Payment of Stamp Duty vis-à-vis  Resolution Plan under Insolvency and Bankruptcy Code, 2016

Introduction

The Supreme Court vide judgment dated 15-11-2019, deliberated upon a concatenation of significant issues in the case concerning the Committee of Creditors (CoC) of Essar Steel India Ltd. v. Satish Kumar Gupta[1] under Insolvency and Bankruptcy Code, 2016[2] (IBC). The acquisition of Essar Steel had undergone proceedings under the Code for more than two years and eventually brought clarifications on multiple questions pertaining to the insolvency regime. The article is an attempt to unravel the answer to the issue of whether approval of a resolution plan under the Code results in extinguishment of stamp duty?

Background

The debt amounting to INR 55,000 crores was overdue from Essar Steel and these mounting non-performing assets (NPA) were critically affecting the banking system operations in India. Pursuant to the process of insolvency, in December 2019, a joint venture between ArcelorMittal India (P) Ltd. (ArcelorMittal) and Nippon Steel acquired Essar Steel.

The National Company Law Tribunal (NCLT) issued an order[3] wherein insolvency proceedings were initiated against Essar Steel on the admission of an application which was filed by Standard Chartered Bank and SBI. During its initial phase, resolution plans submitted by ArcelorMittal and Numetal Ltd. (Numetal) were found to be ineligible under Section 29-A[4] of the Code by NCLT order dated 4-10-2018.[5] Section 29-A of the Code states that:

A person or any other person acting in concert joint with such person is not eligible to submit a resolution plan if the person (a) is an undischarged insolvent; (b) in accordance with the guidelines of the RBI under Banking Regulation Act, 1949[6] is a wilful defaulter; or (c) at the time of submission of the resolution plan has an account or an account of a corporate debtor under the control and management of such person or of whom such person is a promoter, classified as NPA in accordance with the guidelines of RBI issued under the Banking Regulation Act, 1949.

The commencement of proceedings before the learned adjudicating authority and Appellate Tribunal

Through an order dated 8-3-2019,[7] NCLT partially approved the resolution plan proposed by ArcelorMittal and recommended CoC to consider the segregation of funds to reduce the discrimination between the creditors and enable higher recovery for the operational creditors with claim value more than Rs 1 crore.

The impugned judgment in this particular case applied the principle of equality. It elaborated that irrespective of the creditors being unsecured or secured, operational or financial, equitable treatment must be accorded to the creditors as they are essentially a group of creditors who are situated in a similar position and based on this, there should be no differences in terms of debt to be repaid to them.

The CoC placed due emphasis on the position of Standard Chartered and stated that it was placed distinctly in terms of other secured financial creditors because of the fact that it was not a direct lender to the company and its debt was secured by the way of a pledge and not in the form of a charge in the project assets of the company. In furtherance of this, vide judgment,[8] the National Company Law Appellate Tribunal (NCLAT) approved the resolution plan of ArcelorMittal and redesigned the manner of distribution of amount so that creditors, irrespective of their group and nature were treated equally.

The Supreme Court further set aside the NCLAT order because if the distinction between the groups of creditors in terms of secured or unsecured operational and secured or unsecured financial creditors is vitiated then the bankers would be hesitant to apply for IBC for stressed assets and they would certainly look for liquidation of the companies which lies in contradistinction to the objective of the Code. The line of distinction between secured and unsecured creditors is pertinent particularly in the banking area as a majority of lending is based on collateral.

Prevalence of creditor-driven process in Indian insolvency landscape

The Code provides the entire process for the corporate insolvency resolution process (CIRP) to find a path for maintaining the viability of the business before undergoing the liquidation process in case of no revival prospects of the corporate persons. The Code mandates that the whole process of CIRP should be completed within the stipulated time of 180 days or an extended period of additional 90 days. Therefore, in total, the CIRP process should be completed anyhow within 330 days, including the period of extension time taken and in the legal proceedings. The time-bound period of CIRP is in line with the objectives enshrined under the Code.

