STATE TAX OFFICER (1) versus RAINBOW PAPERS LIMITED on 6 September 2022

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[2022] 13 S.C.R. 808

SUPREME COURT REPORTS

[2022] 13 S.C.R.

ASTATE TAX OFFICER (1)

v.

RAINBOW PAPERS LIMITED

(Civil Appeal No. 1661 of 2020)

BSEPTEMBER 06, 2022

[INDIRA BANERJEE AND A.S. BOPANNA, JJ.]

Insolvency and Bankruptcy Code, 2016: ss. 9, 15, 30, 31&53– Insolvency and Bankruptcy Board of India (Insolvency ResolutionProcess for Corporate Persons) Regulations, 2016 – rr. 4, 4A, 6 toC14 – Gujarat Value Added Tax, 2003 – s. 48 – s. 53 of the IBC, ifoverrides s. 48 of GVAT – Certain amount due from the respondentto the Sales Tax authorities towards CST and VAT – Recoveryproceedings initiated and respondent’s property attached – Petitionu/s. 9 for initiation of CIRP and Resolution professional-RP wasDappointed – Appellant then filed claim before the RP that certainamount was due under the GVAT Act and RP informed the appellantthat its entire claim had been waived off – Challenge to, by theappellant –NCLT rejected the application as not maintainable andholding that the Government cannot claim first charge over theproperty of the Corporate Debtor, as s. 48 which provides for firstEcharge on the property of a dealer in respect of any amount payableby the dealer on account of tax, interest, penalty etc. under the saidAct, cannot prevail over s. 53 of the IBC – NCLAT dismissed theappeal as also held that the claim of the State is belated – On appeal,held: NCLAT erred in holding that s. 53 of the IBC overrides s. 48Fof GVAT – s48 of the GVAT Act is not contrary to or inconsistentwith Section 53 or any other provisions of the IBC – Under Section53(1)(b)(ii), the debts owed to a secured creditor, which would includethe State under the GVAT Act, are to rank equally with other specifieddebts including debts on account of workman’s dues for a periodof 24 months preceding the liquidation commencement date – StateGis a secured creditor under the GVAT Act – s. 3(30) of the IBC definessecured creditor to mean a creditor in favour of whom securityinterest is credited – Such security interest could be created byoperation of law - Definition of secured creditor in the IBC doesnot exclude any Government or Governmental Authority –H

Furthermore, delay in filing a claim cannot be the sole ground forrejecting the claim–Impugned orders set aside.

Allowing the appeal, the Court

HELD 1.1 The Regulations have to be read as a whole andnot in a truncated manner and interpreted in the light of thestatutory provisions of the IBC. The time lines stipulated in theIBC even for completion of proceedings are directory and notmandatory. [Para 23][831-C-D]

1.2 The claims were invited well before the 5th October,2017 which was the last date for submission of claims. Under theunamended provisions of Regulation 12(1), the appellant was notrequired to file any claim. Read with Regulation 10, the appellantwould only be required to substantiate the claim by production ofsuch materials as might be called for. The time stipulations arenot mandatory as is obvious from Sub-Regulation (2) of Regulation14 which enables the Interim Resolution Professional or theResolution Professional, as the case may be, to revise theamounts of claims admitted, including the estimates of claimsmade under Sub-Regulation (1) of the said Regulation as soon asmight be practicable, when he came across additional informationwarranting such revision. [Para 24][831-D-F]

1.3 There was no obligation on the part of the State to lodgea claim in respect of dues which are statutory dues for whichrecovery proceedings have also been initiated. The appellantswere never called upon to produce materials in connection withthe claim raised by the Appellants towards statutory dues. TheAdjudicating Authority as well as the Appellate Authority/NCLATmisconstrued the Regulations. [Para 25][831-G]

1.4 The Adjudicating Authority (NCLT) and the AppellateAuthority (NCLAT) have held that the claim of the State isbelated. Regulation 12 of the 2016 Regulations deals with thetime period for submission of a claim along with proof, as stipulatedin the public announcement under Section 15 of the IBC. Thetime period is, however, not mandatory but only directory. [Para39][834-G-H]

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A1.5 Section 31 of the IBC which provides for approval of aResolution Plan by the Adjudicating Authority makes it clear thatthe Adjudicating Authority can approve the Resolution Plan onlyupon satisfaction that the Resolution Plan, as approved by theCommittee of Creditors (CoC), meets the requirements ofSection 30(2) of the IBC. When the Resolution Plan does notBmeet the requirements of Section 30(2), the same cannot beapproved. [Para 41][835-C]

1.6 When a grievance was made before the AdjudicatingAuthority with regard to a Resolution Plan, the AdjudicatingAuthority was required to examine if the Resolution Plan metCthe requirements of Section 30(2) of the IBC. The word “satisfied”used in Section 31(1) contemplates a duty on the AdjudicatingAuthority to examine the Resolution Plan. The Resolution Plancannot be approved by way of an empty formality. [Para 43][836-F-G]D

1.7 There can be no question of acceptance of a ResolutionPlan that is not in conformity with the statutory provisions ofSection 31(2) of the IBC. Section 30(2) (b) of the IBC, casts anobligation on the Resolution Professional to examine eachresolution plan received by him and to confirm that such resolutionEplan provides for the payment of dues of operational creditors,as specified by the Board, which shall not be less than the amountto be paid to such creditors, in the event of liquidation of theCorporate Debtor under Section 53, or the amount that wouldhave been paid to such operational creditors, if the amount to bedistributed under the resolution plan had been distributed inFaccordance with the order of priority in Sub-section 2 of Section53, whichever was higher, and provided for the payment of debtsof financial creditors, who did not vote in favour of the resolutionplan, in such manner as might be specified by the Board. [Para45][837-D-F]G

1.8 Under Section 31 of the IBC, a resolution plan asapproved by the Committee of Creditors under Sub-Section (4)of Section 30 might be approved by the Adjudicating Authorityonly if the Adjudicating Authority is satisfied that the resolutionplan as approved by the Committee of Creditors meets the H

requirements as referred to in Sub- Section (2) of Section 30 ofthe IBC. The condition precedent for approval of a resolutionplan is that the resolution plan should meet the requirements ofSub-Section (2) of Section 30 of the IBC.[Para 46][837-G-H]

1.9 A resolution plan which does not meet the requirementsof Sub- Section (2) of Section 30 of the IBC, would be invalid andnot binding on the Central Government, any State Government,any statutory or other authority, any financial creditor, or othercreditor to whom a debt in respect of dues arising under any lawfor the time being in force is owed. Such a resolution plan wouldnot bind the State when there are outstanding statutory dues of aCorporate Debtor. [Para 48][838-E-F]

1.10 Section 31(1) of the IBC which empowers theAdjudicating Authority to approve a Resolution Plan uses theexpression “it shall by order approve the resolution plan whichshall be binding...” subject to the condition that the ResolutionPlan meets the requirements of sub- section (2) of Section 30. Ifa Resolution Plan meets the requirements, the AdjudicatingAuthority is mandatorily required to approve the Resolution Plan.On the other hand, Sub-section (2) of Section 31, which enablesthe Adjudicating Authority to reject a Resolution Plan which doesnot conform to the requirements referred to in sub-section (1) ofSection 31, uses the expression “may”.[Para 49][838-F-H]

