1. Introduction

The Insolvency and the Bankruptcy Code, 2016 (hereinafter referred to as ‘the Code’) objects at revival and continuation of a Corporate Debtor and to avoid its death by liquidation.¹ The term Corporate Debtor means Companies and LLPs who owe a debt to any person and if they default in payment of debt, then the application for initiation of insolvency proceedings can be filed in relation to such Corporate Debtor. If the application is accepted by the Hon’ble National Company Law Tribunal (hereinafter referred to as ‘NCLT‘), then the management of the Corporate Debtor will be taken over by the Interim Resolution Professional (hereinafter referred to as ‘IRP‘) appointed by the NCLT and the powers of the existing management will be suspended. The management is initially vested with the IRP and thereafter the Resolution Professional (hereinafter referred to as ‘RP‘) manages the operations of the corporate debtor during the entire Corporate Insolvency Resolution Process (hereinafter referred to as ‘CIRP‘) period. In pursuance of the object of the Code, Section 20 duty bounds the IRP to manage the affairs of the Corporate Debtor as a going concern and the similar duty has also been cast upon the RP under Section 23(2) of the Code. Though, immediately on the acceptance of the application, moratorium is imposed by the NCLT, during which there would be prohibition on alienation of assets of the Corporate Debtor and no recovery proceedings would take place, inter alia. However, to assure the continuity in business operations of the Corporate Debtor during the moratorium period, Section 14(2A) of the Code mandates the continued supply of the goods and services to the Corporate Debtor, which are critical for the survival of the business of the Corporate Debtor.

Despite such powers under the Code, the IRPs/RPs were facing several practical challenges and hindrances in ensuring the smooth running of the business of the Corporate Debtor as going concern. One such challenge arose due to the functionalities under the Goods and Service Tax regime. To address the same, the Government has recently notified a special procedure vide Notification No. 11/2020 ²(hereinafter referred to as ‘the Notification’) read with Circular No.134/04/2020-GST ³(hereinafter referred to as ‘the Circular’) issued by the CBIC. This article discusses and provides critical analysis of special procedure notified by the Govt.

The document is updated till May14, 2020.

2. Issues Faced by RP/IRPs

Rule 138-E of the CGST Rules⁴ provides that a registered person who fails to furnish the returns for two consecutive tax periods or who do not file Form GSTR-1 for any two tax periods cannot generate E-way bill (hereinafter referred to as ‘EWB’) for movement of goods. Further, Section 39(10) of the CGST Act⁵ provides that a registered person shall not be allowed to furnish a return for a tax period if the return for any of the previous tax periods has not been furnished by him.

Many of the Corporate Debtors undergoing CIRP have previously defaulted in filing their returns and discharging their liabilities under the CGST Act due to which the functionalities of Portal does not allow them to generate EWB or file subsequent returns. In several circumstances the proceedings under Section 29 of the CGST Act were also initiated for suspension/cancelation of the registration of these Corporate Debtors. After the initiation of CIRP, when IRP/RP takes over the management of the Corporate Debtor, it is almost impossible for them to undertake any procurement or supplies for such Corporate Debtors as GSTN portal have blocked EWB generation facility and further they were unable to file the returns during the CIRP period due to the defaults made by Corporate Debtors before the initiation of CIRP. This situation was jeopardizing the continued operations of Corporate Debtors due to which several applications were being filed by the RPs before the NCLT seeking resolution of such difficulties. To resolve these difficulties, the Hon’ble NCLT in various cases had given directions to the GST authorities asking them to permit manual returns, payment of taxes, etc. The few orders are as under:

•		M/s Hind Tradex Ltd. v. M/s Lakshmi Precision Screws Ltd.6 – The Hon’ble NCLT, Chandigarh has directed GST authorities to accept the manual filing of returns and payment of tax liability during the CIRP period.
•		Videocon Industries v. CGST Department, MA-4048/20197 -In the given case, the Hon’ble NCLT, Mumbai has also restrained the Department from canceling the registrations of these Corporate Debtors who are undergoing CIRP.
•		R. Ravichandran, RP v. Asst. Commissioner (ST) Kilpauk Assessment Circle8 – The Hon’ble NCLT, Chennai directed the Department to allow the RP to access the GSTN Portal and permit the filing of the subsequent returns without insisting on the filing of previous returns.

The GST Council in its 39th Meeting dated 14 March 2020 discussed these issues and recommended a special procedure for the Corporate Debtors undergoing CIRP to enable them to comply with the provisions of GST Laws during the CIRP period.