In the process of CIRP, a resolution applicant proposes potential solutions for the revival of the corporate debtor. It is contended that CoC occupies the position of driver’s seat for directing the entire CIRP process. This presumption is driven by the fact that the financial creditors are certainly not unaware of the viability of the corporate debtor and the underlining feasibility of the resolution plan because they are engaged in the money lending business and they always do a due diligence check as a part of their homework before providing loan to the corporate debtor. Therefore, the determination of the route of the corporate resolution process is carried out through the commercial wisdom of the majority of creditors with the prospective resolution applicant.[9] The Court clarified further that the business decision depends upon the CoC; however, sufficient emphasis must be provided to the objectives enshrined in the Code.

In Karad Urban Cooperative Bank Ltd. v. Swwapnil Bhingardevay[10] the Court focused on the primordial right in the hands of resolution applicant to receive substantial and complete information pertaining to the corporate debtor as the prospective resolution applicant suddenly cannot face “undecided” claims because it would cause uncertainty for the applicant who would soon take over the business of the corporate debtor. Through all the pointers mentioned above, it is clear that the process of CIRP should be concluded in a timely fashion, and complete information regarding corporate debtor must be made available in the hands of resolution applicant with final decision making bestowed on CoC.

Stamp duty implications on resolution plan

It is important to understand the ramifications of stamp duty on the resolution plan under the Code. The NCLT via order dated 8-3-2019,[11] rejected the claim of Essar Steel[12] due to the failure to pay requisite stamp duty on the documents and for non-completion of statutory formalities which were necessitated by the Stamp Act, 1899[13]. The Supreme Court also took into consideration this particular fact and rejected the claims on the basis of failure to make payment of respective statutory stamp duty.

Placing reliance on Monnet Ispat,[14] NCLT in the insolvency resolution case rejected its plea for exemption from stamp duty provisions on the transfer of assets pursuant to the resolution plan. In this case, an issue arose wherein an order was sought by the applicant for an exemption from the payment of stamp duty in respect of actions undertaken as per the final resolution plan. The Bench answered the question negatively and stated that in respect of reconstruction and amalgamation as envisaged in the resolution plan, there being no express provision conferring powers to exempt levying stamp duty upon this Bench, an exemption cannot be granted and there is no escape of the resolution applicant from paying taxes and other governmental dues. In furtherance to this, the pivotal case of Synergies Dooray Automotive Ltd. (SDAL)[15] can also be referred. The matter of the case deals a situation wherein Synergies Dooray was placed on the foothold of insolvency proceedings. The debt owed by the corporate debtor to its financial creditors was around Rs 972.15 crores however, the repayment according to the approved insolvency plan by CoC was of the amount Rs 50 crores, consequently an appeal was filed by Edelweiss ARC before NCLAT challenging the order of NCLT that approved SDAL’s resolution plan. The resolution plan also provided for the exemption from payment of stamp duty on the transfer of assets on amalgamation. The NCLAT order deduced upon the issue of statutory dues and whether these statutory dues relating to Central or State Government or legal authority come under the umbrella term of “operational creditors”?

While answering this, the Bench viewed the term “operational debt” as a debt arising during the operation of the company as a going concern. If company remains a going concern, and operational then such statutory liabilities such as income tax payment, VAT, etc. will arise and since, there is a direct nexus between the two, such statutory dues come within the ambit of “operational dues”. The Bench ordered SDAL to pay full payment pertaining to the statutory dues in a staggered manner. In the similar vein, stamp duty is in the nature of a tax which is congruent to sales tax and the income tax collected by the government authorities therefore, it is in the nature of a statutory due. A stamp duty is an important aspect which reflects the evidentiary value of the documents in the court of law and therefore, in the case of Essar Steel[16], by rejecting the claims due to non-payment of requisite stamp duty, the Court had taken a right step.

