Jagmeet Singh Sabharwal & Ors vs Rubber Products Ltd. & Ors

Jagmeet Singh Sabharwal & Ors. ...Appellants Versus Rubber Products Ltd. & Ors. ...Respondents Present : For Appellants: Ms. Varsha Banerjee, Advocate

For Respondents: Mr. Sachindra Moh and Ms. Megna Rao, Advocates For Respondent No. 2

Mr. Dhaval Deshpande, Advocate for Intervenor

ORDER

11.06.2019 This appeal has been preferred by Mr. Jagmeet Singh

Sabharwal & Ors. (Successful Resolution Applicant) against part of the order

dated 19th February, 2019 passed by the Adjudicating Authority (National

Company Law Tribunal), Mumbai Bench in M.A. No. 1039/2018 in C.P. (I.B.) -

1686(MB)/2017 whereby the 'resolution plan' submitted by the Appellant has

been approved with the following modifications :

"17.0 Although this Resolution Applicant is seeking

waiver in respect of number of liabilities, however,

the same should be restricted to those government

liabilities which are ascertained and crystalized as

on the date when the CIRP commenced. On

commencement of CIRP due to pronouncement of

moratorium if any tax is levied, the same requires

waiver. For rest of the tax demand a reliance is 2

placed on a decision of NCLT, Chandigarh Bench in

the case of "State Bank of India vs. Mor Farms

Pvt. Ltd." dated 15.06.2018 in CA Nos. 71/2018

& 171/2018 in CP(IB) - 51/Chd/Hry/2017

wherein waiver is granted in respect of tax dues.

Although the question of waiver has been dealt

with in this order by the respected Coordinate

Bench, NCLT, Chandigarh. However, an important

aspect is to be kept in mind that the petition in this

case has moved u/s 10 of the Insolvency Code to

declare itself insolvent. In other words, the

petitioner is seeking waiver in respect of all the

statutory taxes & liabilities for the period during

which the same management was at the helm of

the affairs and liable for statutory compliances.

The important point which requires due

consideration is that the Resolution Plan is also

now submitted by the entity/ resolution applicant

who has nexus with the Corporate Debtor.

Therefore, while placing reliance on the decision of

respected Coordinate Bench, this aspect requires

due consideration."

2. The learned counsel appearing on behalf of the Appellant has grievance

against the aforesaid part of the modified order on the ground that the claim

with regard to the additional Government Dues of Rs. 14 Crores were added by

Company Appeal (AT)(Ins) No. 405 of 2019 3

the Adjudicating Authority, the claim which was not before the 'Resolution

Professional' nor shown in the 'Information-Memorandum'. It is submitted that

whatever claim was made towards the statutory dues, i.e. dues arising out of

existing law, were taken into consideration and the 'Resolution Applicant' made

suitable provision for such dues. Therefore, according to the Appellant,

additional burden of Rs. 14 Crores has been levied on the 'Resolution Applicant'

without any basis. Learned counsel for the Appellant further submits that the

Adjudicating Authority wrongly held that the resolution applicant has nexus with

the 'Corporate Debtor'.

3. On earlier date, on hearing the learned counsel for the Appellant and the

learned counsel appearing on behalf of the 'Resolution Professional', we

expressed our view that the 'Resolution Applicant' can prepare a chart of re-

distribution amount to all the stakeholders including the debt payable to the

Central Government, State Government or local authorities. It was also agreed

on behalf of the Appellant that they may increase some amount for re-

distribution of the assets to stakeholders such as 'Financial Creditors',

'Operational Creditors' and 'Others'. Pursuant to such observations, the revised

re-distribution chart has been furnished by the 'Resolution Applicant.

