The petitioner contended that having made the full and final payment as proposed by the resolution professional during corporate insolvency resolution process, all other remaining claims and proceedings stood extinguished in terms of the resolution plan.

Further it was highlighted that the resolution plan once approved shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom any debt in respect of the payment of dues arising under any law for the time being in force is owed.

The petitioner highlighted the amended provision of Section 31 of the IBC wherein it was clearly mentioned that the approved resolution plan shall be binding on the corporate debtor, its employees, members and all creditors including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force is owed.

Contention of the Department

The respondent has approached the Hon'ble Supreme Court of India against the order of the NCLT stating their revenue was curtailed and restricted as the result of the order passed by NCLT and thereby challenged the judgment of NCLT, however the same was rejected by the Hon'ble Supreme Court. Further the respondent argued before  the Supreme Court that  section 31 of the Act was  not applicable on government authority . The same was rejected on the grounds that amended  provision of IBC was not considered by the respondent and further it was made clear that  provisions of IBC  has an overriding effect and the same shall be applicable to government authorities as well. 

Observation of the Hon’ble High Court Jodhpur

The Court clarified the legislative intent behind the amendment in Section 31(1) of the IBC. The same is reproduced below for easy reference:-

>“IBC has actually an overriding effect. For instance, you asked whether IBC will override SEBI. Section 238 provides that IBC will prevail in case of inconsistency between two laws. Actually, Indian courts will have to decide, in specific cases, depending upon the material before them, but, largely, yes, it is IBC.  There is also this question about indemnity for successful resolution petitioner. The amendment now is clearly making it binding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. So that is going to be a major, major sense of assurance for the people who are using the resolution plan.”

Further it was held that respondent cannot argue that they were not heard by COC since the amendment in Section 31 of the Act applies to current situation where by operational creditors have been pertinently included in the scope. It was stated that the purpose of the IBC is salutary and it has been enacted to ensure that an industry under distress does not fade into oblivion and can be revived by virtue of the resolution plan. Once the offer of the resolution petitioner is accepted and the resolution plan is approved by the appropriate authority, the same is binding on all concerned to whom the industry concern may be having statutory dues. No right of audience is given in the resolution proceedings to the operational creditors viz. the Central Government or the State Government, as the case maybe.

In light of the ratio of the above judgment it is clear that the financial creditors have been given precedence in the ratio of payments when the resolution plan is being finalized.

It is the financial creditors who are given right to vote in the COC whereas, the operational creditors viz. Commercial Taxes Department of the State Government or the Central Government, as the case may be, have no right of audience.

Hence in view of the above discussion and Explanation to it was considered that the demand notices was illegal, arbitrary and cannot be sustained and therefore the demand in  respect of notices and order pending as on the date of finalization of the resolution plan issued by the respondents are quashed and proceedings was required to be dropped.

Civil Writ Petition No. 9480/2019¹