3. Notified Special Procedure: Decoded

The Corporate Debtor undergoing CIRP is required to follow special procedure notified by the Govt. from the date of appointment of IRP/RP and till the period it undergo the CIRP. The special procedure prescribed in the notification is explained hereunder:

3.1 New Registration requirement: The notification treats the Registered Person undergoing the CIRP (hereinafter referred to as ‘Corporate Debtor undergoing CIRP‘)as the separate class of person under Section 148 of CGST Act. This section empowers the Government to notify a certain class of Registered Persons to follow special procedures for registration, filing of returns, payment of tax and the administration of such persons.

The said class of person, from the date of appointment of IRP/RP, would be treated as a distinct person from the Corporate Debtor and would be required to take new registration in each State or Union Territory in which the Corporate Debtor is registered. The new registration is to be taken within 30 days from the date of appointment of IRP/RP. Here it is pertinent to mention that as per section 16 of the Code, the NCLT has to appoint the IRP on the Insolvency commencement Date itself(i.e. date of acceptance of Insolvency application by NCLT).

The Corporate Debtors who are already undergoing the CIRP would also be required to obtain registration within 30 days of the appointment of IRP or by 30th June 2020, whichever is later.⁹

However, the Corporate Debtor who have not defaulted in discharging their obligations under the GST law (which includes timely filing of all GSTR-1 and GSTR-3B)prior to the date of commencement of CIRP would not be required to take the fresh registration even after the initiation of CIRP¹⁰ as such Corporate Debtors have neither defaulted in payment of tax nor are facing any difficulty generation of EWB or filing of return.

Illustration – M/s ABC is a Corporate Debtor who is registered under the GST. An Insolvency Application is filed against M/s ABC on 15.12.2019 which was accepted by NCLT on 02.01.2020 and IRP is appointed on the same day. As per the Notification, from 02.01.2020, M/S ABC under the management of IRP is a distinct person for the purpose of CGST Act and has to take new GST registration on or before30.06.2020.

3.2 Treatment of existing registration of Corporate Debtor – The Circular clarifies that the original GST Registration of the Corporate Debtor should not be canceled. If needed, the GST authorities may suspend the registration. Also, where the cancellation has already been done, the Circular advises to revoke the said cancellation if it falls within the period of revocation i.e. 30 days from service of cancellation order.

3.3 Liability pertaining to Pre–CIRP period – The Corporate Debtor undergoing CIRP will not be required to discharge any outstanding tax liability or file any return pertaining to the period before the commencement of CIRP. Any amount outstanding towards the Government has been regarded as operational debt under the Code and the Government is free to claim such amount by filing the claim form before the IRP/RP as operational creditor. Further, it has been clarified that no coercive action will be taken for recovering the outstanding dues as the moratorium prohibits institution or continuation of suits or recovery proceedings against the corporate debtor during CIRP.

3.4 Period after the date of Registration till the completion of CIRP –After obtaining the new registration in accordance with the said Notification, the Corporate Debtor undergoing the CIRP will be required to file the First Return under Section 40 of the CGST Act for the period beginning from the date of commencement of CIRP till the date of new registration. Further, IRP/RP shall be responsible to ensure all procedural compliances under the CGST Act on the behalf of the Corporate Debtor undergoing CIRP which includes the payment of taxes, furnishing of First Return/statements, etc. It may be noted that no separate format of return under Section 40 is prescribed, it would be a normal return (i.e. Form GSTR 3B) as a registered person files in GST. It is pertinent to note here that only filing of First Return under Section 40 has been prescribed by the said notification but there is no mention about the status of filing of statement under Section 37 (GSTR-1) pertaining to the said period.

3.5 Treatment of Input tax credit– Special mechanism has been prescribed for claiming Input tax credit (hereinafter referred to as ‘ITC’)pertaining to the transactions undertaken from the date of commencement of CIRP till the date of registration, required in this Notification. The claim of ITC for such period shall be done as under:

(a)		ITC can be claimed under the first return required to be filed for new registration as per Section 40 of the CGST Act. It can be claimed even if invoices were issued using the previous GSTIN but relating to the supplies received during such period.
(b)		The time limit provided for claiming ITC under Section 16(4) of CGST Act would not be applicable for the procurement made during such period. Further, Rule 36(4) of the CGST Rules (i.e. restriction on claiming ITC in respect of invoices which are not uploaded by vendors in their Form GSTR-1) would also not be applicable for the procurement of goods/services made during such period.
(c)		The registered person receiving supplies from the Corporate debtor undergoing CIRP for the period from the date of commencement of CIRP till the date of new registration as required in this Notification or 30 days from the date of this notification, whichever is earlier, shall be eligible to claim ITC on such invoices issued using GSTIN of the erstwhile registration. In respect of these transactions recipient would not be required to comply with the provisions of Rule 36(4) of the CGST Rules.