4. Mr. Dhaval Deshpande, Advocate filed an Interlocutory application on

behalf of the 'Fouress Engineering (India) Pvt. Ltd.'. He submits that 'Fouress

Engineering (India) Pvt. Ltd.' has also filed a claim as 'Financial Creditor' for a

sum of Rs. 74,68,798/- ; another claim was also filed as 'Operational Creditor'

of Rs.3,64,653/- and another claim was filed as 'other creditor' for a sum of

Rs.74,80,492/-. He further submits that Intervenor - ''Fouress Engineering

(India) Pvt. Ltd.' is also a shareholder of the 'Corporate Debtor'. In the case of

Company Appeal (AT)(Ins) No. 405 of 2019 4

the 'Pr. Director General of Income Tax (Admn. & TPS) Vs. M/s. Synergies

Dooray Automotive Ltd. & Ors.' - in 'Company Appeal (AT) (Insolvency) No.

205 of 2017', this Appellate Tribunal held that the debt payable to Central

Government, State Government or Local Authority is 'Operational Debt', relevant

of which reads as follows:

"28. From the plain reading of sub-section (21) of Section

5, we find that there is no ambiguity in the said

provision and the legislature has not used the word

'and' but chose the word 'or' between 'goods or

services' including employment and before 'a debt

in respect of the payment of dues arising under any

law for the time being in force and payable to the

Central Government, and State Government or any

local authority'.

29. 'Operational Debt' in normal course means a debt

arising during the operation of the Company

('Corporate Debtor'). The 'goods' and 'services'

including employment are required to keep the

Company ('Corporate Debtor') operational as a

going concern. If the Company ('Corporate Debtor')

is operational and remains a going concern, only in

such case, the statutory liability, such as payment

of Income Tax, Value Added Tax etc., will arise. As

the 'Income Tax', 'Value Added Tax' and other

statutory dues arising out of the existing law, arises

Company Appeal (AT)(Ins) No. 405 of 2019 5

when the Company is operational, we hold such

statutory dues has direct nexus with operation of

the Company. For the said reason also, we hold

that all statutory dues including 'Income Tax',

'Value Added Tax' etc. come within the meaning of

'Operational Debt'.

30. For the said very reason, we also hold that 'Income

Tax Department of the Central Government' and the

'Sales Tax Department(s) of the State Government'

and 'local authority', who are entitled for dues

arising out of the existing law are 'Operational

Creditor' within the meaning of Section 5(20) of the

'I&B Code'."

5. In view of the aforesaid position of law, we are of the view that the

'Resolution Applicant' is required to provide the same treatment to all the

'Operational Creditors', who are equally situated.

6. The 'Operational Creditor' is defined in Section 5(20) which read with

'Operational Debt' as defined in Section 5(21), read as follows:

" (20) "operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

(21) "operational debt" means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central

Company Appeal (AT)(Ins) No. 405 of 2019 6

Government, any State Government or any local authority;"

7. From the definition of the 'Operational Debt' it is clear that there are 3

types of 'Operational Creditors', namely:-

(i) Those who supplied goods and/or rendering services to the

'Corporate Debtor';

(ii) Employees of the 'Corporate Debtor'; and

(iii) The debt payable under the existing law to the Central

Government or State Government or local authority.

The 'Operational Creditors' who were supplying goods or rendered services

including employees are investing money for keeping the company operational.

Employees are also working to keep the company operational, therefore, they are

class in themselves.

8. On the other hand, the Central Government or State Government, they do

not invest any money nor render any services but derive advantage of operation

by claiming of the debt on the basis of the existing law (statutory debt).

Therefore, classification is made between - (i) those 'Operational Creditors' who

were employees; (ii) those who were suppliers of goods or rendering services by

investing money and (iii) the Central Government or State Government or local

authority, who only claim the statutory debt. Resolution plan cannot be

arbitrary or discriminatory amongst class of such 'Operational Creditors'. Only

the same treatment is to be made.

