do not contemplate automatic transfer of all Pre-CIRP liabilities of the Corporate Debtor to the Auction Purchaser.
It has been further clarified that the right, tilted and interest which the owner has on the Schedule Assets as on the date of the deed has been transferred to the Purchaser on “As is Where is”, “As is What is” and “whatever there is”basis.
Blogger’s Comments; Following questions still remain to be answered.
Liabilities, auctioned/sold along with assets in going concern auction/sale during liquidation, will thus get novated and will be satisfied in full in due course of time. Clubbing of liabilities (claims on CD) with assets will also tantamount to preferential treatment of such liabilities vis-a-viz liabilities/claims settled by liquidator under the provisions of Section 53.
Whether liquidator has to settle liabilities/creditors mandatorily as per the priority specified in section 53 or the priority of liabilities/creditors can be altered by RP/Liquidator by clubbing the liabilities with assets in consultation with CoC [CIRP Regulation 39(c)] / SCC [Liquidation Regulation 32A]
Excerpts of the order;
Introduction:-
The Petitioner, SMC Power Generation Limited, a Company registered under the Indian Companies Act, 1956 by filing this writ petition has invoked the jurisdiction of this Court under Articles 226 and 227 of the Constitution of India in advancing the following prayers as against the Opposite Party No.1 (Odisha Industrial Infrastructure Development Corporation (herein after in short, ‘the IDCO):-
“(i) to quash the demand letter dated 28.06.2021 issued by the Opposite Party No.1 under Annexure-25 directing the Petitioner-Company to pay an amount of Rs.13.52 crores towards penalty (damage charge) and GST;
(ii) to direct the Opposite Party No.1 to refund the amount of Rs.1.92 crores paid by the Petitioner- Company under Annexure-23 series towards outstanding statutory dues of SPS/CONCAST for processing Petitioner-Company’s application for transfer of land; and
(iii) to direct that the application for transfer/recording of the subject lands be processed and the lands be transferred/recorded in the name of Petitioner-Company as per the order of National Company Law Tribunal in liquidation process under Insolvency and Bankruptcy Code.”
W.P.(C) No.22033 of 2021
1. Mr. P.K. Mohanty, learned Senior Advocate appearing for the IDCO states that he will file a reply on or before 10th January, 2022. Rejoinder thereto, if any, be filed before the next date.”
# 4. The IDCO (Opposite Party No.1) in its counter affidavit stated all the background facts of the case as regards the allotment of the land to SPSS&PL and PSPL which then came to the hands of SPSS&PL and finally the same coming to rest with CS & PL which of course, though within the knowledge of IDCO (Opposite Party No.1), there has been no final Approval. It is stated that due to non-payment of statutory dues, letter of cancellation of allotment of the land had been rightly issued by the IDCO under Annexure-D/1 series.
4.1. It is admitted by the Opposite Party No.1 (IDCO) that finally by virtue of the order of NCLT, Kolkata Bench on 26.09.2018, the unit in question of CS & PL which was previously SPSS & PL had been sold to the Petitioner- Company-SMCPGL. It is also admitted that the Opposite Party No.2 had been appointed as the Liquidator and the liquidation process having started was completed on 23.12.2019 and in that process the Petitioner-Company (SMCPGL) was the successful bidder. The Petitioner- Company (SMCPGL) having acquired the unit in the public auction carried out by the Liquidator(Opposite Party No.2) under the I&B Code read with the Liquidation Process Regulations, on 15.02.2020 the sale deed was executed by the Liquidator (Opposite Party No.2) in favour of the Petitioner- Company (SMCPGL) and that the Liquidator (Opposite Party No.2) handed over the possession of the assets to the Petitioner-Company (SMCPGL) on 15.02.2020.
4.2. It is further admitted that the Principal Secretary to Government in the Department of Industries had taken a meeting on 09.10.2020 and the decision therein as reflected in the minutes, was that the IDCO(Opposite Party No.1) shall be guided by the order of the NCLT. It is further admitted that the Petitioner-Company (SMCPGL) had deposited Rs.1,92,24,618.00 on 09.10.20 under Annexure-23 series towards the outstanding dues and the IDCO Board thereafter decided to revoke the cancellation of allotment upon release of the demand from the Petitioner-Company (SMCPGL) towards damage and GST as per their Circular underAnnexure-24 series. It is stated that the total area of land inthe hands of SPSS & PL was Ac.196.188 and consequent upon the transfer of the share of SPSS & PL in favour of CS & PL, Government in the Department of Steel and Mines vide letter dated 28.03.2014 had observed that this change of the name of the unit would be considered for the acts already done/to be done by the proponent pursuant to the original MOU. So, it is said that IDCO (Opposite Party No.1) had not approved the change of the name of the SPSS & PL. It is then, however, admitted that PSPL had made a representation to the IDCO (Opposite Party No.1) on 06.06.2017 and 20.06.2017 that due to labour unrest, the unit had been put on suspension of work with effect from 01.01.2017 and it had requested for waiver of the interest and penal interest and to allow them to pay the outstanding dues in installments. It is stated that as per the IDCO norms, there is no provision of waiver of interest. It is also stated that on receipt of the cancellation letters, CS & PL had represented to the IDCO for revocation of cancellation of allotment of land. But the reply had been given that in the default of payment of outstanding dues in deviation of the Clause in the agreement executed between the IDCO and SPSS & PL the allotment had been cancelled and that was intimated vide letter dated 02.06.2017 under Annexure 4/1.
