Creditors under IBC

Creditors under IBC

Subject :Economy

Context:

The Central Board of Indirect Taxes and Customs (CBIC) has allowed tax officers to recover reduced dues from bankrupt businesses.

Details:

• This clarifies how field officers would deal with tax dues, which are classified as operational credit under the Insolvency and Bankruptcy Code (IBC).
• Under IBC secured creditors and workmen whose wages are due, have a higher right on the proceeds of liquidation over that of operational creditors.
• NCLT and its appellate body are adjudicating authorities for bankruptcy proceedings which also cover government dues.
• IBC also adjudicates government dues pending under the Central GST Act or under existing laws against the corporate debtor.
  • Section 84 of the CGST Act deals with a reduction in dues payable-Tax officers have to inform the taxpayer about reduction in the tax payable and proceed with the recovery.
  • Commissioner GST has been authorized to reduce tax demands on the finalization of IBC proceedings in respect of the corporate debtor.

Concept:

• Under the Insolvency and Bankruptcy Code, 2016, a “creditor” means any person to whom a debt is owed, and includes among others, a financial creditor, an operational creditor, a secured creditor, and an unsecured creditor.
• Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited.
• Unsecured Creditors, like credit card issuers, suppliers, and some cash advance companies (although this is changing), do not hold a lien on its debtor’s property to assure payment of the debt if there is a default. The secured creditor holds priority on debt collection from the property on which it holds a lien.
• Financial Creditor-As per Section 5(7) “financial creditor” means any person to whom a financial debt is owed. As per Section 5(8) of the Code, “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money.
• Operational Creditor:
  • As per Section 5(20), “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;
  • As per Section 5(21) of the code, “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment 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;
  • The ‘Operational Creditors’ can be classified into three different classes for determining the manner in which the amount is to be distributed to them:
    • Those who have ‘supplied goods’ and ‘rendered services’ and thereby entitled to payment.
    • The employees who have ‘rendered services’ for which they are entitled to payment.
    • The Central Government, the State Government, or the Local Authority who has not rendered any services but dues payable under any statute like Goods and Service Tax Act and generally termed as statutory dues.
• The dues payable towards “statutory dues” to the Government, Central or State or any local authority is also Operational debt, and the Government or the authority will be an Operational Creditor.

National Company Law Tribunal (NCLT):

• It is a successor body to the Company Law Board.
• It is a quasi-judicial body set up to govern companies established under the Companies Act, 2013.
• Powers of NCLT, 2013
  • Mismanagement and Oppression
  • Revival of Sick companies
  • Winding up of Companies

Once NCLT admits the case for insolvency process under IBC, 2016 the case cannot be withdrawn even if the payment decides to settle. But SC using Art 142 (extraordinary constitutional provisions) can allow it.

National Company Law Appellate Tribunal (NCLAT)

• National Company Law Appellate Tribunal (NCLAT) was constituted under Section 410 of the Companies Act, 2013 for hearing appeals against the orders of National Company Law Tribunal(s) (NCLT), with effect from 1st June, 2016.
• Objectives
• Hear appeals against the orders passed by NCLT(s) under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC).
• Hear appeals against the orders passed by Insolvency and Bankruptcy Board of India under Section 202 and Section 211 of IBC.
• Hear and dispose of appeals against any direction issued or decision made or order passed by the Competition Commission of India (CCI) – as per the amendment brought to Section 410 of the Companies Act, 2013.
• NCLAT is also the Appellate Tribunal to hear and dispose of appeals against the orders of the National Financial Reporting Authority.