Alerts & Updates 4th Nov 2024

NCLAT’s Ruling on the Supremacy of IBC over Statutory Dues: Treatment of Annual Mine Closure Costs in CIRP – NCLAT Judgment in Avil Menezes (RP) v. Ministry of Coal and Ors.

Authors

Mukesh Chand Senior Counsel | Mumbai

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  • Introduction

    The NCLAT Principal Bench, New Delhi, in Avil Menezes (RP) v. Ministry of Coal and Ors. (Company Appeal (AT) (Insolvency) No. 944 of 2024, decided on 23-Oct-2024), addressed a significant question regarding the treatment of certain statutory dues within the context of an ongoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), specifically the Annual Mine Closure Cost (AMCC) obligations and their priority in insolvency proceedings. The case primarily examined whether the AMCC constituted an asset of the Corporate Debtor or a separate trust asset that could be excluded from the CIRP pool, testing the boundaries of the IBC’s supremacy over other statutory provisions.

  • Legal Position laid down in the Judgment

    The NCLAT upheld the supremacy of the IBC over other laws, including the Mines and Minerals (Development and Regulation) Act (MMDR Act) and Coal Mines (Special Provisions) Act, 2015 (CMSPA).

    The Tribunal ruled that:

    • AMCC is part of the Corporate Debtor’s estate and should not be excluded from the CIRP process.
    • IBC supersedes other laws through Section 238’s non-obstante clause, meaning other statutory dues or obligations must conform to the IBC’s resolution framework.
    • Pre-CIRP dues cannot be recovered outside the resolution process, as this would give preferential treatment to one creditor over others, which contradicts the IBC’s framework.
  • Facts of the Case
    • Pre-CIRP Events:

    – Topworth Urja & Metals Ltd. (Corporate Debtor) was awarded a mining lease for the MM-1 Coal Block by the Ministry of Coal and entered into a Coal Mine Development and Production Agreement (CMDPA) in 2015.

    – It had to deposit Annual Mine Closure Costs (AMCC) into an escrow account for environmental and mine closure obligations.

    – However, the Corporate Debtor defaulted on AMCC payments from FY 2018-19, despite reminders and the submission of a Performance Bank Guarantee (PBG).

    • CIRP Events:

    – Bank of Baroda filed a Section 7 application under IBC against the Corporate Debtor, and CIRP was initiated in August 2022.

    – During CIRP, Respondent No. 1 (Ministry of Coal) terminated the CMDPA and subsequently withdrew mine-opening permission, citing unpaid AMCC.

    – The Resolution Professional (RP) filed an application to challenge the withdrawal of the mine-opening permission, and the matter was escalated to the NCLAT.

  • Arguments from the Parties
    • Appellant’s Arguments (RP):

    – AMCC dues should be treated as part of the Corporate Debtor’s assets and subject to the IBC’s resolution framework.

    – IBC overrides other laws, and the Ministry of Coal cannot recover AMCC independently.

    – The Adjudicating Authority erred in directing the RP to keep aside AMCC and assigning personal liability for mined coal disposal, which was not prayed for in the original application.

    • Respondents’ Arguments (Ministry of Coal & CCO):

    – AMCC represents funds held in trust to safeguard environmental obligations and the public good.

    – AMCC is not part of the Corporate Debtor’s assets and should not be subjected to IBC’s framework or a “haircut” on dues.

    – Cited the public trust doctrine, claiming that AMCC funds should be preserved outside the insolvency process.

  • Issues Before the NCLAT
    • Whether AMCC deposits and unpaid balances are assets of the Corporate Debtor or funds held in trust?
    • Whether IBC’s Section 238 overrides public duties established by the MMDR Act and CMSPA?
    • Whether pre-CIRP AMCC dues can be recovered outside the CIRP framework?
    • If government dues inherently hold secured status without explicit legislative provision.
  • Findings and Judgment of the NCLAT
    • AMCC as Part of Corporate Debtor’s Assets:

    – NCLAT rejected the claim that AMCC deposits were held in trust, noting the absence of any dedicated trust account or separate legal framework governing these deposits outside the Escrow Agreement.

    – AMCC funds, therefore, fall within the purview of the CIRP, and the claim by the Ministry of Coal should be addressed as part of the resolution process.

    • Supremacy of IBC:

    – The Tribunal upheld that the IBC, as a comprehensive code with a later non-obstante clause, supersedes any conflicting provisions under MMDR Act or CMSPA.

    – Relying on Supreme Court precedents, the Tribunal concluded that the IBC’s overriding effect mandates uniform treatment of creditors, including statutory authorities.

    • Pre-CIRP Dues as Operational Debt:

    – NCLAT reiterated that pre-CIRP dues cannot be met outside the IBC framework, ensuring no differential treatment for similarly situated creditors.

    – Allowed the Ministry’s claim as an operational creditor under CIRP, disallowing any independent recovery attempts.

    • Government Dues Without First Charge:

    – The Tribunal clarified that without an explicit statutory first charge, as seen in the Rainbow Papers Ltd. case, government dues do not enjoy an inherent secured status.

    • Conclusion and Directions:

    – The NCLAT set aside the impugned order that treated AMCC as a non-CIRP asset and removed personal liability for the RP regarding mined coal.

    – The case was remanded for further processing consistent with the IBC’s resolution framework.

  • Important Observations & Cases Referenced:
    • Innoventive Industries Ltd. v. ICICI Bank[i] (2017)

    Reaffirmed IBC’s comprehensive framework and supremacy over other laws.

    • Reliance Natural Resources Ltd. v. Reliance Industries Ltd[ii] (2010)

    Public trust doctrine; asserted government’s role as a trustee of natural resources for public benefit.

    • Municipal Corporation of Greater Mumbai v. Abhilash Lal[iii] (2020)

    Held that public health responsibilities of local authorities cannot be undermined by IBC; distinguished from the current case.

    • Sundaresh Bhatt, Liquidator of ABG Shipyard Limited v. CBIT[iv] (2022)

    Affirmed the supremacy of IBC’s Section 238.

    • State Tax Officer v. Rainbow Papers Ltd[v] (2022)

    Discussed the secured status of government dues under statutory first charge, applicable only where explicit legislative provision exists.

    This NCLAT ruling reinforces the principle that the IBC, as a later legislative enactment with a non-obstante clause, takes precedence over earlier statutes with conflicting provisions, even those directed toward public welfare obligations.

    The judgment clarifies that statutory dues, such as AMCC, should be treated as part of the Corporate Debtor’s estate and processed within the CIRP framework, ensuring equitable treatment of all creditors and preserving the IBC’s core objective. This decision underscores the importance of maintaining the IBC’s structured approach to insolvency and disallows piecemeal recoveries by statutory authorities under the guise of trust obligations, fortifying the CIRP’s collective process.

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at   insights@elp-in.com or write to our authors:     

    Mukesh Chand, Senior Counsel – Email – mukeshchand@elp-in.com

  • References

    [i] CIVIL APPEAL NOs. 8337-8338 OF 2017- Decided on August 31, 2017
    [ii] CIVIL APPEAL NO. 4273 OF 2010- Decided on May 07, 2010
    [iii] CIVIL APPEAL NO. 6350 OF 2019- Decided on November 15, 2019
    [iv] 2022 SCC OnLine SC 1101
    [v] CIVIL APPEAL NO. 1661 OF 2020- Decided on September 06, 2022

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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