4.3. It is further stated that CS & Pl then vide letter dated 04.12.2017 intimated the IDCO about the initiation of CIRP by the NCLT, Kolkata Bench vide its order dated 07.11.2017. It is
also admitted that the CS & PL then had informed the IDCO that the outstanding dues would be paid through NCLT route, in further apprising that the matter had been published in the Company website and English Newspaper (Business Standard) on 22.11.2017 fixing the last date of submission of claims as 08.12.2017. It is also admitted that the IDCO, did not file any claim therein. It is next stated that IDCO was not aware of the fact regarding change of IRP and appointment of the Opposite Party No.2 as RP. It is stated that IDCO (Opposite Party No.1) being the owner of the leased lands had not received any notice from the RP for filing any claim. It is next stated that by the time the auction was carried out by the order of the Adjudicating Authority (NCLT), leasehold land was under the occupation of the CS &PL and
it had already been cancelled on 16.03.2017 for nonpayment of the statutory dues. Therefore, it is said that cancellation ought to have been revoked before the auction and then the auction ought to have been carried out which has not been done in the present case.
4.4. It is thus asserted that rightly the decision had been taken for revocation of the cancellation of allotment of the land payment since all such outstanding dues including the penalty (damage charges) and GST are payable by the Petitioner-Company (SMCPGL), which has been impliedly consented to by the Petitioner-Company (SMCPGL). In view of all the aforesaid, it is said that the Petitioner- Company (SMCPGL) has to pay the damage charges with GST to the tune of Rs.11,45,76,544/- and Rs.2,06,23,778/- besides the payment of Rs.1.92 crores already made.
# 5. The prayer thus now is limited as to refund of the all said demanded amount to the Petitioner-Company (SMCPGL) including what has already been paid.
Analysis and Finding:-
# 9. The I & B Code is a complete Code in itself which deals with situations on a holistic perspective concerning a Company and all stake holders, irrespective of whether the provisions pertains to the Resolution Plan or the Liquidation Process. It is self sufficient Code and provides a complete mechanism in respect of Corporate Insolvency Resolution (CIR) and liquidation. The I&B Code is divided in to two halves. Firstly, sections 1 to 32 are concerned with reconstruction of the Company by Resolution Process. Secondly, Section 33 of onwards deals with the Liquidation if resolution plan/s is/are not received or rejected and thus resolution is not possible.
# 10. The central issue being the alleged outstanding owed by the Petitioner-Company (SMCPGL) to the IDCO (Opposite Party No.1); it is not disputed by the IDCO (Opposite Party No.1) that the aforementioned demand pertains to the period prior to the initiation of the Corporate Insolvency Resolution Process (CIRP) against the CS & PL which was admitted by NCLT by order dated 07.11.2017. The scenario that on the basis of afore-stated recapitulation of facts, would indicate that when IRP on 22.11.2017 made a public announcement with regard to the initiation of the CIRP through widely circulated Newspaper (Annexure-8) as per the provision of section 13 of the I&B Code, the IDCO (Opposite Party No.1) had not lodged its claim upon the initiation of the CIRP. When it failed and it was resolved by the CoC to liquidate the Company and after such order of the NCLT for liquidation of the Company (CS & PL), appointing the RP as the Liquidator (Opposite Party No.2), the Liquidator (Opposite Party No.2) once again called for lodging of claims by way of public announcement under Liquidation Process Regulations and then also no claim was lodged by IDCO (Opposite Party No.1) in accordance with Regulation 31-A of the Liquidation
Process Regulations.
# 11. The relevant Regulations, i.e., Regulations 6, 7, 10, 12 and 13 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (for short, the Insolvency Resolution Process Regulations) governing and regulating the Insolvency Resolution Process (IRP) for Corporate Persons read as under:
# 12. When the Resolution Process does not yield any success or no application is received and in certain other situations, the Corporate Debtor enters into the liquidation phase, section 33 of the I&B Code comes into play, which is extracted herein below:- . . . .
# 13. Upon initiation of liquidation, a liquidator has to be appointed, to carry out the liquidation process and manage other affairs of the corporate debtor. The RP, appointed to conduct the resolution process, is ordinarily appointed as liquidator. The powers and duties of liquidator are prescribed by Section 35 of the I&B Code. It includes verification of claims of creditors, evaluation of assets of the corporate debtor, carrying on the business of the corporate debtor, taking into consideration the assets of the corporate debtor, etc. The liquidator has to issue a public announcement within 5 days from appointment in a prescribed format; the purpose of public announcement is to call upon creditors and others persons to submit their claims in relation to the corporate debtor. The creditors of the corporate debtor have to send their claims within 30 days from the initiation of the liquidation process. After the receipt of the claims, the liquidator has to verify the claims submitted by the creditors (Section 39). The liquidator may also ask the creditors to submit any evidence in relation to their claims for the purpose of verification.
# 14. The Liquidator is empowered to either admit or reject the claims on the basis of due verification. If the liquidator rejects or admits a claim of a creditor, the same has to be communicated to the creditor as well as the corporate debtor within 7 days from such decision (Section 40). The liquidator has to concurrently determine what constitutes the “liquidation estate”. Section 36 (3) lists out the various assets and claims, etc. which form the liquidation estate.22 After the admission of claims, the liquidator has to determine the value of the claims, for the purpose of distribution of assets of the Corporate Debtor. (Emphasized)
# 15. In terms of Regulation 47 of the Liquidation Regulations, liquidation proceedings should be completed within 1 year from the date of its initiation. This contrasts with the extendable time limit of 330 days, for the resolution process under I & B Code.
