Payment Of Pre-CIRP Dues To Creditors Including Government Dues Cannot Be Made By RP Outside Resolution Framework: NCLAT New Delhi

The NCLAT New Delhi Bench of Justices Ashok Bhushan, Barun Mitra] Member and Arun Baroka held that the assets of the Corporate Debtor are to be taken over by the Resolution Professions for resolution of the Corporate Debtor. The RP has to make every endeavour to protect and preserve the value of the property of the Corporate Debtor. Payment of pre-CIRP dues to creditors Including Government Dues cannot be made by RP outside the resolution framework.

Brief Facts

• The Ministry of Coal, Government of India, vide order dated June 6, 2015 under Rule 8(2) of the Coal Mines (Special Provisions) Rules, 2016 had directed the auction of the coal mines under Section 41 of the Coal Mines (Special Provisions) Act, 2015 ('CMSPA' in short).
• The Corporate Debtor participated in bidding and was declared the Successful Bidder for the MM-I Coal Block. The Corporate Debtor and the President of India, acting through the nominated authority, entered into a Coal Mine Development and Production Agreement dated August 31, 2015 (“CMDPA” in short) regarding the allocation of the MM-1 Coal Block in favour of the Corporate Debtor.
• A Mining Lease Deed dated 09.02.2017 was executed by the District Mining Officer, Govt. of Maharashtra, in respect of the MM-I Coal Block in favour of the Corporate Debtor.
• The Corporate Debtor deposited Rs 1.56 Cr. as Annual Mine Closure Cost (AMCC) for the FY 2017-18 but due to unfavourable business environment and other reasons, the Corporate Debtor failed to deposit the amount for the FY 2018-19 following which reminders for payment were issued by the COO. Show Cause Notice was also issued on August 31, 2021 to the Corporate Debtor for non-compliance with the efficiency parameters of the CMDPA in respect of the MM-I Coal Block.
• The Corporate Debtor furnished Performance Bank Guarantee ('PBG' in short) on May 30, 2022 of Rs 33.17 Cr. to the nominated authority. The nominated authority again demanded of the Corporate Debtor to submit PBG of Rs 41.47 Cr. within extended time period of August 12, 2022.
• Meantime a Section 7 application had been filed by Bank of Baroda against the Corporate Debtor.
• Respondent No. 2 issued a withdrawal of mine opening permission vide letter dated 05.09.2023 (“Withdrawal Letter” in short) for the MM-I Coal Block due to non-deposit of the AMCC for the pre-CIRP period in the escrow account as per the Escrow Agreement. Aggrieved by the decision of Respondent No. 1 and Respondent No. 2 to withdraw the mine opening permission, the Appellant preferred IA No. 4460 of 2023 on 27.09.2023 before the Adjudicating Authority seeking withdrawal of the withdrawal letter.
• The Adjudicating Authority vide Impugned Order partly allowed IA No. 4460 of 2023. The Adjudicating Authority directed the Appellant to keep aside the AMCC besides directing the Appellant personally liable for disposal of the mined coal in accordance with the terms of the Mine Agreement in the said Impugned Order. Since the Adjudicating Authority had passed directions beyond the reliefs sought by the Appellant, aggrieved by the same, the present appeal has been filed.

Contentions

The appellant submitted that AMCC constituted an operational debt as it is relatable to performing mine closure operations and hence subject to the provisions of IBC. The AMCC being in the nature of an operational debt, the Respondents cannot be paid in preference to other creditors as that would defeat the purpose of CIRP and would prejudice other secured financial creditors who are members of the CoC.

• It was further submitted that AMCC payable by the Corporate Debtor during the CIRP in terms of Escrow Agreement was being considered as CIRP cost which has utmost priority as per provisions of the IBC.
• It was further argued that Section 233 of IBC protects insolvency professionals from actions taken in good faith while acting under provisions of IBC and the Rules and Regulations framed thereunder and hence the Adjudicating Authority had erred in observing that the RP would be personally liable for depositing AMCC.

Per contra, the respondents submitted that mine opening permission was withdrawn not because of insolvency of the Corporate Debtor but because of persistent default by Corporate Debtor since FY 2016-17 in depositing AMCC.

• It was further submitted that the purpose of AMCC is to rehabilitate the coal-mine land back to the original condition so as to mitigate the ill effects and damages caused to the environment while mining. It was belaboured hard
• It was further submitted that AMCC draws its sustenance particularly from Article 39(b) of the Constitution of India. AMCC therefore helped in sub-serving the common good and in the protection of environment. Hence, AMCC amount was required to be deposited in the Escrow Account which was in the nature of trust to fulfils Union's obligation to act as a trustee of nature's resources for the welfare of public.

NCLAT's Analysis

The tribunal first addressed the contention of AMCC deposit being held in trust for public benefit. The tribunal while rejecting this argument observed that since no separate trust account was created or opened by the Corporate Debtor in the absence of separate trust account, by no stretch of imagination it can be said that the AMCC deposit including unpaid balance thereto were/are held by the Corporate Debtor in trust for the benefit of the others.

The tribunal further analysed the scheme of the MMDR Act and Escrow agreement to understand the nature of the AMCC. The tribunal observed that the Escrow Agreement itself provides that the entire amount is to be returned to the Corporate Debtor after completing mine closure activities.

The tribunal held that this sum clearly belonged to the Corporate Debtor for discharge of mine closure obligations.

The tribunal further rejected the contention of the respondents with respect to overriding effect of the MMDR Act over the IBC due to non-obtante clause. The tribunal referred to the Supreme Court judgment in Innoventive Industries Ltd vs ICICI Bank (2019) and observed that the court had reaffirmed the IBC's overriding authority.

Consequently, the Court clarified that the later non-obstante clause of this Parliamentary enactment takes precedence over the limited non-obstante clause present in any other Act. This Bench is therefore of the considered view that IBC being a later enactment, it would override both CMSPA and MMDR Act.

The tribunal further noted that once the corporate debtor is admitted into insolvency, its pre-CIRP dues have to be treated as per the resolution plan. The tribunal rejected the contention of the respondents that their Pre-CIRP dues must be kept out of the purview of the IBC.

The tribunal further noted that Payment of pre-CIRP dues to creditors cannot be made by RP outside the resolution framework. If Respondents are allowed to recover their AMCC dues of pre-CIRP period in full by keeping it outside CIRP process, it would be a discriminatory arrangement which has not been envisaged or contemplated under the IBC.

The tribunal further noted that recovery of unpaid AMCC as pre-CIRP dues independently of the other stakeholders of the Corporate Debtor is a step in direct contravention of the IBC as it is barred under Section 14 and therefore deserves to be set aside.

The tribunal further observed that if the AMCC is allowed to be kept outside the CIRP of the Corporate Debtor, it would tantamount to giving the Respondents a special status that is not recognised by law. Respondents cannot be paid in preference to other creditors as that would defeat the purpose of CIRP. Accordingly, the present appeal was allowed.

Case Title: Avil Menezes v. Ministry of Coal and Ors.

Case Reference: Company Appeal (AT) (Insolvency) No. 944 of 202

Court: NCLAT New Delhi

Judgment Date: 23/10/2024

Click Here To Read/Download Order