Insolvency and Bankruptcy Board of India

(AL Division)

File No.

Sub: Can Govt. trigger the CIRP?

In the pursuance to the question whether the Government can trigger the
resolution process under the Insolvency and Bankruptcy Code, 2016 relevant
observations are following: -

2. As per Section 3 (11) of the Insolvency and Bankruptcy Code, 2016 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. And as per the Section 3(10) of the
Insolvency and Bankruptcy Code, 2016 "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. The Code clearly specifies creditor as any
person to whom a debt is owed. The Government dues and tax fall within the ambit
of creditors.
3. Under Section 3 (21) of the Insolvency and Bankruptcy Code, 2016
"operational debt" means a claim in respect of the provision of goods or services
including employment or a debt in respect of the repayment 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. Such claim constitutes any liability or obligation
towards the Government by any person as per Section 3 (11) which defines "debt" as
a liability or obligation in respect of a claim which is due from any person and
includes a financial debt and operational debt.
4. The pertinent point on the part of distinction between tax and claim may be
that the tax is not a claim arising out of any contract between the parties.
5. On the perusal of Section 3(21), within the ambit of operational debt, tax
cannot be repayment.
6. The Government as operational creditor may include the cases where
certain dues are to be repaid to the Government against certain utilisation of good or
services by any person. Here the Government will be operational creditor. One
important point in this regard may be that the Government may be one entity but it
may act in many capacities.
7. As per section 6 of the Insolvency and Bankruptcy Code, 2016, 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 Chapter II of the
Insolvency and Bankruptcy Code, 2016.
8. The rights of the Central and State Government in the distribution
waterfall in liquidation is given a priority below that of the unsecured financial
creditors (in addition to all kinds of secured creditors) for promoting the availability
of credit and developing a market for unsecured financing (including the
development of bond markets).
9. In Dena Bank vs. BHIKHABHAI PRABHUDAS PAREKH & CO. &
ORS. [247 ITR 165 (SC)] it was held that, The Crowns preferential right to
recovery of debts, over other creditors is confined to ordinary or unsecured creditors.
10. In the case of Stock Exchange, Bombay v. V.S. Kandalgaonkar [(2014) 51
taxmann.com 246 (SC)] it was held that, By virtue of lien on securities under rule
43 of Bombay Stock Exchange Rules, BSE being secured creditor of defaulting
member would have priority over dues of Income tax department.
11. In the case of Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [2005] 5
SCC 694 (para 19) held that Government dues only have priority over unsecured
debts and in so holding the Court referred to a judgment in Giles v. Grover (1832)
(131) English Reports 563 in which it has been held that the Crown has no
precedence over a pledgee of goods.
12. In Collector of Aurangabad v. Central Bank of India [1967] 3 SCR 855 after
referring to various authorities held that the claim of the Government to priority for
arrears of income tax dues stems from the English common law doctrine of priority
of Crown debts and has been given judicial recognition in British India prior to 1950
and was therefore law in force in the territory of India before the Constitution and
was continued by Article 372 of the Constitution (at page 861, 862). In the present
case, as has been noted above, the lien possessed by the Stock Exchange makes it a
secured creditor. That being the case, it is clear that whether the lien under Rule 43 is
a statutory lien or is a lien arising out of agreement does not make much of a
difference as the Stock Exchange, being a secured creditor, would have priority over
Government dues.
13. Judgment of the Supreme Court in the case of Stock Exchange, Bombay v.
V.S. Kandalgaonkar [(2014) 51 taxmann 246 (SC)] holds that there is priority of
 rights of secured creditors over the rights of income tax department while recovering
dues.
14. As per the perusal of the judgments of the Honble Supreme Court, it
becomes evident that secure creditors rights get primacy over the tax dues. The Code
also contemplates the same under the liquidation waterfall provided in section 53 of
chapter III.
15. The Govt. for its statutory dues can be treated as secured creditor or get
primacy over other secured creditors. However, the Govt. can always submit its
claim in pursuance to the corporate insolvency resolution process admitted by the
Adjudicating Authority.
16. For certain cases, as referred in para 6, government as an operational creditor
may invoke the provisions of the Code for corporate insolvency resolution process.
17. Submitted for kind perusal, please.

Executive Assistant to WTM(AL)

10th August 2017

WTM(AL)