# 16. During the insolvency resolution process, a secured creditor is not permitted to realize its dues by initiating any proceeding. This is by virtue of Section 14 (1) (c) which enables the imposition of a moratorium period, during which a secured creditor is precluded from bringing any action to foreclose, recover or enforce any security interest. Secured creditors’ rights are restored only in the event of failure of the insolvency resolution process, at the stage of liquidation.
# 17. Regulations 16, 17, 31, 31A, 32, 32-A and 33 of the Liquidation Process Regulations, read as under:
XXXX
# 18. At this juncture, we need to take into account the provisions contained in sections 7, 29, 31, 33, 52 and 53 of the I&B Code, which read as under:-
XXXXX
# 19. Reliance was placed on the decision of the Hon’ble Apex Court in case of Ghanashyam Mishra and Sons Private Limited (supra).
The Supreme Court in the aforesaid case after an extensive review of the I&B Code and various decisions rendered thereunder, observed that once the resolution plan is approved, it becomes binding on the stakeholders including creditors. Relevant paragraphs of the judgement read as under:
"65. Bare reading of Section 31 of the I&B Code would also make it abundantly clear, that once the resolution plan is approved by the Adjudicating Authority, after it is satisfied, that the resolution plan as approved by CoC meets the requirements as referred to in subsection (2) of Section 30, it shall be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders. Such a provision is necessitated since one of the dominant purposes of the I&B Code is, revival of the Corporate Debtor and to make it a running concern.
66. The resolution plan submitted by successful resolution applicant is required to contain various provisions, viz., provision for payment of insolvency resolution process costs, provision for payment of debts of operational creditors, which shall not be less than the amount to be paid to such creditors in the event of liquidation of the Corporate Debtor under section 53; or the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in subsection (1) of section 53, whichever is higher. The resolution plan is also required to provide for the payment of debts of financial creditors, who do not vote in favour of 62 the resolution plan, which also shall not be less than the amount to be paid to such creditors in accordance with subsection (1) of section 53 in the event of a liquidation of the Corporate Debtor. Explanation 1 to clause (b) of subsection (2) of Section 30 of the I&B Code clarifies for the removal of doubts, that a distribution in accordance with the provisions of the said clause shall be fair and equitable to such creditors. The resolution plan is also required to provide for the management of the affairs of the Corporate Debtor after approval of the resolution plan and also the implementation and supervision of the resolution plan. Clause (e) of subsection (2) of Section 30 of I&B Code also casts a duty on RP to examine, that the resolution plan does not contravene any of the provisions of the law for the time being in force.
67. Perusal of Section 29 of the I&B Code read with Regulation 36 of the Regulations would reveal, that it requires RP to prepare an information memorandum containing various details of the Corporate Debtor so that the resolution applicant submitting a plan is aware of assets and liabilities of the Corporate Debtor, including the details about the creditors and the amounts claimed by them. It is also required to contain the details of guarantees that have been given in relation to the debts of the corporate debtor by other persons. The details with regard to all material litigation and an ongoing investigation or proceeding initiated by Government and statutory authorities are also required to be contained in the information memorandum. So also the details regarding the number of workers and employees and liabilities of the Corporate Debtor towards them are required to be contained in the information memorandum.
68. All these details are required to be contained in the information memorandum so that the resolution applicant is aware, as to what are the liabilities, that he may have to face and provide for a plan, which apart from satisfying a part of such liabilities would also ensure, that the Corporate Debtor is revived and made a running establishment. The legislative intent of making the resolution plan binding on all the stakeholders after it gets the seal of approval from the Adjudicating Authority upon its satisfaction, that the resolution plan approved by CoC meets the requirement as referred to in subsection (2) of Section 30 is, that after the approval of the resolution plan, no surprise claims should be flung on the successful resolution applicant. The dominant purpose is, that he should start with fresh slate on the basis of the resolution plan approved.
69. This aspect has been aptly explained by this Court in the case of Committee of Creditors of Essar Steel India Limited through Authorised Signatory (supra).
"107. For the same reason, the impugned NCLAT judgment [Standard Chartered Bank v. Satish Kumar Gupta, 2019 SCC OnLine NCLAT 388] in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with "undecided" claims after the resolution plan submitted by him has been accepted as 65 this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, NCLAT judgment must also be set aside on this count."
70. In view of this legal position, we could have very well stopped here and held, that, the observation made by NCLAT in the appeal filed by EARC to the effect, that EARC was entitled to take recourse to such remedies as are available to it in law, is impermissible in law.
71. As held by this Court in the case of Pr. Commissioner of Income Tax vs. Monnet Ispat and Energy Ltd.10 , in view of provisions of Section 238 of I&B Code, the provisions thereof will have an overriding effect, if there is any inconsistency with any of the provisions of the law for the time being in force or any instrument having effect by virtue of any such law. As such, the observations made by NCLAT to the aforesaid effect, if permitted to remain, would frustrate the very purpose for which the I&B Code is enacted.
72. However, in Civil Appeal arising out of Special Leave Petition (Civil) No.11232 of 2020, Writ Petition (Civil) No.1177 of 2020 and Civil Appeals arising out of Special Leave Petition (Civil) Nos. 71477150 of 2020, the issue with regard to the statutory claims of the State Government and the Central Government in respect of the period prior to the approval of resolution plan by NCLT, will have to be considered.
