MORATORIUM ORDER UNDER IBC – A BAR TO PROCEEDINGS UNDER TAX LAWS?

[Mr. M. GOVINDARAJAN]

Corporate Insolvency Resolution Process

The Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides for the initiation of corporate insolvency resolution process by a financial creditor or an operational creditor against the corporate debtor by filing a form in the prescribed form along with the required fees before the Adjudicating Authority.  The corporate applicant may also suo motu initiates corporate insolvency resolution process. 

The Adjudicating Authority, if it is satisfied that the application is in order it will admit the application under section 13 of the Code.  The Adjudicating Authority, after admission of the application shall, by an order-

• declare a moratorium for the purposes referred to in section 14;
• cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims under section 15; and
• appoint an interim resolution professional in the manner as laid down in section 16.

The public announcement as referred to above shall be made immediately after the appointment of the interim resolution professional.

Moratorium

Section 14(1) of the Code provides that  Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:-

• the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
• transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
• any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
• the recovery of any property by an owner or less or where such property is occupied by or in the possession of the corporate debtor.

The explanation to this sub section clarifies that notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period.

Section 14(2) of the Code provides that the supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

Section 14(2A) of the Code provides that where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.

Section 14(3) of the Code provides that the provisions of sub-section (1) shall not apply to-

• such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority
•  a surety in a contract of guarantee to a corporate debtor.

Section 14(4) of the Code provides that the order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process.  Where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

Tax laws

In recovery of tax from the assessee, the proper officer will issue a show cause notice under the relevant provisions of the concerned tax law to the assessee.  The assessee is to give his reply within the time fixed in the notice along with the documents he relied upon.  The Assessing Officer on considering the reply may pass an order either withdrawing the show cause notice or confirming the tax and imposing penalty. 

Whether such proceeding is barred when there is a moratorium is in existence?  The following case law gives answer to this:

In ‘National Plywood Industries Limited v. Union of India and another, the Commissioner of Central Goods and Service Tax, Dibrugarh’ – 2020 (2) TMI 1185 – Gauhati High Court, the writ petitioner assailed the order of Commissioner, GST, Dibrugarh, dated 15.11.2019.  The Commissioner passed an order on 15.01.2019, confirming a requirement for payment of ₹ 1,82,67,651/- and a penalty of ₹ 1,82,67,581/- was imposed under Rule 173Q (1) of the Central Excise Rules, 1944.   Before the Commissioner, the writ petitioner raised an objection that an corporate insolvency resolution proceeding was launched against the writ petitioner as a corporate debtor.  The Adjudicating Authority admitted the insolvency resolution application and passed a moratorium order on the said application and bar all judicial proceedings in favor and against the corporate debtor.  The writ petitioner submitted before the Commissioner because of the moratorium order passé by the Adjudicating Authority under the Insolvency and Bankruptcy Code the proceedings could not be continued.  The Commissioner considered the objections raised by the writ petitioner and held as below-

“I find that the Hon’ble National Company Law Tribunal, Guwahati Bench had passed the order dated 26.08.2019 in respect of the bankruptcy case of the assessee wherein they are liable to certain debt to the financial creditor and their properties are also controlled for the debt including any action under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. By virtue of the order dated 26.08.2019, the Hon’ble National Company Law Tribunal has declared a Moratorium under the insolvency & bankruptcy code-2016 in terms of Section 14 of the said code vide which proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority was prohibited. Now, the question arises whether adjudication of Show cause notices would mean an execution order or be treated as decree against them. I find that adjudication means determination of liability against any assessee to whom show cause notices have been served and in the instant case also there is no bar of the tax authority to carry out the exercise of adjudication process for determining the liability of the assessee towards the department.”

The Revenue submitted before the High Court that said objection raised by the petitioner as regards the order of moratorium passed by the National Company Law Tribunal had been taken care of by the Commissioner in its order.

The High Court examined the order passed by the Commissioner.  The High Court observed that Commissioner took a view that by the order dated 26.08.2019, the National Company Law Tribunal has declared a moratorium under Section 14 (Section 13) of The Insolvency and Bankruptcy Code, 2016 against the corporate debtor (writ applicant) in respect of execution of any judgment and decree or order of any court of law, tribunal, arbitration panel or other authority. Accordingly, in the order of the Commissioner a question was raised whether issuance of show cause notice by the GST authorities would mean to be an execution of an order or it be treated as decree against the petitioner. Despite the objection that the further proceeding is not maintainable because of the order of moratorium of the National Company Law Tribunal,  the same was overruled by the Commissioner.

The High Court expressed its discerning note that the Commissioner has not taken into account the objection raised by the writ petitioner about the moratorium order passed by the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 and also omitted to consider the consequences of passing order while the moratorium order is in vogue.

The High Court order set aside the order of the Commissioner and remanded the matter back to the Commissioner or a fresh consideration by examining the aspect as to whether the order of moratorium of the National Company Law Tribunal also covers the proceeding pending before the GST authorities under the GST Act 2017.  The Commissioner is to decide the issue within one month from the date of receipt of the certified copy of the order.

Conclusion

From the above discussion, the moratorium order passed under the Code by the Adjudicating Authority restrains the proceedings initiated against the corporate debtor under tax laws.  The said proceedings shall be kept in abeyance till the ceasing of moratorium order.