9. The original 'distribution chart' of the 'Resolution Applicant' showing the

distribution is as under:

Company Appeal (AT)(Ins) No. 405 of 2019 7

TABLE-1

(a) Distribution Chart of the Resolution Applicant as proposed in the Resolution Plan

Sr. Particulars Amount Amount % to the No. Admitted Proposed by Admitted by RA dues RP

1. CIRP Cost 62.00 62.00 100

2. Workmen dues Admitted claim 221.76 221.76 100 Workmen dues as mentioned by RP from 12.43 12.43 100 Books of accounts in IM 234.19 234.19

3. Employee dues Admitted claim 56.42 56.42 100 Employee dues as mentioned by RP from 9.25 9.25 100 Books of accounts in IM 65.67 65.67

4. Secured Financial Creditor - SBI 465.26 465.26 100

5. Unsecured Financial Creditor - Promoter 505.85 505.85 100 Group

6. Operational Creditors - Trade Payables 233.56 233.56 100

7. Operational Creditors and Other 78.46 78.46 100 Creditors-

Promoter Group

8. Operational Creditor - Government dues Admitted claim 88.09 88.09 100 Government dues as mentioned by RP 99.42 99.42 100 from Books of accounts in IM 187.51 187.51

9. Equity Shareholder@ 7.15 Rs per share 0.00 292.50

10. Grade Total 1832.50 2125.00

Company Appeal (AT)(Ins) No. 405 of 2019 8

b) Detailed breakup of Operational Creditors-Statutory dues as Mentioned in Sr. No. 8 in

Sr. Particulars Amount Amount % of No. Earlier proposed amount Claimed/ To be paid claimed Due /due A Statutory Dues related to workmen and Employee Dues 1. Provident Fund 44.77 44.77 100 2. Projected Interest and damages on PF 0 0 100 Liability

3. Maharashtra Labour Welfare Fund 0.24 0.24 100

4. Employee State Insurance Corporation 9.33 9.33 100 5. Profession Tax 21.53 21.53 100 Subtotal 75.87 75.87 B Other Statutory Dues 1. Tax deducted at Source 10.94 10.94 100

2. Value added Tax & Central State Tax 12.19 12.19 100 3. Excise 78.84 78.84 100 4. The Rubber Board 0.61 0.61 100 5. Good & Service Tax 3.10 3.10 100 6. Service Tax 5.01 5.01 100 7. Tax Collected at Source 0.29 0.29 100

8. TNGST 0.73 0.73 Sub total 111.73 111.71 Total 187.6 187.58 -

Now in view of aforesaid position of law, the 'resolution applicant' has filed the

'Revised Redistribution Chart', as follows:

TABLE-2

a) Revised New Redistribution chart as proposed by the RA after approval of the Resolution Plan

Sr. Amount as Amount % No. Particulars due and Proposed payable as By RA on date

1. CIRP Cost 62.43 62.43 100.00

2. Workmen dues 234.19 234.19 100.00

Company Appeal (AT)(Ins) No. 405 of 2019 9

3. Employee dues 65.67 65.67 100.00

4. Secured Financial Creditor -SBI 465.26 465.26 100.00

5. Unsecured Financial Creditor -Promoter 505.85 505.85 100.00 Group

6. Operational Creditors - Trade Payables 233.56 165.39 70.81

7. Operational Creditors and Other 78.46 55.29 70.47 Creditors- Promoter Group

8. Operational Creditor - Government dues 1643.87 596.92 36.31

9. Equity Shareholder @ 7.15 Rs per share 292.5 0.00 0.00

10 Grand Total (1to 9) 2125.00 2151.00

b) Detailed breakup of Operational Creditors - Government Dues as mentioned in Sr. No. 8

Sr. Amount Amount Redistributed % of No. Particulars claimed/ earlier Amount now redistri Demande proposed to proposed to -buted d (Post be paid be paid by RA Pay-

NCLT ment Approval) A Government Dues related to Workmen and Employee Dues 1 Provident Fund 62.43 44.77 62.43 100

2 Projected Interest and 50.00 0 50.00 100 Damages on PF Liability 3 Maharashtra Labour 0.24 0.24 0.24 100 Welfare Fund 4 Employee State 9.33 9.33 9.33 100 Insurance Corporation 5 Profession Tax 21.53 21.53 21.53 100 Subtotal 143.54 75.87 143.54 B Other Government Dues 1 Customs 384.84 0 116.29 30.22