73. Vide Section 7 of Act No.26 of 2019 (vide S.O. 2953(E), dated 16.8.2019 w.e.f. 16.8.2019), the following words have been inserted in Section 31 of the I&B Code. "including the Central Government, any State Government or any 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 authorities to whom statutory dues are owed"
74. As such, with respect to the proceedings, which arise after 16.8.2019, there will be no difficulty. After the 67 amendment, any debt in respect of the payment of dues arising under any law for the time being in force including the ones owed to the Central Government, any State Government or any local authority, which does not form a part of the approved resolution plan, shall stand extinguished....
79. In the Rajya Sabha debates, on 29.7.2019, when the Bill for amending I&B Code came up for discussion, there were certain issues raised by certain Members. While replying to the issues raised by certain Members, the Hon'ble Finance Minister stated thus:
"IBC has actually an overriding effect. For instance, you asked whether IBC will override SEBI. Section 238 provides that IBC will prevail in case of inconsistency between two laws. Actually, Indian courts will have to decide, in specific cases, depending upon the material before them, but largely, yes, it is IBC. There is also this question about indemnity for successful resolution applicant. The amendment now is clearly making itbinding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. So, that is going to be a major, major sense of assurance for the people who are using the resolution plan. Criminal matters alone would be proceeded against individuals and not company. There will be no criminal proceedings against successful resolution applicant. There will be no criminal proceedings against successful resolution applicant for fraud by previous promoters. So, I hope that is absolutely clear. I would want all the hon. Members to recognize this message and communicate further that this Code, therefore, gives that comfort to all new bidders. So now, they need not be scared that the taxman will come after them for the faults of the earlier promoters. No. Once the resolution plan is accepted, the earlier promoters will be dealt with as individuals for their criminality but not the new bidder who is trying to restore the company. So, that is very clear. (emphasis supplied)”
80. It could thus be seen, that in the speech the Hon'ble Finance Minister has categorically stated, that Section 238 provides that I&B Code will prevail in case of inconsistency between two laws. She also stated, that there was question about indemnity for successful resolution applicant and that the amendment was clearly making it binding on the Government. She stated, that the Government will not make any further claim after resolution plan is approved. So, that is going to be a major sense of assurance for the people who are using the resolution plan. She has categorically stated, that she would want all the Hon'ble Members to recognize this message and 73 communicate further that I&B Code gives that comfort to all new bidders. They need not be scared that the taxman will come after them for the faults of the earlier promoters. She further states, that once the resolution plan is accepted, the earlier promoters will be dealt with as individuals for their criminality but not the new bidder who is trying to restore the company.
84. It is clear, that the mischief, which was noticed prior to amendment of Section 31 of I&B Code was, that though the legislative intent was to extinguish all such debts owed to the Central Government, any State Government or any local authority, including the tax authorities once an approval was Granted to the resolution plan by NCLT; on account of there being some ambiguity, the State/Central Government authorities continued with the proceedings in respect of the debts owed to them. In order to remedy the said mischief, the legislature thought it appropriate to clarify the position, that once such a resolution plan was approved by the Adjudicating Authority, all such claims/dues owed to the State/Central Government or any local authority including tax authorities, which were not part of the resolution plan shall stand extinguished.
93. As discussed hereinabove, one of the principal objects of I&B Code is, providing for revival of the Corporate Debtor and to make it a going concern. I&B Code is a complete Code in itself. Upon admission of petition under Section 7, there are various important duties and functions entrusted to RP and CoC. RP is required to issue a publication inviting claims from all the stakeholders. He is required to collate the said information and submit necessary details in the information memorandum. The resolution applicants submit their plans on the basis of the details provided in the information memorandum. The resolution plans undergo deep scrutiny by RP as well as CoC. In the negotiations that may be held between CoC and the resolution applicant, various modifications may be made so as to ensure, that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders, the Corporate Debtor is revived and is made an on- going concern. After CoC approves the plan, the Adjudicating Authority is required to arrive at a subjective satisfaction, that the plan conforms to the requirements as are provided in subsection (2) of Section 30 of the I&B Code. Only thereafter, the Adjudicating Authority can Grant its approval to the plan. It is at this stage, that the plan becomes binding on Corporate Debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution Plan. The legislative intent behind this is, to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans, would go haywire and the plan would be unworkable.
94. We have no hesitation to say, that the word "other stakeholders" would squarely cover the Central Government, any State Government or any local authorities. The legislature, noticing that on account of obvious omission, certain tax authorities were not abiding by the mandate of I&B Code and continuing with the proceedings, has brought out amendment so as to cure the said mischief. We therefore hold, that the 2019 amendment is declaratory and clarificatory in nature and therefore retrospective in operation. 102. In the result, we answer the questions framed by us as under:
102.1 That once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;
102.2 The 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect; 102.3 Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority Grants its approval under Section 31 could be continued."
20. Admittedly, in the present case, when the CIRP was undertaken, claims were invited; the IDCO (Opposite Party No.1) did not lodge any such claim and that having not been done, the IDCO (Opposite Party No.1) had also no occasion to update the claim during Liquidation Process. Thereafter, at the stage of liquidation also IDCO (Opposite Party No.1) did not come forward to lodge any such claim. The Hon’ble Supreme Court in case of Ghanashyam
Mishra & Sons (supra) considered all other earlier decisions including the Essar Steel India Limited, Committee of Creditors (Supra) and Maharasthra Seamless Ltd., Vrs. Padmanavan Venketesh & Others (2020) 11 SCC 467 and Innovative Industries Vrs. ICICI Bank, (2018) 1 SCC 407. The Hon’ble Supreme Court also referred to its earlier decision in K. Sashidhar Vrs. Indian Overseas Bank (2019) 12 SCC 150. After discussing all the above judgments, the Hon’ble Supreme Court in Ghanashyam Mishra & Sons Private Ltd. (supra) has held as under:-
“57. It could thus be seen, that the legislature has given paramount importance to the commercial wisdom of CoC and the scope of judicial review by Adjudicating Authority is limited to the extent provided under Section 31 of I&B Code and of the Appellate Authority is limited to the extent provided under subsection (3) of Section 61 of the I&B Code, is no more res integra.