1.11 Ordinarily, the use of the word “shall” connote amandate/binding direction, while use of the expression “may”connote discretion. If statute says, a person may do a thing, hemay also not do that thing. Even if Section 31(2) is construed toconfer discretionary power on the Adjudicating Authority to rejecta Resolution Plan, it has to be kept in mind that discretionarypower cannot be exercised arbitrarily, whimsically or withoutproper application of mind to the facts and circumstances whichrequire discretion to be exercised one way or the other. [Para50][839-A-B]

1.12 If the established facts and circumstances requirediscretion to be exercised in a particular way, discretion has tobe exercised in that way. If a Resolution Plan is ex facie not in AB

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Aconformity with law and/or the provisions of IBC and/or the Rulesand Regulations framed thereunder, the Resolution would haveto be rejected. It is also a well settled principle of interpretationthat the expression “may”, if circumstances so demand can beconstrued as “Shall”. [Para 51][839-C]

B1.13 If the Resolution Plan ignores the statutory demandspayable to any State Government or a legal authority, altogether,the Adjudicating Authority is bound to reject the Resolution Plan.In other words, if a company is unable to pay its debts, whichshould include its statutory dues to the Government and/or otherauthorities and there is no plan which contemplates dissipationCof those debts in a phased manner, uniform proportionalreduction, the company would necessarily have to be liquidatedand its assets sold and distributed in the manner stipulated inSection 53 of the IBC. [Para 52, 53][839-D-E]

1.15 The Committee of Creditors, which might includeDfinancial institutions and other financial creditors, cannot securetheir own dues at the cost of statutory dues owed to anyGovernment or Governmental Authority or for that matter, anyother dues. [Para 54][839-F]

1.16 NCLAT erred in its observation that s. 53 of the IBCEoverrides s. 48 of GVAT. Section 48 of the GVAT Act is notcontrary to or inconsistent with Section 53 or any other provisionsof the IBC. Under Section 53(1)(b)(ii), the debts owed to asecured creditor, which would include the State under the GVATAct, are to rank equally with other specified debts including debtsFon account of workman’s dues for a period of 24 months precedingthe liquidation commencement date. [Paras 55,56][839-G; 840-B]

1.17 The State is a secured creditor under the GVAT Act.Section 3(30) of the IBC defines secured creditor to mean aGcreditor in favour of whom security interest is credited. Suchsecurity interest could be created by operation of law. Thedefinition of secured creditor in the IBC does not exclude anyGovernment or Governmental Authority. [Para 57][840-C]

1.18 The Appellate Authority (NCLAT) and the AdjudicatingHAuthority erred in law in rejecting the application/appeal of the

appellant. Delay in filing a claim cannot be the sole ground forrejecting the claim. [Para 58][840-D]

1.19 The impugned orders are set aside. The Resolutionplan approved by the CoC is also set aside. [Para 59][840-E]

Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC17 : [2019] 3 SCR 535; Vishal Saxena & Anr. v. SwamiDeen Gupta Resolution Professional (2020) SCCOnline NCLT 2734; Assistant Commissioner of Customsv. Mathur SabhapathyVishwanathan IBA/578/2019;NCLT, Chennai Ghanshyam Mishra & Sons (P) Ltd. v.Edelweiss Asset Reconstruction Co. Ltd. (2021) 9 SCC657; Ebix Singapore Private Limited v. Committee ofCreditors of Educomp Solutions Limited and Another(2022) 2 SCC 401 – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION : Civil Appeal No.1661of 2020.

From the Judgment and Order dated 19.12.2019 of the NationalCompany Law Appellate Tribunal, New Delhi in Company Appeal (AT)(Insolvency) No.404 of 2019.

With

Civil Appeal No.2568 of 2020.

Tushar Mehta, SG, K. M. Nataraj, ASG, Ms. Aastha Mehtra, Ms.Vishakha, Ms. Prerana Mohapatra, Vinayak Sharma, Ms. Indira Bhaskar,Ms. Deepanwita Priyanka, Advs. for the Appellant.

Ankur Kashyap, Ayush Agarwala, Aditi Mittal, Ms. ArushiKaulaskar, Ms. Swati Khanvisara, Aman Bajaj, Arnav Narain, RajeshSrivastava, Neeraj Datt Gaur, Gaurav Verma, Advs. for the Respondent.

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814SUPREME COURT REPORTS

AThe Judgment of the Court was delivered byINDIRA BANERJEE, J.

These appeals under Section 62 of the Insolvency and BankruptcyCode, 2016, hereinafter referred to as ‘IBC’, is against a judgment andorder dated 19[th] December, 2019, passed by the National Company LawBAppellate Tribunal (NCLAT) dismissing Company Appeal(AT)(Insolvency) No. 404 of 2019 filed by the Appellant, against anorder dated 27[th] February 2019 of the Adjudicating Authority, rejectingthe application being I.A No.224/271/272/337 of 2018and P-01 of 2019in C.P. No. (IB) 88/9/NCLT/AHM/2017 filed by the appellants andCholding that the Government cannot claim first charge over the propertyof the Corporate Debtor, as Section 48 of the Gujarat Value Added Tax,2003, hereinafter referred to as the “GVAT Act”, which provides forfirst charge on the property of a dealer in respect of any amount payableby the dealer on account of tax, interest, penalty etc. under the saidGVAT Act,cannot prevail over Section 53 of the IBC.D2. The short question raised by the appellant in this appeal is,whether the provisions of the IBC and, in particular, Section 53 thereof,overrides Section 48 of the GVAT Act which is set out herein below forconvenience:- “48. Tax to be first charge on property.—NotwithstandingEanything to the contrary contained in any law for the timebeing in force, any amount payable by a dealer or any otherperson on account of tax, interest or penalty for which he isliable to pay to the Government shall be a first charge on theproperty of such dealer, or as the case maybe, such person.”F3. The respondent, a company within the meaning of theCompanies Act, 2013 is engaged in the business of manufacture andsale of Crafts and Oars within and outside the State of Gujarat since16[th] April, 1990.

4. The appellant has, from time to time, been assessed for ValueGAdded Tax (VAT) and Central Sales Tax (CST) under the GVAT Act. Itis stated that an amount of Rs.53,71,65,489/- is due from the Respondentto the Sales Tax authorities towards CST and VAT, as per the statementenclosed at Page 44 of the Paper Book.

5. On or about 8[th] July, 2016, recovery proceedings were initiatedHagainst the respondent, in respect of its dues for the year 2011-2012, and the appellant attached the property of the respondent being land at SurveyNo.2379 and 2381 situated at Rajpur, Taluka Kadi on 8[th] October, 2018.

6. One Neeraj Papers Private Limited, as operational creditor ofthe respondent, filed Company Petition (IB) No.88 of 2017under Section9 of the IBCbefore Ahmedabad Bench of the National Company LawTribunal (NCLT), for initiation of the Corporate Insolvency ResolutionProcess (CIRP) against the respondent.

