GST in relation to the bankruptcy code

The Insolvency & Bankruptcy code plays an important role in reviving a sick industry and also to decide further actions that can save the company from further losses. IBC applies to companies, partnerships and individuals. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency either by reviving the business or by resolving a bankruptcy plan. Under IBC debtor and creditor both can start 'recovery' proceedings against each other.

GST is a law that focuses on transparency for every transaction and that it has rules that are to be followed for every situation. In line with it, Section 7(1)(c ) of the CGST Act 2017 read with Schedule I of the Act, provides that it is even permanent disposal of the business assets on which ITC was availed will be considered as supply even if there is no consideration. 

The process of IBC initiates when an application is made & approved duly by the Adjudicating Authority, the NCLT. When the Corporate Insolvency Resolution Process starts, moratorium is imposed where no other laws shall be applicable on them. While there is an interesting twist that culminates amidst the proceeding where, the business will have to comply to the GST & the Income tax norms. Income tax will have a limited impact over IBC process as the returns are filed yearly by then the IBC proceedings would be concluded. Challenge remains for GST liability as it accrues every month. 

In Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Private Limited case, the Hon’ble Supreme Court interpreted government dues as “The expression “government dues” is not defined in the Code and it finds place only in the Preamble. What constitutes such dues is spelt out in the waterfall mechanism under section 53(1)(e) – (any amount due to the Central Government and State Government including amount of Consolidated Fund of India) and rank lower in priority to the class of creditors described in clauses (a) to (d). Thus, there exists a separate enumeration or specification of the Central Government and State Government dues, as a class apart from other creditors, including creditors who may have secured interest (in respect of which amounts may be payable to them)”. 

Let us capture the GST compliance that the Resolution professional( RP) would be required to comply with as Sec 17(2) of the I&B, Code, 2016, which states that all the statutory compliances are now the responsibility of the RP. Therefore, whether it is GST or any other Act the RPs cannot escape their duties.

Analysis of GST Complexities:

1. Place of business of the RP:  

The Insolvency Resolution Professionals/ Resolution Professionals (IRPs/RPs), appointed to undertake corporate insolvency resolution proceedings for Corporate Debtors, can apply for new registration on GST Portal, on behalf of the Corporate Debtors, in each of the States or Union Territories, on the PAN and CIN of the Corporate Debtor, where the corporate debtor was registered earlier, in terms of Notification No. 11/2020-CT, dated 21st March, 2020 and as amended vide Notification No. 39/2020-CT, dated 5th May, 2020. The IRP / RP are required to obtain a new registration within thirty days of their appointment as IRP/RP or by 30th June, 2020, whichever is later, except in cases where the corporate debtors have filed Form GSTR-1 and Form GSTR-3B, for all the tax periods prior to the appointment of IRP/RP.

They should select the Reason for Registration as “Corporate Debtor undergoing the Corporate Insolvency Resolution Process with IRP/RP” from the drop down menu. The date of commencement of business for IRP/RPs will be the date of their appointment. Their compliance liabilities will also come into effect from the date of their appointment.

2. Appointment of the IRP/RP: 

Responsibility of Resolution Professional enshrined under I&B, Code, 2016:

“RP is a trustee, custodian and he works in a fiduciary capacity, he is appointed to step in the shoes of the board of director and is wholly and solely responsible in running the company, nursing it back to health or finding ways to preserve the value of the company during Corporate Insolvency Resolution Process (CIRP) period”.

RP acts as the custodian of the business till the resolution plan is approved by the adjudicating authority. Hence, the RP is looked at in position of Director working in good faith for the company. Yet, it is only a service provided by the Resolution professional who acts on behalf of the creditors & appointed by them. Hence, GST is applicable duly. 

3. Disposal of Assets:   

When the resolution process culminates there would be situations where the assets of the company are to be disposed off to save the business. In the given scenario, GST would be duly applicable. The question arises as to who will bear the GST liability the RP or the Corporate Debtor. It is to be noted that though the RP has a fiduciary responsibility, the responsibility to discharge the liability will lie with the Corporate debtor unless the duty is discharged with good faith. If the RP is found to have discharged the liability with malfeasance then it shifts to the personal liability of the RP. 

4. Auction sale: 

In Eva Agro Feeds Private Limited Vs. Punjab National Bank case, the Hon’ble Supreme Court referred that in Valji Khimji and Company Versus Official Liquidator of Hindustan Nitro Product (Gujarat) Limited & Ors, held that liquidator was not justified to set aside the confirmation of sale. It observed that “if every confirmed sale can be set aside the result would be that no auction-sale will ever be completed because always somebody can come after the auction or its confirmation offering a higher amount.”

SC emphasised the role and duties of the liquidator while observing “Liquidator is vested with a host of duties, functions, and powers to oversee the liquidation process in which he is not to act in any adversarial manner while ensuring that the auction process is carried out in accordance with law and to the benefit of all the stakeholders. Merely because the Liquidator has the discretion of carrying out multiple auction it does not necessarily imply that he would abandon or cancel a valid auction fetching a reasonable price and opt for another round of auction process with the expectation of a better price”.

It shows that the auction made by the liquidator is also a sale and that the disposal is also a part of GST Transaction. It is in the responsibility of the liquidator does the auction take place & that it becomes the responsibility of the liquidator to discharge the liability of GST. Hence, registration would be a question which can be solved via registering himself as a Casual taxable person u/s 27 CGST Act, 2017. 

5. Transfer of business to the Resolution Professional: 

Though the Resolution Professional takes over the business of the Corporate Debtor, it is actually not transfer of business. Hence, the rules relevant for transfer of business shall not be applicable to the Resolution Professional. 

6. Related Party Transaction: 

In many instances, the related party transactions would be a big hindrance in resolving the value. Business assets dealing with related parties have specific valuation rules for the same in Rule 27 to 31 of the CGST Rules. It is in the fiduciary capacity of the Resolution Professional to discharge the liability as per CGST Rules for the related party transactions in the process of revival of the business. 

- KN Akshaya MA LLB