58. Bare reading of Section 31 of the I&B Code would also make it abundantly clear, that once the resolution plan is approved by the Adjudicating Authority, after it is satisfied, that the resolution plan as approved by CoC meets the requirements as referred to in subsection (2) of Section 30, it shall be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders. Such a provision is necessitated since one of the dominant purposes of the I&B Code is, revival of the Corporate Debtor and to make it a running concern.
59. The resolution plan submitted by successful resolution applicant is required to contain various provisions, viz., provision for payment of insolvency resolution process costs, provision for payment of debts of operational creditors, which shall not be less than the amount to be paid to such creditors in the event of liquidation of the Corporate Debtor under section 53; or the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in subsection (1) of section 53, whichever is higher. The resolution plan is also required to provide for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, which also shall not be less than the amount to be paid to such creditors in accordance with sub section (1) of section 53 in the event of a liquidation of the Corporate Debtor. Explanation 1 to clause (b) of sub section (2) of Section 30 of the I&B Code clarifies for the removal of doubts, that a distribution in accordance with the provisions of the said clause shall be fair and equitable to such creditors. The resolution plan is also required to provide for the management of the affairs of the Corporate Debtor after approval of the resolution plan and also the implementation and supervision of the resolution plan. Clause (e) of subsection (2) of Section 30 of I&B Code also casts a duty on RP to examine, that the resolution plan does not contravene any of the provisions of the law for the time being in force.
60. Perusal of Section 29 of the I&B Code read with Regulation 36 of the Regulations would reveal, that it requires RP to prepare an information memorandum containing various details of the Corporate Debtor so that the resolution applicant submitting a plan is aware of the assets and liabilities of the Corporate Debtor, including the details about the creditors and the amounts claimed by them. It is also required to contain the details of guarantees that have been given in relation to the debts of the corporate debtor by other persons. The details with regard to all material litigation and an ongoing investigation or proceeding initiated by Government and statutory authorities are also required to be contained in the information memorandum. So also the details regarding the number of workers and employees and liabilities of the Corporate Debtor towards them are required to be contained in the information memorandum. All these details are required to be contained in the information memorandum so that the resolution applicant is aware, as to what are the liabilities that he may have to face and provide for a plan, which apart from satisfying a part of such liabilities would also ensure, that the Corporate Debtor is revived and made a running establishment. The legislative intent of making the resolution plan binding on all the stakeholders after it gets the seal of approval from the Adjudicating Authority upon its satisfaction, that the resolution plan approved by CoC meets the requirement as referred to in subsection (2) of Section 30 is, that after the approval of the resolution plan, no surprise claims should be flung on the successful resolution applicant. The dominant purpose is, that he should start with fresh slate on the basis of the resolution plan approved.”
# 21. As pointed out in Ghanashyam Mishra & Sons Private Ltd. (supra); after the approval of the Resolution Plan, no surprise claim should be flung on the successful resolution of the applicant. (Emphasized) Further the resolution Applicant “should start with fresh slate on the basis of the resolution plan approved”.
# 22. The liquidation as envisaged in the I&B Code is not a mere isolated off shoot of Insolvency Resolution Proceeding but is one of the logical conclusion of the Resolution Proceeding. The procedure as contemplated in the I&B Code is an integrated continuum.
# 23. Now to examine the scheme of liquidation under the I&B Code in such context, section 51 (18) of the I&B Code has to be considered. The said sub-section provides that the Liquidator means an Insolvency Professional appointed as Liquidator in accordance with the provisions of Chapter-III, Chapter-V of Part-2 as the case may be. Section 5(20) of the I&B Code stipulates that "Operational Creditor" means a person to whom an Operational Debt is owed and includes any person to whom such debt has been legally assigned or transferred. Section 5(21), on the other hand, defines "Operational Debt" as 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. Section 33, I&B Code provides for initiation of liquidation. It is clear from a plain reading of Section 33 that liquidation begins where a Corporate Insolvency Resolution fails.
23.1. Section 35 stipulates the powers and duties of the liquidator. Clauses (a) to(d), (f) and (j) of Section 35, subsection (1) are relevant in the context. Clause (a) empowers the liquidator to verify claims of all the creditors, Clause (b) to take into custody or control all the assets, property, effects and actionable claims of the corporate debtor, Clause (c) to evaluate the assets and property of the corporate debtor in the manner as may be specified by the Board and prepare a report and Clause (d) to take such measures to protect and preserve the assets and properties of the corporate debtor as he considers necessary. Clause (f) confers power on the Liquidator, subject to Section 52, to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate or to sell the same in parcels in such manner as may be specified. The proviso thereto says that the liquidator shall not sell immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant. Clause (j) empowers the liquidator to invite and settle claims of the creditor and claimants and distribute proceeds in accordance with the provisions of the Code. Section 38 of the IBC provides for consolidation of claims by the liquidator, Section 39 the verification of claims and Section 40 deals with the admission or rejection of claims by the liquidator. Hence, the powers of the liquidator are on a similar footing as those of a Resolution Professional in a resolution proceeding with the distinction that where the actions carried out by Resolution Professionals (RP) when are more or less administrative in nature, the Liquidator discharges qausi judicial function while admitting and rejecting the claim independently assessing the merit based on documents which orders are appealable under section 41 and 42 of the I&B Code. In this context, when it can be said that the IRP/RP assists in the process of continuation of Corporate Debtor; the liquidator assists upon to prepare the liquidation estate to institute eventual dissolution of the Corporate Debtor. Unlike CIRP, post completion of liquidation of Corporate-Debtor; creditors do not have any recourse to claim settlement. It is also noteworthy that Section 5 (18) of the IBC stipulates that a Liquidator has to be a Resolution Professional in the first place.
