GST Claim - Trust funds or Statutory Dues (Operational Debt) in IBC

 GST Claim - Trust funds or Statutory Dues (Operational Debt) in IBC. 

1.  Usually, GST claim in CIRP or Liquidation Process has the following components;

1. GST charged in invoices by the CD & collected from the customers by CD and not remitted or credited in Govt. Account.

2. GST charged in invoices by the CD, but not yet realised/collected from the customers.

3. Interest & penalties imposed by the GST authorities for non/delayed  payment of GST collected/charged into Govt. Account.

4. Interest & penalties imposed by the GST authorities for non/delayed  filing of GST/Statutory returns with the GST Authorities.

2. Provisions of the Code for Trust funds;

2.1. During Corporate Insolvency Resolution Process(CIRP).

# 18. Duties of interim resolution professional. -

The interim resolution professional shall perform the following duties, namely: -

XXXX

(f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including -

XXXX

Explanation. – For the purposes of this section, the term “assets” shall not include the following, namely: -

(a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment;

XXXX

2.2. During Liquidation Process;

# 36. Liquidation estate. -.

(1) For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.

XXXX

(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: -

(a) assets owned by a third party which are in possession of the corporate debtor, including -

(i) assets held in trust for any third party;

XXXX

2.3. From the above provisions it is quite clear that funds held in trust by CD neither form part of the assets of the CD, nor form part of the Liquidation Estate & thus are to be returned/paid to the owner of such funds (Trust funds).

2.4. Though GST laws in India are silent on this aspect but in Canada Subsection 222(1) of the ETA (Excise Taxation Act.) provides that GST or HST collected but not remitted is deemed to be held in trust by the collector for the Crown.

2.5. In my opinion the GST department can ask/direct that the GST charged in invoices by the CD & collected from the customers by CD and not remitted or credited in Govt. Account be treated as trust funds in the hands of CD/IRP/RP/Liquidator, for which no claim is required to be filed by the GST department. These trust funds are required to be paid by CD/IRP/RP/Liquidator in priority to the payment to a creditor/stakeholder under Resolution Plan or Liquidation process under section 53.

3. Case Laws;

3.1. Supreme Court (17.07.2023) In Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Pvt. Ltd. & Ors.[Civil Appeal Nos. 7976 of 2019, (2023) ibclaw.in 81 SC] held that;

• # 46. The specific mention of other class of creditors whose dues are statutory, such as dues payable to workmen or employees, “the provident fund, the pension fund, the gratuity fund” under Section 36(4), which excludes these enumerated amounts from the liquidation, especially clarifies that not all dues owed under statute are treated as ‘government’ dues. In other words, dues payable to statutory corporations which do not fall within the description “amounts due to the central or state government” such as for instance amounts payable to corporations created by statutes which have distinct juristic entity but whose dues do not constitute government dues payable or those payable into the respective Consolidated Funds stand on a different footing. Such corporations may be operational creditors or financial creditors or secured creditors depending on the nature of the transactions entered into by them with the corporate debtor. On the other hand, dues payable or requiring to be credited to the Treasury, such as tax, tariffs, etc. which broadly fall within the ambit of Article 265 of the Constitution are ‘government dues’ and therefore covered by Section 53(1)(f) of the IBC

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3.2. High Court Jharkhand (2020.05.01) in  Electrosteel Steels Limited  V/s The State of Jharkhand & Ors.  [W.P.(T). No. 6324 of 2019] held that;

• # 22. We however, find force in the submissions of the learned Additional Advocate General that the tax amount, which had been sought to be realised from the petitioner Company, had already been realised by the petitioner Company from the customers which was to be deposited in the Government Exchequer, but that having not been done by the Company and the amount having been utilized for its business purposes, throughout after the years 2011-12 and onwards, shall certainly amount to criminal misappropriation of the Government money by the Company, and the State Government is entitled to realize the same with the penalty due thereon.

• # 23. There is yet another aspect of the matter. The amount of VAT must have already been realised by the petitioner Company from the customers. In that view of the matter, it is debatable whether the amount of VAT shall be covered by the expressions "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", so as to bring it within the definition of "operational debt", as defined in the IB Code. This Tax liability can very well be treated as the amount of tax already realised by the petitioner Company from its customers, on behalf of the State Government, and not the direct debt of the petitioner Company towards the State Government, in which case the tax liabilities of the petitioner Company, for realising which the impugned garnishee order has been issued, may not come within the definition of "operational debt", as defined in the IB Code. The decisions cited by learned counsel for the petitioner in Embassy Property Developments Pvt. Ltd.'s case (supra) and in Monnet Ispat and Energy Ltd.'s case (supra), are of no help to the petitioner Company, as they related to Income Tax dues, which were the direct debts of the corporate debtors in those cases.

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Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. One must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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