Analysis

The skeleton of the entire CIRP is formed by a resolution professional, and the Supreme Court substantiated that the roles and responsibilities of a resolution professional entail collection, collation, and admission of claims without getting into the skin of an adjudicatory role. All the claims which are collected are then fully negotiated and decided by the CoC. Theoretically, it may be possible for a resolution professional to restrict to a non-adjudicatory function; however, the restriction seems difficult to follow in practice. Once the determination of the issue pertaining to the going concern of the corporate debtor has been placed before CoC, and it is taken into consideration by the CoC, and CoC takes a conscious decision for the resolution plan, then the adjudicating authority will have to transit to hands-off mode.

The claim of the Essar Steel was rejected by the resolution professional as there was a failure to furnish proof of making payment of requisite stamp duty pursuant to Stamp Act on behalf of the Essar Steel despite repeated reminders to them. Though the proposition is not clear enough on the issue concerning treatment of pending stamp duty on approval of resolution plan, however the stamp duty being in the nature of income tax, and VAT should be considered in line as a statutory due.

The NCLT vide order dated 8-3-2019[17] rejected the subsequent restoration of the application, which was filed by the Essar Steel on the basis of dual grounds claiming that at the belated stage, the application should not be considered and there is no merit in the claim on the failure to produce duly stamped agreements. For the working of the Bankruptcy Code, speed is of the essence and can be attributed to two reasons. Firstly, the claim period is the time where the organisation is afloat without the clarity of control and ownership and hence, during this period no significant decisions are taken. In addition, the liquidation value has the propensity to go down in a situation wherein assets suffer from high economic rate of depreciation. From the creditor’s perspective, good realisation can be carved out provided the firm is sold as a going concern. In the cases of liquidation, delay causes value destruction.[18] Therefore, the stand taken by the Supreme Court is sustainable because the entire objective of the Code rests on the premise of timely resolution for the revival of the company and belated claims made at the final hour should not be entertained because it goes contrary to the objective of the IBC.

Conclusion

Various beneficial outcomes stemmed from the pronouncement of Essar Steel case.[19] The most significant outcome is that the objectives of IBC were unequivocally reaffirmed. The judicial pronouncement also conveyed a clear message to the promoters of the defaulting companies that they could no longer take defaults lightly and there was a real threat and possibility of them losing their companies. The treatment of stamp duty was appreciable in the instant case because the claim was made on a belated stage and entertaining such issue lately despite reminders provided does not justify the act of considering the issue and secondly, the levying of stamp duty being a State subject is also revenue for the government exchequer. There being no express provision to non-application of stamp duty, the courts cannot and should not go beyond the letters of law. This essentially facilitates the establishment of the principles of the Code and deepen its roots.


Principal Associate at Saraf & Partners, New Delhi.

†† Student, National Law University, Nagpur.

[1] (2020) 8 SCC 531.

[2] <http://www.scconline.com/DocumentLink/86F742km>.

[3] Standard Chartered Bank v. Essar Steel India Ltd., 2017 SCC OnLine NCLT 10751.

[4] Section 29-A, Insolvency and Bankruptcy Code, 2016

[5] Arcelormittal India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1.

[6] The Banking Regulation Act, 1949.

[7] Resolution Professional for Essar Steel India Ltd., In re,  2019 SCC OnLine NCLT 750.

[8] Standard Chartered Bank v. Satish Kumar Gupta, 2019 SCC OnLine NCLAT 388.

[9] K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150

[10] (2020) 9 SCC 729

[11] Resolution Professional for Essar Steel India Ltd., In re,  2019 SCC OnLine NCLT 750.

[12] 2017 SCC OnLine NCLT 10751.

[13] The Stamp Act, 1899

[14] SBI v. Monnet Ispat & Energy Ltd., 2018 SCC OnLine NCLT 23789

[15] Director General of Income Tax v. SDAL, 2019 SCC OnLine NCLAT 691

[16] Resolution Professional for Essar Steel India Ltd., In re,  2019 SCC OnLine NCLT 750.

[17] Resolution Professional for Essar Steel India Ltd., In re,  2019 SCC OnLine NCLT 750.

[18] Institute for Policy Research Studies, Report Summary: The Financial Sector Legislative Reforms Commission, 2013.

[19] (2020) 8 SCC 531.

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