23.2. Section 53 provides for distribution of assets in liquidation and sets out the order of priority of distribution of proceeds from the sale of the liquidation assets. The sixth category in such pecking order is Section 53(1)(f), "any remaining debts and dues". Clause (f) is the only provision in Section 53 which confers rights on the operational creditors to recover their dues. As such, Section 53 is the culmination of the entire endeavour of the Liquidator and the order of priority given therein cannot be overridden by any of the operational creditors of the corporate debtor by jumping the queue in contravention of the priorities enumerated in Section 53.
23.3. What is next relevant is Regulation 32 of the LiquidationProcess. The different types of sale of asset have been enumerated therein. Up to Clause (d) of Regulation 32, sale of assets is dealt with. Clause(e) provides for sale of the corporate debtor as a going concern. Again, Clause(f) contemplates the business of the Corporate Debtor being sold as a going concern. Regulation 32-A of the said Regulations provides for sale as a going concern. Sub-regulation(2) of Regulation 32-A stipulates that for the purpose of sale under Sub-regulation (1), the group of assets and liabilities of the Corporate Debtor, as identified by the Committee of Creditors under subregulation (2) of Regulation 39-C of the Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, shall be sold as a going concern.
23.4. On the other hand, Regulation 32-A (3) provides that where the Committee of Creditors has not identified the assets and liabilities under sub- regulation (2) of Regulation 39-C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall identify and group the assets and liabilities to be sold as a going concern, in consultation with the consultation committee.
# 24. It is evident from the schematic arrangement of the I&B Code, in respect of Liquidation, is that the pecking order as stipulated in Section 53 of the I&B Code cannot be superseded by any of the categories as provided therein. The said provision is set out below for convenience of ready reference
"53. Distribution of Assets. - (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely:-
XXXXX
Thus, the operational creditors, who fall within category (f), that is, "any remaining debts and dues", cannot claim any priority over the preceding categories in having their debts paid off.
# 25. However, it is worth considering what precisely will happen if the demand of the IDCO (Opposite Party No.1) is accepted in the context of expression "sale of going concern", as used in the I&B Code and connected Regulations in respect of liquidation, to construe and include transfer of pre-CIRP liabilities of the Corporate Debtor. Regulation 32-A of the Liquidation Process Regulations clearly specifies that "liabilities" for the purpose of going concern sales in liquidation are only those liabilities which have been identified and earmarked for the going concern sale by the Committee of Creditors, if not, by the liquidator. Section 53 of the I&B Code which, again, is preceded by a non obstante clause, can be attributed to the expression "going concern sale", as contemplated in Rule 32 of the Liquidation Process Regulations. These dues which are presently demanded by the IDCO (Opposite Party No.1) to be paid by the Auction Purchaser (Petitioner-Company-SMCPGL), of the Corporate Debtor in the Liquidation Process do not operate a charge on the assets of the Corporate Debtor. Hence, the sale of the Corporate Debtor and the business(es) of the Corporate Debtor as a going concern, as envisaged in Regulation 32, Clauses (e) and (f) respectively, do not contemplate automatic transfer of all Pre-CIRP liabilities of the Corporate Debtor to the Auction Purchaser.
26. Taking a pause here, we feel it apposite at this stage also refer to the recent judgment in case of Moser Baer Karmachari Union Vrs. Union of India (2023) 9 SCC 499, which has been duly taken note of in the decision of the Hon’ble Supreme Court in case of Paschimanchal Vidyut Vitaran Nigam Ltd., Vrs. Raman Ispat Pvt. Ltd., (2023) 10 SCC 60, which we feel is necessary to be borne in mind while dealing the matters like the one in our hand. It has been held therein:-
“49. The Code is based on the organic evolution of law and is a product of an extensive consultative process to meet the requirements of the Code governing liquidation. It introduced a comprehensive and time-bound framework to maximise the value of assets of all persons and balance the interest of the stakeholders. The guiding principle for the Code in setting the priority of payments in liquidation was to bring the practices in India in line with global practices. In the waterfall mechanism, after the costs of the insolvency resolution process and liquidation, secured creditors share the highest priority along with a defined period of dues of the workmen. The unpaid dues of the workmen are adequately and significantly protected in line with the objectives sought to be achieved by the Code and in terms of the waterfall mechanism prescribed by Section 53 of the Code. In either case of relinquishment or non-relinquishment of the security by the secured creditor, the interests of workmen are protected under the Code. In fact, the secured creditors are taking significant hair-cut and workmen are being compensated on an equitable basis in a just and proper manner as per Section 53 of the Code. The Code balances the rights of the secured creditors, who are financial institutions in which the general public has invested money, and also ensures that the economic activity and revival of a viable company is not hindered because it has suffered or fallen into a financial crisis. The Code focuses on bringing additional gains to both the economy and the exchequer through efficiency enhancement and consequent greater value capture.