7. By an order dated 12[th] September, 2017, the said CompanyPetition [Company Petition (IB) No. 88 of 2017] filed by the said NeerajPapers Private Limited was admitted. One George Samuel was appointedInterim Resolution Professional (IRP) on 22[nd] September, 2017.

8. After appointment of the said George Samuel as IRP, claimswere invited from Creditors under Section 15 of the IBC by issuance ofnewspaper publications. The last date for submission of claims was 5[th]October 2017.

9. After receipt of claims, a Committee of Creditors (CoC) wasconstituted on 10[th] October 2017. At its first meeting, the CoC passed aresolution to replace the IRP. Accordingly,Ramachandra D. Choudhary,a Chartered Accountant, was appointed as Resolution Professional (RP).The appointment of Mr. Choudhary was approved by the NCLT by anorder dated 6[th] November 2017.

10. The appellant filed a claim before the RP in the requisite FormB, claiming that Rs.47.36 crores (approximately), was due and payableby the respondent to the appellant, towards its dues under the GVATAct. The claim was filed beyond time.

11. After admission of the CIRP and appointment of the RP, oneKushal Limited submitted a Resolution Plan. Various Creditors hadobjected to the Resolution Plan.

12. The Tourism Finance Corporation of India Limited, a financialcreditor of the Respondent-Corporate Debtor moved an interlocutoryapplication No.273 of 2018 contending that the Tourism FinanceCorporation of India Limited had wrongly been categorised as anunsecured financial creditor.

13. By an order Sr. No.JCCT/Div-4/Mahesana/NCLT/case/O.W.No.3090 dated 22[nd] October, 2018, the appellant called upon theRP to confirm the claim of the appellant towards outstanding tax dues.

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A14. By a letter dated 22[nd] October, 2018, the Resolution Professionalinformed the appellant that the entire claim of the appellant had beenwaived off. The order of the RP was conveyed to the appellant by anemail dated 6[th] November, 2018.

15. On or about 20[th] December, 2018, the appellant challengedBthe Resolution Plan by making an application being I.A No. P-01 of2019before the Ahmedabad Bench of the NCLT contending thatGovernment dues could not be waived off. The appellant prayed forpayment of total dues of Rs.47,35,72,314/- towards VAT/CST on theground that the Sales Tax Officer was a secured creditor.

C16. By an order dated 27[th] February, 2019 in IA No. 224/271/272/337 of 2018 and P-01 of 2019 in CP No.(IB) 88 of 2017,the AdjudicatingAuthority being the Ahmedabad Bench of the NCLT rejected theapplication made by the appellant as not maintainable.The AdjudicatingAuthority (NCLT) Ahmedabad held:-

D“13.The Resolution Applicant again filed the amendedresolution plan on 26.05.2018. On scrutiny RP issuedcertificate on 28.05.2018 in compliance of the Regulation39(2). Accordingly, RP/the applicant issued notice dated29.05.2018 for convening the eighth and final meeting ofCoC on 04.06.2018. In the said meeting, CoC sought certainEchanges in the plan. In view of that, the Resolution Applicantwas permitted to provide the addendum to the revised planwithin a period of one (1) day which was accepted and dulyacted upon by the Resolution applicant.

14. The said amended revised resolution plan along with theFaddendum dated 05.06.2018 was placed for e-voting beforethe members of the CoC which took place on two (2) days i.e.on 06.06.2018 and 07.06.2018. The CoC in their aforesaide-voting resolved to approve the resolution plan along withthe addendum with majority of 79.79% voting share in favourGof the Resolution Applicant.

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16. On filing of the application by the RP under Section 30(6)read with section 31 of the Code, notices were issued to theCoC and suspended management. CoC approved andHconceded to the fact of filing application by the RP under section 33(6) of the Code and have supported the argumentadvanced by the Ld. Counsel of the RP. No representationreceived from the suspended management.”

17. On or about 8[th] April, 2019, the appellant filed an appeal beforethe NCLAT against the aforesaid order dated 27[th] February 2019 of theAdjudicating Authority, under Section 61 of the IBC. The appeal hasbeen dismissed by the NCLAT by the judgment and order impugned.

18. The NCLAT held:-

“34.The Adjudicating Authority noticed that the Appellantapproached the ‘Resolution Professional’ on 22[nd] October,2018 whereas the ‘Resolution Plan’ dated 26[th] May, 2018along with Addendum dated 5[th] June, 2018 was approved bythe ‘Committee of Creditors’ with voting majority of 72.79per cent in favour of the ‘Resolution Plan’. Thus, the claimwas made by the Appellant at a much belated stage not onlybefore the ‘Resolution Professional’ but also before theAdjudicating Authority.

35. We find that the Appellant has not filed claim within time.It approached the ‘Resolution Professional’ at belated stageafter approval of the ‘Resolution Plan’ by the AdjudicatingAuthority.

36. Learned counsel for the ‘Resolution Professional’submitted that the claim of the Appellant- ‘State Tax Officer(1)’ comes within the meaning of ‘Operational Debt’ as definedunder Section 5(21). The claim of the Appellant also does notfall within the meaning of ‘Secured Creditor’ as defined underSection 3(30) read with Section 3(31) of the I&B Code.

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38. In view of Statement of Objects and Reasons of the ‘I&BCode’ read with Section 53 of the ‘I&B Code’, the Governmentcannot claim first charge over the property of the ‘CorporateDebtor’. Section 48 cannot prevail over Section 53. Therefore,the Appellant – ‘State Tax Officer-(1)’ do not come within themeaning of ‘Secured Creditor’ as defined under Section 3(30)read with Section 3(31) of the I&B Code’.

39. Further, as ‘Sales Tax Department’ filed its claim at belatedstage after the plan had been approved by the ‘Committee of A

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818SUPREME COURT REPORTS

ACreditors’, the ‘Resolution Professional’ had no jurisdictionto entertain the same and rightly not entertained.”19. Sections 30 and 31 of the IBC are set out hereinbelow forconvenience:- “30. Submission of resolution plan.—(1) A resolution applicantBmay submit a resolution plan along with an affidavit statingthat he is eligible under Section 29-A to the resolutionprofessional prepared on the basis of the informationmemorandum.

(2) The resolution professional shall examine each resolutionCplan received by him to confirm that each resolution plan—

(a) provides for the payment of insolvency resolution processcosts in a manner specified by the Board in priority to thepayment of other debts of the corporate debtor; (b) provides for the payment of debts of operational creditorsDin such manner as may be specified by the Board which shallnot be less than—

(i) the amount to be paid to such creditors in the event of aliquidation of the corporate debtor under Section 53; or E(ii) the amount that would have been paid to such creditors,if the amount to be distributed under the resolution plan hadbeen distributed in accordance with the order of priority insub-section (1) of Section 53, whichever is higher, and provides for the payment of debts ofFfinancial creditors, who do not vote in favour of the resolutionplan, in such manner as may be specified by the Board, whichshall not be less than the amount to be paid to such creditorsin accordance with sub-section (1) of Section 53 in the eventof a liquidation of the corporate debtor.

GExplanation 1.—For the removal of doubts, it is herebyclarified that a distribution in accordance with the provisionsof this clause shall be fair and equitable to such creditors.

