Moratorium vs. Search and Seizure by Tax Authorities

Black’s Law Dictionary defines “Moratorium” as “delay in performing an obligation or taking an action legally authorised or simply agreed to be temporary”. The concept of moratorium under IBC is similar to Section 446 of Companies Act, 1956 which provides that no legal proceedings shall be instituted against the company once an order for winding up has been passed or once the official liquidator has been appointed; and Section 22 of Sick Industrial Companies Act, 1983, which provides that no suit for recovery of money or enforcement of security will lie against such industrial concern except with the consent of BIFR.  

It is clear from the bare reading of Section 238 of the Code that IBC has overriding powers over any other laws in case of conflicting provisions. Despite of the law being clear, time and again there is interference of the tax authorities during moratorium. The Supreme Court in the case of Pr. Commissioner of Income Tax v Monnet Ispat and Energy Ltd held that IBC will override anything inconsistent contained in any other enactment. The court in this case referred Dena Bank v Bhikhabhai Prabhudas Parekh and Co & ors where in it was held that the nature of income tax dues is of Crown dues and they do not take precedence over the secured creditors who are private persons. 

Section 84 of Central Goods and Services Act reads as follows:

“Section 84 - Continuation and validation of certain recovery proceedings.- Where any notice of demand in respect of any tax, penalty, interest or any other amount payable under this Act, (hereafter in this section referred to as "Government dues"), is served upon any taxable person or any other person and any appeal or revision application is filed or any other proceedings is initiated in respect of such Government dues, then- .. 

(b) where such Government dues are reduced in such appeal, revision or in other proceedings- 

(i) it shall not be necessary for the Commissioner to serve upon the taxable person a fresh notice of demand; 

(ii) the Commissioner shall give intimation of such reduction to him and to the appropriate authority with whom recovery proceedings is pending; 

(iii) any recovery proceedings initiated on the basis of the demand served upon him prior to the disposal of such appeal, revision or other proceedings may be continued in relation to the amount so reduced from the stage at which such proceedings stood immediately before such disposal.”

It was made clear by the GST department vide Circular No.134/04/2020-GST that the corporate debtor cannot be subjected to coercion in regards to payments owed for the time prior to the start of the Corporate Insolvency Resolution Process (CIRP). Such obligations will be regarded as "operational debt," and the proper official may submit claims before the NCLT in accordance with the IBC's rules.

It was further clarified vide Circular No. 187/19/2022-GST that according to Section 84, the Commissioner must notify the person and the appropriate authority where the recovery proceedings are ongoing if the government dues against any person under the CGST Act are reduced as a result of any appeal, revision, or other proceedings in respect of such government dues. Additionally, recovery actions in regard to the lower amount of government fees may still be pursued.

The CGST Act does not define the term "other proceedings" under Section 84. It should be noted that the IBC's adjudicating and appellate authorities are quasi-judicial bodies set up to handle civil disputes involving insolvency and bankruptcy. For instance, the NCLT acts as an adjudicating authority under the IBC for insolvency proceedings that are commenced upon a request from any stakeholder of the entity, such as the company, creditors, workers, etc., and it issues an order approving the resolution plan. As the IBC proceedings also resolve any outstanding government debts against the corporate debtor under the CGST Act or other applicable legislation, they appear to fall under the definition of "other proceedings" in Section 84 of the CGST Act.

Despite of such clear law being established about overriding effect of IBC over Tax laws and that the tax department falls under the category of Operational Creditors who has to file their claim with the IRP/RP where the CD is into CIRP; the department is still continuing to proceed against CD after the moratorium is imposed. One such case recent case was K. Easwara Pillai RP Vs. Goods and Services Tax Department wherein CIRP was initiated against the CD. Moratorium was imposed, GST authorities submitted their claim. After serving a summons with a date of 10.03.2023 on the suspended managing director of the corporate debtor in person, a raid was conducted on the corporate debtor's property to acquire the suspended director’s statement. All the account documents were confiscated during the raid, and a summons with the date 13.03.2023 was also delivered to the Resolution Professional to appear for an inquiry. RP filed an application under section 60(5) of the code seeking a direction to GST department to release the documents that were seized and further prayed to initiate proceedings against the department u/s 70(2) of the code. The question before NCLT was whether the search and seizure of records is violative of moratorium-imposed u/s 14. The NCLT Kochi referred to the circular No.134/04/2020-GST and held that the act of the department causes inconvenience and paralysis resolution process. It was held that the act of the department is violative of moratorium-imposed u/s 14 of the code and imposed a compensatory cost of Rs.50,000/- on GST departments. 

The circulars and precedents set up by the SC time and again held that IBC prevails over GST Act and that the tax authorities can file their claim before the RP but cannot proceed against CD as moratorium is imposed. The tax authorities time and again proceed against CD after moratorium is imposed which at times may result in paralysing the CIR Process.

Latest Developments:

The recent amendments to CIRP Regulations had extended the time to submit a claim up to the date of request for resolution plan is issued or 90 days from the insolvency commencement date whichever is later provided that the creditor shall provide reasons for delay in submitting the claim beyond 90 days from the insolvency commencement date. 

This will help the tax authorities in getting an extra time for submitting the claim and will lessen the burden on Adjudicating Authorities in hearing the petitions related to submitting the time barred claims to some extent.