2 Tax deducted at 15.85 10.94 4.79 30.22 Source 3 Value added Tax & 736.29 12.19 222.5 30.22 Central State Tax

Company Appeal (AT)(Ins) No. 405 of 2019 10

4 Excise 353.4 78.84 106.79 30.22

5 The Rubber Board 0.82 0.61 0.25 30.22

6 Goods & Service Tax 3.1 3.1 0.94 30.22

7 Service Tax 5.01 5.01 1.51 30.22

8 Tax Collected at 0.29 0.29 0.09 30.22 Source

9. TNGST 0.73 0.73 0.22 30.22

Sub total 1,500.34 111.73 453.38

Total 1,643.88 187.6 596.92 -

10. From the Re-distribution Chart, we find the workmen dues, employee

dues paid 100% and others like 'Secured Financial Creditor' and 'Unsecured

Financial Creditor (Promoter)' paid 100%. The other 'Operational Creditors'

like 'supplier of goods' or 'rendered services' have been paid 70.81 %. The

'Operational Creditor' and 'other creditors' - 'Promoter Group' like 'Fouress

Engineering (India) Pvt. Ltd.' allocated 70.47% of dues. On the other hand,

the debt payable to the Central Government or State Government etc. they

have been paid 36.31%. We are of the view that the aforesaid classification

between the 'employees', 'Operational Creditors' who have supplied goods or

rendered services and the 'Operational Creditors' like Government dues i.e.

debt payable to the Central Government or State Government etc. is rational

and correct. We have noticed that those employees who have rendered

services to keep the company a going concern even during the 'Corporate

Insolvency Resolution Process', the supplier of the goods and those who

rendered services have also invested money for keeping the company

operational. On the other hand, the Central Government or State

Company Appeal (AT)(Ins) No. 405 of 2019 11

Government, only derive the advantage of the existing law, claiming without

supplying any goods or rendering any services. So far as the inventory of

'Fouress Engineering (India) Pvt. Ltd.' is concerned, it is equated with all the

similar placed 'Operational Creditors' therefore it cannot allege

discrimination. So far as the 'Shareholders' or 'Promoters' are concerned

because of their failure the 'Corporate Insolvency Resolution Process' got

initiated against the 'Corporate Debtor' and 'Successful Resolution Applicant'

pays the dues to all the creditors on behalf of the 'Corporate

Debtor'/'Promoters'/'Shareholders'. In lieu of such payment, it is always open

to the 'Successful Resolution Applicant' to claim transfer of shares of

'Shareholders'/'Promoters' in its favour.

11. Section 29A is the ineligibility clause which deals with question as to

who are ineligible to file 'resolution plan'. As per said provision any persons

who act jointly or in concert with such person if fall within any of the clause

as mentioned therein (Clause (a) and (j) ) are ineligible to file 'resolution plan'.

It is not the case that the 'Resolution Professional' or the 'Committee of

Creditors' or that the Adjudicating Authority found the 'Resolution Applicant'

to be ineligible under Section 29A. In absence of any such evidence, it was

not open to the Adjudicating Authority to observe that the Appellant has a

nexus with the 'Corporate Debtor'.

12. For the reasons aforesaid, we set aside the aforesaid part of the

observation as made by the Adjudicating Authority at Paragraph 17 of the

impugned order dated 19th February, 2019 and modify the impugned order

by substituting the revised manner of distribution as quoted above. However,

Company Appeal (AT)(Ins) No. 405 of 2019 12

the other terms & conditions of the related plan will remain same including

the period for upfront payment etc.

13. For the reasons aforesaid, we modify the impugned order dated 19th

February, 2019 and substitute the manner of distribution as shown in the

'Resolution Plan' with the 'Revised distribution' as noted above. All the

stakeholders will be bound by the 'Revised distribution' and other terms and

condition of the 'Resolution plan'.

The appeal is allowed with aforesaid observations and directions.

[Justice S.J. Mukhopadhaya] Chairperson

[Justice A.I.S. Cheema] Member (Judicial)

[Kanthi Narahari] Member (Technical)

ns/sk/

Company Appeal (AT)(Ins) No. 405 of 2019