Explanation 2.—For the purposes of this clause, it is herebydeclared that on and from the date of commencement of theInsolvency and Bankruptcy Code (Amendment) Act, 2019, theH

provisions of this clause shall also apply to the corporateinsolvency resolution process of a corporate debtor—

(i) where a resolution plan has not been approved or rejectedby the Adjudicating Authority;

(ii) where an appeal has been preferred under Section 61 orSection 62 or such an appeal is not time barred under anyprovision of law for the time being in force; or

(iii) where a legal proceeding has been initiated in any courtagainst the decision of the Adjudicating Authority in respectof a resolution plan;

(c) provides for the management of the affairs of the corporatedebtor after approval of the resolution plan; (d) the implementation and supervision of the resolution plan; (e) does not contravene any of the provisions of the law forthe time being in force; (f)conforms to such other requirements as may bespecified by the Board.

Explanation.—For the purposes of clause (e), if any approvalof shareholders is required under the Companies Act, 2013or any other law for the time being in force for theimplementation of actions under the resolution plan, suchapproval shall be deemed to have been given and it shall notbe a contravention of that Act or law.

(3) The resolution professional shall present to the committeeof creditors for its approval such resolution plans whichconfirm the conditions referred to in sub-section (2).

(4) The committee of creditors may approve a resolution planby a vote of not less than sixty-six per cent of voting share ofthe financial creditors, after considering its feasibility andviability the manner of distribution proposed, which may takeinto account the order of priority amongst creditors as laiddown in sub-section (1) of Section 53,including the priorityand value of the security interest of a secured creditor, andsuch other requirements as may be specified by the Board:

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Provided that the committee of creditors shall not approve aresolution plan, submitted before the commencement of theInsolvency and Bankruptcy Code (Amendment) Ordinance,2017 (Ord. 7 of 2017), where the resolution applicant isineligible under Section 29-A and may require the resolutionprofessional to invite a fresh resolution plan where no otherresolution plan is available with it:

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Provided further that where the resolution applicant referredto in the first proviso is ineligible under clause (c) of Section29-A, the resolution applicant shall be allowed by thecommittee of creditors such period, not exceeding thirty days,to make payment of overdue amounts in accordance with theproviso to clause (c) of Section 29-A:

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Provided also that nothing in the second proviso shall beconstrued as extension of period for the purposes of theproviso to sub-section (3) of Section 12, and the corporateinsolvency resolution process shall be completed within theperiod specified in that sub-section.

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Provided also that the eligibility criteria in Section 29-A asamended by the Insolvency and Bankruptcy Code(Amendment) Ordinance, 2018 (Ord. 6 of 2018) shall applyto the resolution applicant who has not submitted resolutionplan as on the date of commencement of the Insolvency andBankruptcy Code (Amendment) Ordinance, 2018.

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(5) The resolution applicant may attend the meeting of thecommittee of creditors in which the resolution plan of theFapplicant is considered:

Provided that the resolution applicant shall not have a rightto vote at the meeting of the committee of creditors unlesssuch resolution applicant is also a financial creditor.

(6) The resolution professional shall submit the resolution planas approved by the committee of creditors to the AdjudicatingAuthority.

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31. Approval of resolution plan.—(1) If the AdjudicatingAuthority is satisfied that the resolution plan as approved bythe committee of creditors under sub-section (4) of Section H

STATE TAX OFFICER (1) v. RAINBOW PAPERS LIMITED[INDIRA BANERJEE, J.]

30 meets the requirements as referred to in sub-section (2) ofSection 30, it shall by order approve the resolution plan whichshall be binding on the corporate debtor and its employees,members, creditors, including the Central Government, anyState Government or any local authority to whom a debt inrespect of the payment of dues arising under any law for thetime being in force, such as authorities to whom statutorydues are owed, guarantors and other stakeholders involvedin the resolution plan:

Provided that the Adjudicating Authority shall, before passingan order for approval of resolution plan under this sub-section, satisfy that the resolution plan has provisions for itseffective implementation.

(2) Where the Adjudicating Authority is satisfied that theresolution plan does not confirm to the requirements referredto in sub-section (1), it may, by an order, reject the resolutionplan.

(3) After the order of approval under sub-section (1),—

(a) the moratorium order passed by the Adjudicating Authorityunder Section 14 shall cease to have effect; and (b) the resolution professional shall forward all recordsrelating to the conduct of the corporate insolvency resolutionprocess and the resolution plan to the Board to be recordedon its database.

(4) The resolution applicant shall, pursuant to the resolutionplan approved under sub-section (1), obtain the necessaryapproval required under any law for the time being in forcewithin a period of one year from the date of approval of theresolution plan by the Adjudicating Authority under sub-section (1) or within such period as provided for in such law,whichever is later:

Provided that where the resolution plan contains a provisionfor combination, as referred to in Section 5 of the CompetitionAct, 2002 (12 of 2003), the resolution applicant shall obtainthe approval of the Competition Commission of India underthat Act prior to the approval of such resolution plan by thecommittee of creditors.”

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A20. Section 53 of the IBC, which provides for the mode and mannerfor distribution of the proceeds of sale of the assets of a CorporateDebtor in liquidation, is set out hereinbelow for convenience :- “53. Distribution of assets.—(1) Notwithstanding anything tothe contrary contained in any law enacted by the ParliamentBor any State Legislature for the time being in force, theproceeds from the sale of the liquidation assets shall bedistributed in the following order of priority and within suchperiod and in such manner as may be specified, namely—

(a) the insolvency resolution process costs and the liquidationCcosts paid in full;(b)the following debts which shall rank equally between andamong the following—

(i) workmen’s dues for the period of twenty-four monthspreceding the liquidation commencement date; andD(ii) debts owed to a secured creditor in the event such securedcreditor has relinquished security in the manner set out inSection 52;

(c) wages and any unpaid dues owed to employees other thanworkmen for the period of twelve months preceding theEliquidation commencement date; (d) financial debts owed to unsecured creditors; (e) the following dues shall rank equally between and amongthe following :—

F(i) any amount due to the Central Government and the StateGovernment including the amount to be received on accountof the Consolidated Fund of India and the Consolidated Fundof a State, if any, in respect of the whole or any part of theperiod of two years preceding the liquidation commencementGdate;(ii) debts owed to a secured creditor for any amount unpaidfollowing the enforcement of security interest; (f) any remaining debts and dues; (g) preference shareholders, if any; and H

(h) equity shareholders or partners, as the case may be.

(2) Any contractual arrangements between recipients undersub-section (1) with equal ranking, if disrupting the order ofpriority under that sub-section shall be disregarded by theliquidator.

(3) The fees payable to the liquidator shall be deductedproportionately from the proceeds payable to each class ofrecipients under sub-section (1), and the proceeds to therelevant recipient shall be distributed after such deduction.

Explanation.—For the purpose of this section—

(i) it is hereby clarified that at each stage of the distributionof proceeds in respect of a class of recipients that rankequally, each of the debts will either be paid in full, or will bepaid in equal proportion within the same class of recipients,if the proceeds are insufficient to meet the debts in full; and

(ii) the term “workmen’s dues” shall have the same meaningas assigned to it in Section 326 of the Companies Act, 2013(18 of 2013).”

