In this article, we will unpack the inconsistent positions taken by the Supreme Court and the NCLAT while interpreting the same set of provisions of the Insolvency and Bankruptcy Code (IBC). First, the importance of the moratorium will be analyzed. Second, the extent to which the moratorium can restrain authorities created under respective statutes like the Customs Act and Employees’ Provident Funds Act will be examined. Third, based on the analysis, we will determine whether the judicial authorities have indeed taken contrary views on the same points.
Introduction
The IBC was introduced to consolidate laws related to insolvency. Corporate Insolvency Resolution Process can be initiated by financial creditor, operational creditor or corporate debtor under section 7, 9 or 10 of the code respectively. Once insolvency application is admitted by the Adjudicating Authority, moratorium under section 14 of the code kicks in which ensures that no coercive proceedings are continued or instituted against the corporate debtor until approval of a resolution plan or initiation of the liquidation process.
Moratorium Under Sections 14 and 33(5) of IBC
One of the primary focuses of the moratorium is to keep the assets of the corporate debtor intact and ensure the orderly completion of the process envisaged under the code. This also ensures that the parallel proceedings are curtailed which could have led to conflicting outcomes.
The Insolvency Law Committee, in its 2020 report, after referring to the UNCITRAL Guide, observed that “a moratorium is critical during reorganization proceedings since it facilitates the continued operation of the business and allows the debtor a breathing space to organize its affairs, time for preparation and approval of a reorganization plan and for other steps such as shedding unprofitable activities and onerous contracts, where appropriate.”
On a plain reading of the subsections of Section 14 of the Code, it is clear that the primary purpose of this section is to shield the corporate debtor from pecuniary attacks. This provision is designed to provide the corporate debtor with a “breathing space,” enabling it to operate as a going concern and work toward its rehabilitation.
Even when the corporate debtor is ordered to undergo liquidation, the moratorium remains in effect. Section 33(5) of the Code specifies that no suit or other legal proceedings shall be initiated by or against the corporate debtor. However, the proviso to this subsection grants the liquidator the authority to initiate suits or other legal proceedings on behalf of the corporate debtor, subject to prior approval from the Adjudicating Authority.
Whether IBC Shall Prevail Over Customs Act
This question came up for consideration before the Supreme Court in Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, where customs authorities sought to sell the assets of the corporate debtor after the initiation of insolvency proceedings. The Court noted that no notices regarding customs dues were issued before the admission of the corporate debtor into insolvency. Therefore, such actions are clearly barred once the CIRP is initiated against the corporate debtor under Section 14 of the Code. The Court also noted that Section 142A of the Customs Act further supports this conclusion. It states that customs authorities will have the first charge over the assets of an assessee, except in cases under Section 529A of the Companies Act, 1956, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and the IBC.
Accordingly, this exception created under the Customs Act is duly acknowledged under Section 238 of the IBC, which provides an overriding effect to the provisions of the Code over any other law for the time being in force. Although the Customs Act and the IBC operate within their respective domains, in case of a conflict between the two statutes, the former must yield to the IBC.
The Court observed that demand notices under Section 72 of the Customs Act cannot be issued after the initiation of insolvency proceedings, as the moratorium under Section 14 would be in operation, prohibiting any legal proceedings against the corporate debtor. Similarly, such notices cannot be issued when the corporate debtor has been liquidated, and the moratorium under Section 33(5) has come into effect.
The Court also examined the extent to which customs authorities can act while the moratorium is in operation. The Court relied on its earlier judgment in S.V. Kondaskar v. V.M. Deshpande, where it was held that the authorities can take steps to determine the tax, interest, fines, or penalties due. However, the authorities are precluded from enforcing a claim for recovery or levying any interest on the tax due during the moratorium period.
The above judgment was delivered by the Court while considering the interplay between Section 446 of the Companies Act and the Income Tax Act, 1961.
The Court, while fully agreeing with the proposition laid down in the earlier case, observed that the ratio of that case would be squarely applicable in determining the powers of customs authorities when the moratorium under Section 14 of the Code is in effect.
It held that “the customs authorities could only initiate assessment or re-assessment of the duties and other levies. They cannot transgress such boundary and proceed to initiate recovery in violation of Sections 14 or 33(5) of the IBC.”
Such limited jurisdiction is justified for customs authorities to enable them to determine the amount due and stake their claims for customs duty under Section 53 of the Code.
The court concluded that once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC as the case may be, the respondent authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The respondent authority does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act.
Whether Employment Provident Fund Organization Can Conduct Its Assessment Proceedings When Moratorium Is In Operation
It is clear that customs authorities are permitted to continue their assessment proceedings during the moratorium period under Section 14 of the Code. The next question is whether other authorities, such as the EPFO, can also proceed with their assessment proceedings or whether they are barred by Section 14 of the Code.
This issue was addressed by the NCLAT in Employees Provident Fund Organization Regional Office v. Jaykumar Pesumal Arlani and Anr., where the NCLAT, after examining the language of Sections 14 and 33(5) of the Code, held that the expression “suits or other proceedings” has been used under section 14 which encompasses all proceedings, including assessment proceedings and any proceedings which have the depleting effects over the assets of the corporate debtor are clearly hit by this section. Consequently, in view of the explicit bar under Section 14 of the Code, assessment proceedings by the EPFO cannot be conducted during the moratorium period.
However, the tribunal also observed that the expression “suits or legal proceedings” used under Section 33(5) of the Code does not include assessment proceedings, as they are not considered legal proceedings. Therefore, when the corporate debtor is under liquidation, assessment proceedings by the EPFO are not barred and can be continued.
This ruling of the tribunal appears to conflict with the Supreme Court judgment in Sundaresh Bhatt, Liquidator of ABG Shipyard (supra) , wherein the Court held that assessment proceedings could be conducted by the Customs Authority even during the moratorium under Section 14 of the Code.
This case was presented before the tribunal, but it distinguished it based on the facts of that case.The tribunal observed that it is well-settled law that every judgment must be read and understood within the factual background of the particular case, and the ratio of that judgment must also be interpreted in that specific context.
It held that “it is well settled law that a judgment of the Court has to be read in the context of the facts and ratio of judgment has to be read in reference to the facts, which have come for consideration before the Court.”
Based on the above, the tribunal refused to admit the claims of the EPFO, as they had been assessed during the moratorium period under Section 14 of the Code, which explicitly prohibits such actions.
Conclusion
The experience with the Code has once again demonstrated the inconsistency in the positions taken by tribunals and courts while interpreting the same provisions. The Court, while interpreting Section 14 of the IBC, has taken the position that any proceedings, including assessment proceedings, can be undertaken during the moratorium under Sections 14 and 33(5) of the Code. In contrast, the NCLAT, while interpreting the same provision, held that assessment proceedings are prohibited only under Section 14 but they can be undertaken under section 33(5) of the code. The Supreme Court is required to resolve this confusion by delivering an authoritative judgment.
