THE LIQUIDATOR IS NOT LIABLE TO REIMBURSE THE COMPOUNDING FEE

[Mr. M. GOVINDARAJAN]

In ‘SAVAN GODIAWALA VERSUS G. VENKATESH BABU - 2020 (7) TMI 145 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI, the respondent No. 2 in the appeal is a company engaged in engineering, procurement and construction activity.  Due to various problems the company faced liquidity crises and could not pay even the salary of its staff.  There was a delay in depositing the tax deducted at source.  In the mean time IDBI bank, as a financial creditor, initiated corporate insolvency resolution process against the company as the corporate debtor.  The application filed by the financial creditor was approved on 07^th August 2017 by the Adjudicating Authority.  The appellant was appointed as interim resolution professional and subsequently appointed as resolution professional.  Since the corporate insolvency resolution process could not be completed within the time limit prescribed under the Insolvency and Bankruptcy Code, 2016 the Adjudicating Authority ordered for liquidation.  The appellant was appointed as liquidator to proceed further. 

On 31^st March, 2016 the Income Tax Department filed a complaint under section 276B read with section 278B of the Income Tax Act against the first respondent, who was the Managing Director of the corporate debtor and is responsible for the day-to-day affairs of the company.  The main allegation on the respondent No. 1 in the complaint is that the respondent No. 1 did not deposit the tax deducted at source to the tune of ₹ 37,90,796/- during the financial year 2012-13 but not deposited the same to the credit of the Government within the stipulated time i.e., within 7 days from the end of the month in which the deduction is made.  The company and respondent No.1 committed offence punishable under section 276B read with section 278B of the Income Tax Act which prescribes a minimum imprisonment of 3 months which can be extended up to seven years.   

The respondent No. 1 filed a compounding application before the Authority for closing the proceedings pending before Additional Chief Metropolitan Magistrate, Tis Hazari Court.  The respondent No. 1 filed an application before the Adjudicating Authority seeking direction  to the liquidator appellant to keep on priority the funds required for payment of compounding fees on behalf of the corporate debtor before concerned authorities and filed appropriate application for closing of proceedings pending before Additional Chief Metropolitan Magistrate, Tis Hazari Court, New Delhi and to reimburse the compounding fees to him.

The Resolution professional (appellant herein) opposed the application before the Adjudicating Authority stating the application is not maintainable under section 33, 33(1)(k) read with section 60(5) of the Insolvency and Bankruptcy Code.  He stated that the corporate insolvency resolution process started on 7^th August, 2017 and the order of liquidation was passed on 27^th August, 2018.  The criminal proceedings under the Income Tax Act were initiated against the respondent No. 1 corporate debtor on 31^st March, 2016 i.e., prior to corporate insolvency resolution process.  The said proceedings were not in any way connected with the default committed during the corporate insolvency resolution process.  The Resolution professional further contended that the respondent No. 1 was the then Managing Director of the company and he has committed the offence and therefore he has to defend the case.  The prayer in the application is in contravention of the provisions of section 53 of the Insolvency and Bankruptcy Code.  The Adjudicating Authority allowed the application filed by the respondent No. 1 in the appeal.

Against the order of the Adjudicating Authority the appellant filed appeal before the National Company Law Appellate Tribunal, the appellate Authority for insolvency code.  The appellant submitted the following before the Appellate Tribunal-

• The Adjudicating Authority failed to consider that since the prosecution was initiated by the Income Tax Department, against the respondent No. 1 as he was the person responsible and in charge of the day-to-day affairs of the company being Managing Director, therefore, the respondent No. 1 is defending himself.
• The Adjudicating Authority has failed to appreciate the preceding judgment of Kerala High Court in ‘Income-Tax Officer Versus Joseph And Others. - 1971 (6) TMI 1 - KERALA High Court  which holds that the criminal prosecution launched under the provisions of section 276B of the Income Tax Act attached itself personally to the vendor not to the company.
• The Adjudicating Authority erroneously held that the prosecution was lodged against the corporate debtor, thus, compounding fees is payable by the corporate debtor.
• If compounding fees is paid on priority basis it will be in contravention of the mandate of section 53 of the Insolvency and Bankruptcy Code.

The respondent No. 1 submitted the following before the Appellate Tribunal-

• It is the corporate debtor, respondent No. 2 in the present appeal, has defaulted in paying the tax deducted at source on time and alleged offence was not committed by him.
• In the case law cited by the appellant the High Court held that the principal employee should have declared himself as a principal officer and has done the TDS deduction personally and failed to pay the deducted tax to the Department whereas in this case he did not declare himself as the Principal Officer of the company and he has not failed to deposit the tax personally.
• The reimbursement of compounding fee to him can be made as part of liquidation cost to save the corporate debtor facing the penalty.
• The payment of compounding fee is part of liquidation cost as per Section 53 of the Insolvency and Bankruptcy Code.
• The judgment relied on by the appellant is misplaced and not applicable to the facts of the present case.
• If the Department has to drag anybody under the provisions of the Income Tax Act, they have to establish that deduction was done personally by the particular officer and the officer did not deposit the TDS with the Department.
• The corporate debtor is at default and is liable to make payment of compounding fees.
• The appellant in the memo of appeal declared himself that he is in charge of the affairs and management of the corporate debtor and therefore the appellant is responsible to look after the interest of the corporate debtor during liquidation proceedings.
• The Adjudicating Authority rightly held that the application is maintainable.

The Appellate Tribunal heard the submissions of both the parties.  The Appellate Tribunal analyzed the facts of the case and the order of the Adjudicating Authority.  The Appellate Tribunal observed that it is clear that much before the initiation of corporate insolvency resolution process the alleged offence has been committed by the respondent No. 1 and the corporate debtor, the respondent No. 2.   The respondent no. 1 was the person responsible and in charge of day to day affairs of the company being the Managing Director.   Therefore he has committed the offence.  If the alleged offence is proved the corporate debtor cannot be punished with imprisonment.  The respondent No.1 only can be punished.  Therefore the respondent No. 1 filed an application for compounding the offence and he wants to escape the consequences at the cost of the company in liquidation.

The Appellate Tribunal further observed that it is the duty of the liquidator to institute or defend any suit, prosecution or other legal proceedings, civil or criminal in the name of or on behalf of corporate debtor.  The liquidator has not committed any offence.  However the liquidator has to defend the corporate debtor once he has taken the charge of the company.

The criminal proceedings were launched against the company and the respondent No. 1 in his personal capacity.  Therefore, the Appellate Tribunal held that even after the liquidation proceedings have been started the respondent No. 1 has to face the trial in his personal capacity and ultimately if the offence is proved he will be punished.

The Appellate Tribunal allowed the application filed by the appellant resolution professional.

The above said judgment is a guidance to the insolvency resolution process and the concerned persons are to take note of this order.