21. In exercise of power conferred under Sections 5, 7, 9, 14, 15,17, 18, 21, 24, 25, 29, 30, 196 and 208 read with Section 240 of the IBC,the Insolvency and Bankruptcy Board of India, hereinafter referred toas Board, has framed the Insolvency and Bankruptcy Board of India(Insolvency Resolution Process for Corporate Persons) Regulations,2016, hereinafter referred to as “the 2016 Regulations”. Some of therelevant provisions of the 2016 Regulations are extracted hereinbelowfor convenience :- “4. Access to books.—(1) Without prejudice to Section 17(2)(d),the interim resolution professional or the resolutionprofessional, as the case may be, may access the books ofaccount, records and other relevant documents andinformation, to the extent relevant for discharging his dutiesunder the Code, of the corporate debtor held with—

(a) depositories of securities;

(b) professional advisors of the corporate debtor;

(c) information utilities;

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(d) other registries that records the ownership of assets;(e) members, promoters, partners, board of directors and jointventure partners of the corporate debtor; and (f) contractual counterparties of the corporate debtor.

(2) The personnel of the corporate debtor, its promoters orany other person associated with the management of thecorporate debtor shall provide the information within suchtime and in such format as sought by the interim resolutionprofessional or the resolution professional, as the case maybe.

(3) The creditor shall provide to the interim resolutionprofessional or resolution professional, as the case may be,the information in respect of assets and liabilities of thecorporate debtor from the last valuation report, stockstatement, receivables statement, inspection reports ofproperties, audit report, stock audit report, title search report,technical officers report, bank account statement and suchother information which shall assist the interim resolutionprofessional or the resolution professional in preparing theinformation memorandum, getting valuation determined andin conducting the corporate insolvency resolution process.

4-A. Choice of authorised representative.—(1) On anexamination of books of account and other relevant recordsof the corporate debtor, the interim resolution professionalshall ascertain class(s) of creditors, if any.

(2) For representation of creditors in a class ascertained undersub-regulation (1) in the committee, the interim resolutionprofessional shall identify three insolvency professionals whoare—

(a) not his relatives or related parties; (aa) having their addresses, as registered with the Board,inthe State or Union Territory, as the case may be,which hasthe highest number of creditors in the class as per theiraddresses in the records of the corporate debtor:

Provided that where such State or Union Territory does nothave adequate number of insolvency professionals, the STATE TAX OFFICER (1) v. RAINBOW PAPERS LIMITED[INDIRA BANERJEE, J.]

insolvency professionals having addresses in a nearby Stateor Union Territory, as the case may be, shall be considered; (b) eligible to be resolution professional under Regulation 3;and

(c) willing to act as authorised representative of creditors inthe class.

(3) The interim resolution professional shall obtain the consentof each insolvency professional identified under sub-regulation (2) to act as the authorised representative ofcreditors in the class in Form AB of the Schedule.

6. Public announcement.—(1) An insolvency professionalshall make a public announcement immediately on hisappointment as an interim resolution professional.

Explanation:‘Immediately’ means not later than three daysfrom the date of his appointment.

(2) The public announcement referred to in sub-regulation(1) shall:

(a) be in Form A of the Schedule;

(b) be published—

(i) in one English and one regional language newspaper withwide circulation at the location of the registered office andprincipal office, if any, of the corporate debtor and any otherlocation where in the opinion of the interim resolutionprofessional, the corporate debtor conducts material businessoperations;

(ii) on the website, if any, of the corporate debtor; and

(iii) on the website, if any, designated by the Board for thepurpose, (ba) state where claim forms can be downloaded or obtainedfrom, as the case may be; (bb) offer choice of three insolvency professionals identifiedunder Regulation 4-A to act as the authorised representativeof creditors in each class; and A

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(c) provide the last date for submission of proofs of claim,which shall be fourteen days from the date of appointment ofthe interim resolution professional.

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(3) The applicant shall bear the expenses of the publicannouncement which may be reimbursed by the committee toBthe extent it ratifies them.

7. Claims by operational creditors.—(1) A person claiming tobe an operational creditor, other than workman or employeeof the corporate debtor, shall submit claim with proof to theinterim resolution professional in person, by post or byCelectronic means in Form B of the Schedule:

Provided that such person may submit supplementarydocuments or clarifications in support of the claim before theconstitution of the committee.

(2) The existence of debt due to the operational creditor underDthis regulation may be proved on the basis of—

E(i) a contract for the supply of goods and services withcorporate debtor;

(ii) an invoice demanding payment for the goods and servicessupplied to the corporate debtor;

(iii) an order of a court or tribunal that has adjudicated uponFthe non-payment of a debt, if any; or

(iv) financial accounts.

(v) copies of relevant extracts of Form GSTR-1 and FormGSTR-3B filed under the provisions of the relevant lawsGrelating to Goods and Services Tax and the copy of e-waybill wherever applicable:

Provided that provisions of this sub-clause shall not apply tothose creditors who do not require registration and to thosegoods and services which are not covered under any lawrelating to Goods and Services Tax.

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8. Claims by financial creditors.—(1) A person claiming to bea financial creditor, other than a financial creditor belongingto a class of creditors, shall submit claim with proof to theinterim resolution professional in electronic form in Form Cof the Schedule:

Provided that such person may submit supplementarydocuments or clarifications in support of the claim before theconstitution of the committee.

(2) The existence of debt due to the financial creditor may beproved on the basis of—

(i) a financial contract supported by financial statements asevidence of the debt;

(ii) a record evidencing that the amounts committed by thefinancial creditor to the corporate debtor under a facilityhas been drawn by the corporate debtor;

(iii) financial statements showing that the debt has not beenpaid; or

(iv) an order of a court or tribunal that has adjudicated uponthe non-payment of a debt, if any.

8-A. Claims by creditors in a class.—(1) A person claiming tobe a creditor in a class shall submit claim with proof to theinterim resolution professional in electronic form in Form CAof the Schedule.

(2) The existence of debt due to a creditor in a class may beproved on the basis of—

(b) other relevant documents, including any—

(i) agreement for sale;

(ii) letter of allotment;

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A(iii) receipt of payment made; or

(iv) such other document, evidencing existence of debt.

(3) A creditor in a class may indicate its choice of aninsolvency professional, from amongst the three choicesprovided by the interim resolution professional in the publicBannouncement, to act as its authorised representative.

9. Claims by workmen and employees.—(1) A person claimingto be a workman or an employee of the corporate debtorshall submit claim with proof to the interim resolutionprofessional in person, by post or by electronic means in FormD of the Schedule:

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Provided that such person may submit supplementarydocuments or clarifications in support of the claim, on hisown or if required by the interim resolution professional, beforethe constitution of the committee.

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(2) Where there are dues to numerous workmen or employeesof the corporate debtor, an authorised representative maysubmit one claim with proof for all such dues on their behalfin Form E of the Schedule.

(3) The existence of dues to workmen or employees may beEproved by them, individually or collectively on the basis of—

(a) records available with an information utility, if any; or

(i) a proof of employment such as contract of employment forthe period for which such workman or employee is claimingdues; F

(ii) evidence of notice demanding payment of unpaid duesand any documentary or other proof that payment has notbeen made; or G

(iii) an order of a court or tribunal that has adjudicated uponthe non-payment of a dues, if any.