50. In economic matters, a wider latitude is given to the law- maker and the Court allows for experimentation in such legislations based on practical experiences and other problems seen by the law-makers. In a challenge to such legislation, the Court does not adopt a doctrinaire approach. Some sacrifices have to be always made for the greater good, and unless such sacrifices are prima facie apparent and ex facie harsh and unequitable as to classify as manifestly arbitrary, these would be interfered with by the court.” :(2023) 9 SCC 19) (supra)
# 27. It has been further said in case of Paschimanchal Vidyut Vitaran Nigam Ltd., (supra):-
41. It is hence clear that the provisions of IBC are carefully thought out and give options to secured creditors, and balance their interests with those of other creditors in a liquidation proceeding.
# 28. In another recent ruling of the Supreme Court in case of K.C.Ninan Vrs. Kerala SEB (2023) 14 SCC 431 examining the circumstances’ in which such a charge could be constituted in law, it has been held thus:-
“Consequently, in general law, a transferee of the premises cannot be made liable for the outstanding dues of the previous owner since electricity arrears do not automatically become a charge over the premises. Such an action is permissible only where the statutory conditions of supply authorise the recovery of outstanding electricity dues from a subsequent
purchaser claiming fresh connection of electricity, or if there is an express provision of law providing for creation of a statutory charge upon the transferee.”
29. At this juncture, it is pertinent to refer to Clause ‘H’ of the deed of sale in question between the Corporate Debtor (in liquidation) acting through its Liquidator (Opposite Party No.2) referred to as the Owner and the Petitioner-Company (SMCPGL) dated 15.02.2020. The said Clause ‘H’ reads as under:-
“H. The E-action was conducted on December, 23, 2019 and the purchaser was declared as the highest bidder at the price of INR 288,55,00,000 (Indian Rupees Two Hundred Eighty-Eight Crores and Fifty-Five Lacs only), inclusive of the Escrow amount (hereinafter defined) (Sale Consideration) plus taxes as applicable for the assets listed in Schedule I and
Schedule II hereto (collectively the Scheduled assets), pursuant to which a letter of intent was issued by the Liquidator in favour of the purchaser on January, 06, 2020 and was executed by Purchaser on January 06, 2020.”
The parties thereto in consideration of the mutual covenants, terms and conditions and understandings set forth in the deed, legally bound themselves that the Schedules to the Deed would form part of the deed. It has been further clarified that the right, tilted and interest which the owner has on the Schedule Assets as on the date of the deed has been transferred to the Purchaser on “As is Where is”, “As is What is” and “whatever there is” basis. Thus, the transfer of right, title and interest which the Corporate Debtor represented by the liquidator had stood transferred on “As is where is” “As is what is” and “Whatever there is”. This is quite distinct then what those generally postulates that the purchaser would be acquiring the assets with all its existing rights, obligations and liabilities; that when a property is sold on an ‘as is where is basis’; the encumbrances on the property stand transferred to the purchaser upon the sale. All these, appear to have been so provided in the deed keeping in view the contrary intention if expressed would run/stand to counter the intention behind the legislation and the final objective sought to be achieved by the I&B Code.
# 30. Subsequently upon execution of the deed, the Owner through the Liquidator has delivered to the Purchaser the physical possession of all the assets specified at Part-A of Schedule-I of the deed, at their then current locations. The detail history and description of lease hold land very much finds place in Schedule-II of the said deed.
# 31. Thus we find no such stipulation thereunder that the Purchaser, i.e., the Petitioner-Company (SMCPGL) will be liable to pay the prior statutory dues and the damage charge as now being levied upon the Petitioner-Company (SMCPGL) by the IDCO (Opposites Party No.1) running from the time before the initiation of the Corporate Insolvency Process. In that connection, it would also be profitable to refer to the letter of the Liquidator (Opposite Party No.2) dated 23rdMarch, 2020. The Liquidator (Opposite Party No.2) has confirmed that the sale to the Petitioner-Company (SMCPGL) was only of the assets (Asset Lot No.4), the unit of the Corporate Debtor at Jharsuguda, Odisha and that no past liabilities pertaining to the assets or in the running of the unit was transferred to the Petitioner-Company (SMCPGL) nor that the Petitioner Company (SMCPGL) had thereby assumed any liability towards discharge of the same. It has been further clarified that the Purchaser (Petitioner-Company-SMCPGL) had not assumed any liability of any nature, whatsoever in relation to Jharsuguda Unit-Lot No.4, the cause of action in relation to which had arisen before the date of the sale deed and that such liability would be dealt by the Liquidator (Opposite Party No.2) in accordance with section 53 of the I & B Code. Therefore, even an argument that the asset was sold on a condition of “As is Where is”, “As is What is” and “whatever there is” basis, the demand of the IDCO (Opposite Party No.1) of the dues to be paid by the Petitioner-Company (SMCPGL), which is the subject matter of the present proceeding is untenable. This too is, in our opinion, a clause that relieves the Petitioner-Company (SMCPGL) of the liabilities to pay the statutory dues and the demand fees raised by the IDCO (Opposite Party No.1).
# 32. Even otherwise as per the section 100 of the Transfer of Property Act, 1862, a charge cannot be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of such charge as the bona fide transferee for value as that carves out with-save as otherwise expressly provided by any law for the time being in force which can be enforced against any property in the hands of a person to whom property has been transferred for consideration and without notice of the charge.
