Crown debts which are not part of Resolution Plan under IBC cannot be enforced: Karnataka High Court

Crown debts do not take precedence even over secured creditors under the Insolvency and Bankruptcy Code (IBC) since Section 238 of IBC provides for overriding effect of IBC over other laws, the Karnataka High Court held. .Therefore, if the Central or State departments do not file an application to recover debts or participate in the resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC), then their claims get extinguished automatically, the Court ruled. "It is noted that crown debts do not take precedence even over secured creditors, who are private persons. This is clear on a reading of Section 238 of “IBC” which provides for the overriding effect of “IBC” notwithstanding anything inconsistent contained in other law for the time being in force or effect by any such law. Therefore, if the departments of Central or State Governments do not file an application or participate in the resolution process, their claims automatically get extinguished having regard to the judgment of the Hon’ble Supreme Court in the case of Ghanashym Mishra," the judgment said. The judgment was delivered by a Bench of Justices BV Nagarathna and Hanchate Sanjeev Kumar on an appeal filed by the Central government against a judgment of a single-judge. The single-judge had ruled that the respondent, Ruchi Soya Industries would be liable to pay import duty only at 7.5 percent based on a 2012 notification and not 12.5 percent based on a 2015 notification. .The respondent was subjected to insolvency proceedings under the provisions of IBC and by an order dated December 8, 2017, the National Company Law Tribunal, Mumbai (NCLT) admitted the petition filed. Thereafter, a public notice inviting claims from all the creditors of the respondent was issued by the Interim Resolution Professional on December 21, 2017. No claim was filed by the appellant department in the said proceedings. A resolution plan was submitted by the consortium of Patanjali Ayurved Limited, Divya Yog Mandir Trust and Patanjali Gramudhyog Nyas with the resolution professional. The resolution plan was approved by the Committee of creditors of the respondent shortly as per Section 30(4) of the IBC and orders were passed by the adjudicating authority in terms of Section 31 of IBC.The appellant sought to challenge this as it wanted to recover its import duty from the corporate debtor. Therefore, it approached the High Court claiming that it was an operational debtor.The respondent company argued that the dues claimed by the department arose in the year 2015, which was prior to the approval of the resolution planUnless and until the said dues are made part of the resolution plan, the same cannot be recovered, the respondent submitted.They also placed heavy reliance on the judgment of the Supreme Court in Ghanashyam Mishra and Sons Private Ltd v. Edelweiss Asset Reconstruction Company.In the said case, the Supreme Court had ruled that once a resolution plan is approved by the Adjudicating Authority under Section 31(1) of the of Insolvency and Bankruptcy Code, 2016 all claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan.Such a resolution plan, the top court had ruled, will be binding on all creditors, including the Central government, any State government or any local authority, guarantors and other stakeholders.In the instant case, the due claimed by the Central government came within the scope of "operational debt" and the Central government would, therefore, be "operation creditor" under Section 5(20) of the IBC. In such an event, unless the dues owed to the Central government are made part of the resolution plan, it would extinguished, the respondent said. .The High Court accepted the contention noting that the same was in tune with what was held by the Supreme Court in Ghanashyam Mishra case. The Court observed that the Supreme Court had ruled that any claim prior to the approval of the resolution plan cannot be continued and would stand extinguished, if not made a part of the plan. Crown debts do not get precedence under IBC, the Court made it clear.Thus, claims which are not part of the resolution plan, shall stand extinguished, noted the High Court dismissing the appeal. .The Court also turned down the argument of the Central government on merits regarding the levy of extra duty based on 2015 notification. .[Read Order]