9-A. Claims by other creditors.—(1) A person claiming to bea creditor, other than those covered under Regulations 7, 8,8-A or 9, shall submit its claim with proof to the interim H

resolution professional or resolution professional in person,by post or by electronic means in Form F of the Schedule.

(2) The existence of the claim of the creditor referred to insub-section (1) may be proved on the basis of—

(a) the records available in an information utility, if any, or (b) other relevant documents sufficient to establish the claim,including any or all of the following—

(i) documentary evidence demanding satisfaction of the claim;

(ii) bank statements of the creditor showing non-satisfactionof claim;

(iii) an order of court or tribunal that has adjudicated uponnon-satisfaction of claim, if any.

10. Substantiation of claims.—The interim resolutionprofessional or the resolution professional, as the case maybe, may call for such other evidence or clarification as hedeems fit from a creditor for substantiating the whole or partof its claim.

11. Cost of proof.—A creditor shall bear the cost of provingthe debt due to such creditor.

12. Submission of proof of claims.—(1) Subject to sub-regulation (2), a creditor shall submit claim with proof on orbefore the last date mentioned in the public announcement.

(2) A creditor, who fails to submit claim with proof within thetime stipulated in the public announcement, may submit theclaim with proof to the interim resolution professional or theresolution professional, as the case may be, on or before theninetieth day of the insolvency commencement date.

(3) Where the creditor in sub-regulation (2) is a financialcreditor under Regulation 8, it shall be included in thecommittee from the date of admission of such claim:

Provided that such inclusion shall not affect the validity ofany decision taken by the committee prior to such inclusion.

12-A. Updation of claim.—A creditor shall update its claimas and when the claim is satisfied, partly or fully, from any A

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source in any manner, after the insolvency commencementdate.

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13. Verification of claims.—(1) The interim resolutionprofessional or the resolution professional, as the case maybe, shall verify every claim, as on the insolvencyBcommencement date, within seven days from the last date ofthe receipt of the claims, and thereupon maintain a list ofcreditors containing names of creditors along with the amountclaimed by them, the amount of their claims admitted and thesecurity interest, if any, in respect of such claims, and updateit.

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(2) The list of creditors shall be—

(a) available for inspection by the persons who submittedproofs of claim; (b) available for inspection by members, partners, directorsand guarantors of the corporate debtor or their authorisedrepresentatives; D

(c) displayed on the website, if any, of the corporate debtor;(ca) filed on the electronic platform of the Board fordissemination on its website:

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Provided that this clause shall apply to every corporateinsolvency resolution process ongoing and commencing onor after the date of commencement of the Insolvency andBankruptcy Board of India (Insolvency Resolution Processfor Corporate Persons) (Fifth Amendment) Regulations, 2020; F

(d) filed with the Adjudicating Authority; and (e) presented at the first meeting of the committee.

14. Determination of amount of claim.—(1) Where the amountclaimed by a creditor is not precise due to any contingencyGor other reason, the interim resolution professional or theresolution professional, as the case may be, shall make thebest estimate of the amount of the claim based on theinformation available with him.

(2) The interim resolution professional or the resolutionHprofessional, as the case may be, shall revise the amounts of claims admitted, including the estimates of claims made undersub-regulation (1), as soon as may be practicable, when hecomes across additional information warranting suchrevision.”

22. Prior to amendment by Notification No.IBBI/2018-19/GN/REG013 dated 3[rd] July 2018, with effect from 4[th] July, 2018, Sub-Regulation (1) of Regulation 12 read with Sub-Regulation (2) providedthat a creditor shall submit proof of claim on or before the last datementioned in the public announcement. Sub-Regulation (2) was amendedwith effect from 4[th] July, 2018 and now reads “a creditor shall submitclaim with proof on or before the last date mentioned in the publicannouncement”.

23. The Regulations have to be read as a whole and not in atruncated manner and interpreted in the light of the statutory provisionsof the IBC, as interpreted by this Court. This Court has time and againheld that the time lines stipulated in the IBC even for completion ofproceedings are directory and not mandatory.

24. In this case, claims were invited well before the 5[th] October,2017 which was the last date for submission of claims. Under theunamended provisions of Regulation 12(1), the Appellant was not requiredto file any claim. Read with Regulation 10, the appellant would only berequired to substantiate the claim by production of such materials asmight be called for. The time stipulations are not mandatory as is obviousfrom Sub-Regulation (2) of Regulation 14 which enables the InterimResolution Professional or the Resolution Professional, as the case maybe, to revise the amounts of claims admitted, including the estimates ofclaims made under Sub-Regulation (1) of the said Regulation as soon asmight be practicable, when he came across additional informationwarranting such revision.

25. In this case, at the cost of repetition, it may be noted that therewas no obligation on the part of the State to lodge a claim in respect ofdues which are statutory dues for which recovery proceedings havealso been initiated. The appellants were never called upon to producematerials in connection with the claim raised by the Appellants towardsstatutory dues. The Adjudicating Authority as well as the AppellateAuthority/NCLAT misconstrued the Regulations.

26. On behalf of the Appellant, it has been argued that there wereproceedings initiated by the State against the respondent-Corporate A

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ADebtor to realise its statutory dues. The Books of Accounts of theCorporate Debtor would have reflected the liability of the CorporateDebtor to the State in respect of its statutory dues. In abdication of itsmandatory duty, the RP failed to examine the Books of Accounts of theCorporate Debtor, verify and include the same in the informationmemorandum and make provision for the same in the Resolution Plan.BThe Resolution Plan does not conform to the statutory requirements ofthe IBC and is, therefore, not binding on the State.

27. Mr. Tushar Mehta, learned Solicitor General of India appearingon behalf of the Appellant with Mr. K.M. Nataraj, Additional SolicitorGeneral of India and Ms. Aastha Mehta, learned Advocate, referred toCSections 3(30) and 3(31) of the IBC, set out herein below :- “Section 3(30) and 3(31) of the Code read :

“3(30)”secured creditor” means a creditor in favour of whomsecurity interest is created; D3(31)”security interest” means right, title or interest or a claimto property, created in favour of, or provided for a securedcreditor by a transaction which secures payment orperformance of an obligation and includes mortgage, charge,hypothecation, assignment and encumbrance or any otheragreement or arrangement securing payment or performanceEof any obligation of any person:

Provided that security interest shall not include a performanceguarantee;”

28. The learned Solicitor General of India submitted that a readingFof Sections 3(30) and 3(31) of the IBC makes it clear that the finding ofthe NCLAT that the State is not a secured creditor is erroneous andcontrary to the clear definition of secured creditor under the IBC.

29. As argued by the learned Solicitor General, the term “SecuredCreditor” as defined under the IBC is comprehensive and wide enoughGto cover all types of security interests namely, the right, title, interest ora claim to property, created in favour of, or provided for a secured creditorby a transaction, which secures payment or performance of an obligationand includes mortgage, charge, hypothecation, assignment andencumbrance or any other agreement or arrangement securing paymentor performance of any obligation of any person.H

30. The learned Solicitor Generalrightly argued that in view of thestatutory charge in terms of Section 48 of the GVAT Act, the claim ofthe Tax Department of the State, squarely falls within the definition of“Security Interest” under Section 3(31) of the IBC and the State becomesa secured creditor under Section 3(30) of the Code.