33. In AI Champdany Industries Ltd. v. Official Liquidator; (2009) 4 SCC 486; the Apex Court held that such a provision of law should not merely create a charge, but it must expressly provide for the enforcement of a charge against the property in the hands of a transferee for value without notice of the charge.
# 34. In Haji Abadulgafur Haji Husseinbhai, (1971) 1 SCC 757; the Hon’ble Supreme Court considered the doctrine of constructive notice as provided under Section 100. In that case, the Municipal Corporation had a charge on the property of a person who was in arrears of property tax. An auction purchaser, who became the owner of the property, resisted the attempt of the Municipal Corporation to recover the arrears of pending taxes in exercise of its charge on the ground that they were not aware of the past municipal tax arrears. The Corporation argued that the transferee was imputed with constructive knowledge of the charge created against the property due to Section 141 of the Bombay Provincial Municipal Corporations Act 1949. The Court held against the Municipal Corporation on the ground that in the facts of the case, the plaintiff did not have constructive notice of the arrears of municipality.
# 35. While explaining the purport of Section 100 of the T.P. Act, 1862, the Hon’ble Supreme Court held that the second half of Section 100 enacts a general prohibition and no charge can be enforced against property in the hands of a transferee for consideration without notice of the charge. In terms of Section 100, an exception to this rule must be expressly provided by law. The Court held that whether a transferee has actual or constructive notice which satisfies the requirement of notice in the proviso to Section 100, must be determined in the facts and circumstances of each case. It has been observed:
# 36. As regards the contention of learned Senior Counsel for the IDCO (Opposite Party No.1) that the IDCO (Opposite Party No.1) be granted liberty to move the Liquidator (Opposite Party No.2) under section 39 read with section 40 of the I & B Code seeking condonation of delay in laying the claim for determination and payment of the statutory dues
and damage charges from out of the sale proceeds already obtained through the auction by not counting the period spent after the present proceeding before this Court towards delay; we may first state here that the decision in case of Greater Noida Industrial Development Authority (supra) relied upon in support of the same does not come to the aid of the IDCO (Opposite Party No.1) as the factual settings of the said case were completely different. In the said case, the Greater Noida Industrial Development Authority pursuant to the public notice upon initiation of the CIRP and its admission by the NCLT had submitted the claim towards the unpaid installments payable towards premium for the lease of the land to the Corporate Debtor asserting to be the Financial Creditor of the Corporate Debtor. The RP treated the said Authority as an Operational Creditor and asked the said Authority to submit its claim in Form-B as an Operational Creditor of the Corporate Debtor. The said Authority did not, however, act upon the request by submitting the claim afresh as an Operational Creditor. In the meantime the CoC approved a plan which being presented to the Adjudicating Authority (NCLT) received the approval. It was only thereafter that the Authority having received a letter about the finalization and approval of the plan moved the Adjudicating Authority (NCLT) by filing an application questioning the Approved Resolution Plan, the decision of the RP to treat the Authority as an Operational Creditor and all actions in pursuance thereof. The Adjudicating Authority (NCLT) rejected the move. Appeal being preferred, the NCLAT also dismissed the same. So, the orders of Adjudicating Authority (NCLT) and Appellate Authority (NCLAT) were assailed by the Authority under section 62 of the I & B Code carrying an Appeal. The Hon’ble Supreme Court by its decision allowed the Appeal finding fault with the NCLT and NCLAT of having not taken note of several basic facts touching upon the consideration of the status of the said Authority as the Claimant and the claim, also finding fault with the Resolution Plan being based on factual errors as to the claim of the said Authority. In the given case, the IDCO (Opposites Party No.1) as already stated, at no point of time during the resolution process or even when the Corporate Debtor went for liquidation pursuant to the public announcement from time to time had lodged its claims which are now demanded from the Petitioner-Company (SMCPGL). Therefore, the said decision relied upon does not provide any help for acceptance of the submission as above advanced. Although there appears no provision for consideration of claims beyond the prescribed period by the Liquidator and for condonation of delay in filing the claim; we, however, feel it apposite only to observe that if the distribution from the sale proceeds is yet to be completed in the case and no prejudice would be caused if the claim of the IDCO (Opposite Party No.1) is considered on merit; the IDCO (Opposite Party No.1) may seek the permission before the Appropriate Forum as provided in law for consideration of its belated claim.
# 37. In that view of the matter, the impugned demand of Rs.1,92,24,618/- made by the IDCO (Opposite Party No.1) from the Petitioner-Company (SMCPGL) towards outstanding statutory dues of SPSS & PL and CS & PL for processing its application as well as the demand raised by the IDCO (Opposite Party No.1) under Annexure-25 directing the Petitioner-Company(SMCPGL)to pay a sum of Rs.13,52,00,332/- crores towards penalty (damage charge) and GST are hereby set aside. Consequently, the Petitioner-Company (SMCPGL) having earlier paid Rs.1,92,24,618/- under Annexure-23 series to the IDCO (Opposite Party No.1) and also having paid a sum of Rs.13,52,00,332/- and GST during pendency of the proceeding as per the order dated 16.12.2021 of this Court without prejudice to its rights and contentions vis-Ã -vis the IDCO (Opposite Party No.1); we hereby direct that the same be refunded to the Petitioner-Company (SMCPGL) within a period of 6 (six) weeks hence, along with interest @ 9% (nine percent) per annum in terms of this Court’s earlier order dated 16.12.2021.
# 38. The writ petition is disposed of in the above terms, and in the circumstances without costs.
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