Hon'ble Supreme Court renders Govt. toothless to recover Taxes & dues.

A recent judgement of the Hon’ble SCI has gone unnoticed, which has vast implications  on the recovery of Govt. taxes & dues. While deciding the issue of limitation for filing application under IBC, 2016, in the matter of Gaurav Hargovindbhai Dave,Vs. Asset Reconstruction Company (I) Ltd [ Civil appeal 4952 of 2019], Hon’ble SCI observed as under;

• # 6. Having heard the learned counsel for both sides, what is apparent is that Article 62 (of the Limitation Act) is out of the way on the ground that it would only apply to suits. The present case being “an application” which is filed under Section 7, would fall only within the residuary article 137 (of the Limitation Act). As rightly pointed out by learned counsel appearing on behalf of the appellant, time, therefore, begins to run on 21.07.2011, as a result of which the application filed under Section 7 would clearly be time-barred.

With the above ruling Hon’ble SCI, decided that for initiating  action under the Code (IBC, 2016) limitation period is of three years from the date of default by the debtor, irrespective of limitation period which might have been available i.e. 12 years for filing of mortgage suit (Article 62 of the Limitation Act.). Hon’ble SCI in its above judgement did not give the benefit of the sun-set clause. However the benefit of sun-set clause would have been available upto 30.11.2019, as IBC was implemented w.e.f. 01.12.2016.

Now let’s take a look at the various provisions of the Code (IBC. 2016).

# Section 2. Application. – The provisions of this Code shall apply to;

(a) any company incorporated under the Companies Act, 2013 (18 of 2013) or under any previous company law;

(b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;

(c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008 (6 of 2009);

# Section 3. Definitions. –

(6) “claim” means –

(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured;

(10) “creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder;

(11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

(12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;

# Section 5. Definitions. – 

(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 Government, any State Government or any local authority;

# Section 6. Persons who may initiate corporate insolvency resolution process. –

Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter.

# Section 63. Civil court not to have jurisdiction. No civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which National Company Law Tribunal or the National Company Law Appellate Tribunal has jurisdiction under this Code. Civil court not to have jurisdiction

# Section 238. Provisions of the Code to override other laws.The provisions of this code shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

Under the Code (IBC, 2016) the dues of Govt. (Taxes or other dues under any law) have been defined as operational debt of the company & Govt. as operational creditor.  Upon default by the company in payment of Govt. dues (operational debt), action against the company can be initiated by an operational creditor (Central Government, any State Government or any local authority)  only under the provisions of the code, due to non-obstante clauses, section 63 & 238 of the Code. With the above judgement of the Hon’ble SCI, the limitation period for initiation of action under the Code is  3 years. Thus the concepts of “Sovereign Dues” & “Recovery as Land Revenue” have been left meaningless with the implementation of the Code. Further Govt. can not adopt any coercive actions, such as arrests etc. as the Code does not provide for the same for recovery of dues in default.

 

'Disclaimer: The sole purpose of this article  is of  creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this article.