31. Mr. Nataraj, Additional Solicitor General submitted that theAppellate Authority, NCLAT has held that the Tax Department of theState does not fall within the meaning of “Secured Creditor”. The NCLAThas, according to Mr. Nataraj, come to such a conclusion on the erroneouspremise that Section 48 of the GVAT Act, 2003, cannot prevail overSection 53 of the IBC.

32. The learned ASG argued that, it was not the case of theAppellant that Section 48 of the GVAT Act prevails over Section 53 ofthe IBC. It was the case of the Appellant that the State falls within thepurview of “Secured Creditor”.

33. The learned ASG submitted that the mere fact that a creditormight be an operational creditor would not result in loss of status of thatoperational creditor as a secured creditor. The finding of the AppellateAuthority is contrary to law and cannot be sustained.

34. The learned ASGpointed out that the Appellant had made itsclaim to the RP on 28.02.2018, long before the resolution plan wasapproved by the CoC under Section 30(4) of the IBC. Yet, the RP didnot include the claim in the Resolution Plan.

35. The learned ASG emphatically argued that the RP was obligedto receive, verify and collate claims and forward the same to theAdjudicating Authority for approval. The learned ASG cited SwissRibbons(P) Ltd. v. Union of India,[1 ]where this Court held that theResolution Professional does not have adjudicatory powers to accept orreject the claim. His duty is only to receive, verify and collate the claims.

36. Referring to Section 30(2) of the IBC, the learned ASG arguedthat the afore-mentioned provision mandates the RP to ensure that theResolution Plan conforms to the parameters/requirements laid down inthe said provision. It was the duty of the Resolution Professional toexamine, ensure and verify that the resolution plan conformed to theparameters/requirements laid down under Section 30(2) of the IBC.

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AFurther, Section 29 of the IBC casts a statutory duty and/or obligation onthe Resolution Professional to prepare the information memo afterfollowing the procedure laid down in the Court.

37. The learned ASG pointed out that under Section 29 of theIBC, the Resolution Professional is required to prepare the InformationBMemorandum. The Information Memorandum is mandatorily requiredto contain the details as mentioned in Regulation 36(2) of the Regulations,2016.

38. The learned ASG referred to Regulation 36(2) of theRegulations, 2016 which is set out herein below :- C“36. Information memorandum

(2) The information memorandum shall contain the followingdetails of the corporate debtor - (a) .....

D(b) the latest annual financial statements;

(c) audited financial statements of the corporate debtor forthe last two financial years and provisional financialstatements for the current financial year made up to a datenot earlier than fourteen days from the date of the application; E(d) ....

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(h) details of all material litigation and an ongoinginvestigation or proceeding initiated by Government andstatutory authorities; F

(i) ....

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(I)other information, which the resolution professional deemsrelevant to the committee.”

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39. The Adjudicating Authority (NCLT) and the AppellateAuthority (NCLAT) have held that the claim of the State is belated.Regulation 12 of the 2016 Regulations deals with the time period forsubmission of a claim along with proof, as stipulated in the publicannouncement under Section 15 of the IBC. The time period is, however,Hnot mandatory but only directory.

40. In the case of Vishal Saxena &Anr. v. Swami Deen GuptaResolution Professional[2], the NCLT took the view that the timestipulation in Regulation 12 for submission of a claim is directory and notmandatory. Similar view was also taken by the NCLT in its judgmentand order dated 10[th] June 2021 in Assistant Commissioner of Customsv. Mathur SabhapathyVishwanathan[3]. The rejection of the claim ofthe State is unsustainable in law.

41. Section 31 of the IBC which provides for approval of aResolution Plan by the Adjudicating Authority makes it clear that theAdjudicating Authority can approve the Resolution Plan only uponsatisfaction that the Resolution Plan, as approved by the Committee ofCreditors (CoC), meets the requirements of Section 30(2) of the IBC.When the Resolution Plan does not meet the requirements of Section30(2), the same cannot be approved.

42. In Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss AssetReconstruction Co. Ltd.[4], cited by the learned Solicitor General, thisCourt observed :- “64. It could thus be seen, that the legislature has givenparamount importance to the commercial wisdom of CoC andthe scope of judicial review by adjudicating authority is limitedto the extent provided under Section 31 of the I&B Code andof the appellate authority is limited to the extent providedunder sub-section (3) of Section 61 of the I&B Code, is nomore res integra.

65. Bare reading of Section 31 of the I&B Code would alsomake it abundantly clear that once the resolution plan isapproved by the adjudicating authority, after it is satisfied,that the resolution plan as approved by CoC meets therequirements as referred to in sub-section (2) of Section 30, itshall be binding on the corporate debtor and its employees,members, creditors, guarantors and other stakeholders. Sucha provision is necessitated since one of the dominant purposesof the I&B Code is revival of the corporate debtor and tomake it a running concern.

2(2020) SCC Online NCLT 2734

3 IBA/578/2019 NCLT, Chennai

4 (2021) 9 SCC 657

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A66. The resolution plan submitted by the successful resolutionapplicant is required to contain various provisions viz.provision for payment of insolvency resolution process costs,provision for payment of debts of operational creditors, whichshall not be less than the amount to be paid to such creditorsin the event of liquidation of the corporate debtor underBSection 53; or the amount that would have been paid to suchcreditors, if the amount to be distributed under the resolutionplan had been distributed in accordance with the order ofpriority in sub-section (1) of Section 53, whichever is higher.The resolution plan is also required to provide for the paymentCof debts of financial creditors, who do not vote in favour ofthe resolution plan, which also shall not be less than theamount to be paid to such creditors in accordance with sub-section (1) of Section 53 in the event of a liquidation of thecorporate debtor. Explanation 1 to clause (b) of sub-section(2) of Section 30 of the I&B Code clarifies for the removal ofDdoubts that a distribution in accordance with the provisionsof the said clause shall be fair and equitable to such creditors.The resolution plan is also required to provide for themanagement of the affairs of the corporate debtor afterapproval of the resolution plan and also the implementationEand supervision of the resolution plan. Clause (e) of sub-section (2) of Section 30 of the I&B Code also casts a dutyon RP to examine that the resolution plan does not contraveneany of the provisions of the law for the time being in force.”

43. The learned Solicitor General rightly argued that when aFgrievance was made before the Adjudicating Authority with regard to aResolution Plan, the Adjudicating Authority was required to examine ifthe Resolution Plan met the requirements of Section 30(2) of the IBC.The word “satisfied” used in Section 31(1) contemplates a duty on theAdjudicating Authority to examine the Resolution Plan – The ResolutionPlan cannot be approved by way of an empty formality.G

44. Section 61(3) of the IBC which stipulated the grounds forchallenge to the approval of a Resolution Plan, is set out hereinbelow forconvenience :- “61. Appeals and Appellate Authority.—(1)…H(2) …

(3) An appeal against an order approving a resolution planunder Section 31 may be filed on the following grounds,namely—

(i) the approved resolution plan is in contravention of theprovisions of any law for the time being in force;

(ii) there has been material irregularity in exercise of thepowers by the resolution professional during the corporateinsolvency resolution period;

(iii) the debts owed to operational creditors of the corporatedebtor have not been provided for in the resolution plan inthe manner specified by the Board;

(iv) the insolvency resolution process costs have not beenprovided for repayment in priority to all other debts; or

(v) the resolution plan does not comply with any other criteria specified by the Board.”

45. As rightly argued by the learned Solicitor General, there canbe no question of acceptance of a Resolution Plan that is not in conformitywith the statutory provisions of Section 31(2) of the IBC.Section 30(2)(b)of the IBC, casts an obligation on the Resolution Professional to examineeach resolution plan received by him and to confirm that such resolutionplan provides for the payment of dues of operational creditors, as specifiedby the Board, which shall not be less than the amount to be paid to suchcreditors, in the event of liquidation of the Corporate Debtor under Section53, or the amount that would have been paid to such operational creditors,if the amount to be distributed under the resolution plan had beendistributed in accordance with the order of priority in Sub-section 2 ofSection 53, whichever was higher, and provided for the payment of debtsof financial creditors, who did not vote in favour of the resolution plan, insuch manner as might be specified by the Board.

46. Under Section 31 of the IBC, a resolution plan as approved bythe Committee of Creditors under Sub-Section (4) of Section 30 mightbe approved by the Adjudicating Authority only if the AdjudicatingAuthority is satisfied that the resolution plan as approved by theCommittee of Creditors meets the requirements as referred to in Sub-Section (2) of Section 30 of the IBC. The condition precedent for approvalof a resolution plan is that the resolution plan should meet the requirementsof Sub-Section (2) of Section 30 of the IBC.

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A47. In Ebix Singapore Private Limited v. Committee ofCreditors of Educomp Solutions Limited and Another[5], this Courtaffirmed that Resolution Plans would have to conform to the statutoryprovisions of the IBC, and held:- “147. In terms of Regulation 39(4), the RP shall endeavourBto submit the resolution plan approved by the CoC before theadjudicating authority for its approval under Section 31 IBC,at least fifteen days before the maximum period for completionof CIRP. Section 31(1) provides that the adjudicating authorityshall approve the resolution plan if it is satisfied that itcomplies with the requirements set out under Section 30(2)CIBC. Essentially, the adjudicating authority functions as acheck on the role of the RP to ensure compliance with Section30(2) IBC and satisfies itself that the plan approved by theCoC can be effectively implemented as provided under theproviso to Section 31(1) IBC. Once the resolution plan isDapproved by the adjudicating authority, it becomes bindingon the corporate debtor and its employees, members,creditors, guarantors and other stakeholders involved in theresolution plan...”.

48. A resolution plan which does not meet the requirements ofESub-Section (2) of Section 30 of the IBC, would be invalid and not bindingon the Central Government, any State Government, any statutory orother authority, any financial creditor, or other creditor to whom a debt inrespect of dues arising under any law for the time being in force isowed. Such a resolution plan would not bind the State when there areoutstanding statutory dues of a Corporate Debtor.F

49. Section 31(1) of the IBC which empowers the AdjudicatingAuthority to approve a Resolution Plan uses the expression “it shall byorder approve the resolution plan which shall be binding...” subjectto the condition that the Resolution Plan meets the requirements of sub-section (2) of Section 30. If a Resolution Plan meets the requirements,Gthe Adjudicating Authority is mandatorily required to approve theResolution Plan. On the other hand, Sub-section (2) of Section 31, whichenables the Adjudicating Authority to reject a Resolution Plan whichdoes not conform to the requirements referred to in sub-section (1) ofSection 31, uses the expression “may”.H5 (2022) 2 SCC 401

50. Ordinarily, the use of the word “shall” connotes a mandate/binding direction, while use of the expression “may” connotes discretion.If statute says, a person may do a thing, he may also not do that thing.Evenif Section 31(2) is construed to confer discretionary power on theAdjudicating Authority to reject a Resolution Plan, it has to be kept inmind that discretionary power cannot be exercised arbitrarily, whimsicallyor without proper application of mind to the facts and circumstanceswhich require discretion to be exercised one way or the other.

51. If the established facts and circumstances require discretionto be exercised in a particular way, discretion has to be exercised in thatway. If a Resolution Plan is ex facie not in conformity with law and/orthe provisions of IBC and/or the Rules and Regulations framed thereunder,the Resolution would have to be rejected.It is also a well settled principleof interpretation that the expression “may”, if circumstances so demandcan be construed as “Shall”.

52. If the Resolution Plan ignores the statutory demands payableto any State Government or a legal authority, altogether, the AdjudicatingAuthority is bound to reject the Resolution Plan.

53. In other words, if a company is unable to pay its debts, whichshould include its statutory dues to the Government and/or other authoritiesand there is no plan which contemplates dissipation of those debts in aphased manner, uniform proportional reduction, the company wouldnecessarily have to be liquidated and its assets sold and distributed in themanner stipulated in Section 53 of the IBC.

54. In our considered view, the Committee of Creditors, whichmight include financial institutions and other financial creditors, cannotsecure their own dues at the cost of statutory dues owed to anyGovernment or Governmental Authority or for that matter, any otherdues.

55. In our considered view, the NCLAT clearly erred in itsobservation that Section 53 of the IBC over-rides Section 48 of theGVAT Act. Section 53 of the IBC begins with a non-obstante clausewhich reads :- “Not withstanding anything to the contrary contained in anylaw enacted by the Parliament or any State Legislature forthe time being in force, the proceeds from the sale of the A

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Aliquidation assets shall be distributed in the following orderof priority...........”

56. Section 48 of the GVAT Act is not contrary to or inconsistentwith Section 53 or any other provisions of the IBC. Under Section53(1)(b)(ii), the debts owed to a secured creditor, which would includeBthe State under the GVAT Act, are to rank equally with other specifieddebts including debts on account of workman’s dues for a period of 24months preceding the liquidation commencement date.

57. As observed above, the State is a secured creditor under theGVAT Act. Section 3(30) of the IBC defines secured creditor to mean aCcreditor in favour of whom security interest is credited. Such securityinterest could be created by operation of law. The definition of securedcreditor in the IBC does not exclude any Government or GovernmentalAuthority.

58. We are constrained to hold that the Appellate AuthorityD(NCLAT) and the Adjudicating Authority erred in law in rejecting theapplication/appeal of the appellant. As observed above, delay in filing aclaim cannot be the sole ground for rejecting the claim.

59. The appeals are allowed. The impugned orders are set aside.The Resolution plan approved by the CoC is also set aside. The ResolutionEProfessional may consider a fresh Resolution Plan in the light of theobservations made above. However, this judgment and order will not,prevent the Resolution Applicant from submitting a plan in the light ofthe observations made above, making provisions for the dues of thestatutory creditors like the appellant.

60. There shall be no order as to costs.F

Nidhi Jain(Assisted by : Shashwat Jain, LCRA)

Appeals allowed.

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