3.6 Refund of amount deposited in Cash Ledger – Any amount which has been deposited into the cash ledger of the previous registration from the date of appointment of IRP/RP to the date of this Notification shall be available for refund to the erstwhile registration.

It can be seen from above that the Notification has been issued to address the difficulties faced by the IRP/RP while carrying of the management of the Corporate Debtor undergoing insolvency and provide for the alternate mechanism to ensure the smooth running of the Corporate Debtor during the CIRP as the Code has the overriding effect over other laws and the functionalities under other laws cannot come in the way of smooth implementation of the Code.

3.7 Change of IRP/RP-There would be no need for new registration every time when the IRP is replaced by a new RP or if later the COC removes the RP and appoints another RP. Such cases would merely require the change in the name of the authorized signatory of the registered person.¹¹

4. Our Analysis

Though the Notification has been issued to facilitate the insolvency resolution process and to comply with the directions issued by NCLT, however, the Notification and the Circular suffer from several flaws and procedural difficulties. The new procedure increases the burden on Corporate Debtors to maintain a separate registration. A few of such flaws and procedural difficulties arising due to this Notification and Circular are discussed hereunder:

4.1 Functional difficulties arising from the New Registration – As and when the Corporate Debtor is granted a new registration under GST, it would become implied for the IRP/RP to communicate the new GSTIN to all the suppliers, vendors, transporters, etc. It will really be a cumbersome task for the IRP/RP when either due to ignorance or otherwise any of the supplier issues invoice under the previous GSTIN of Corporate Debtor. Further, all the letterheads, stationery, etc. which have the erstwhile GSTIN mentioned will need replacement. Therefore, there are functional problems and additional cost associated with the special procedure and would further burden the IRP/RP who are already required to perform several simultaneous duties in a very less time and would also increase the CIRP Cost.

4.2 Post-CIRP Scenario – The Notification merely prescribes for the new GST registration during the CIRP, however, it does not clarify regarding the continuity or discontinuity of this new GST Registration after the Completion of CIRP. The Notification neither provides for the automatic cancellation of the new registration after the completion of CIRP nor does it require the surrendering of such registration by the Corporate Debtor. This is bound to create the further ambiguity as the language of the Notification suggest the new registration is applicable on the class of person undergoing CIRP and the use of such registration after the completion of CIRP may not stand good.

4.3 Practical difficulties with the time-line – The Notification prescribes that the Corporate Debtor undergoing Insolvency is required to take new GST registration within 30 days from the date of appointment of IRP/RP or 30th June 2020, whichever is later.¹². The prescribed time-line may face the following practical challenges:

•		As per the time-line prescribed under the Code, the IRP is required to constitute the Committee of Creditors (hereinafter referred as ‘COC’) on or before the 23rd day of the commencement of insolvency and thereafter the COC in its first meeting, held within 7 days of the constitution, may either appoint the IRP as the RP or can resolve to replace the IRP with a new RP. If the IRP fails to apply for such registration, then it would be very difficult for the new RP to comply with the time-line for seeking new registration within 30 days of initiation of CIRP, which is the mandatory condition for the companies undergoing CIRP after 30th June 2020.
•		The order of the NCLT for initiating the CIRP against the Corporate Debtor can be challenged before the Hon’ble NCLAT in accordance with provisions of the Code. If the Hon’ble NCLAT quashes the order of initiation of CIRP, then the entire exercise of seeking the fresh registration may turn futile and would add to the further complexities. The similar situation may occur if the Application of Insolvency is subsequently withdrawn in accordance with provision of section 12 A of the Code.

4.4 Issue relating to Unutilized ITC – Since the Notification prescribes new registration as the temporary mechanism which would be valid during the CIRP, then what would happen to the unutilized ITC available in the Credit ledger of the new registrant at the end of the CIRP. Neither the Notification nor the Circular provides the treatment such unutilized ITC. Further, the Notifications fails to provide for the treatment of the ITC available in the credit ledger of previous registration and the same has not been allowed to be carried forward in the new registration. This is bound to affect the interest of the genuine companies who have not committed any default in complying with GST laws and were entitled to use such ITC. It is pertinent to note that such ambiguity has later been cured by the Government¹³ and the Corporate Debtor who have not committed any default under GST Laws before the initiation CIRP will now not be required to take fresh registration and would be entitled to use the available ITC even during the CIRP.

4.5 Role and liability of IRP/RP- The IRP/RP have been asked to ensure that the new registrant adequately and timely complies all legal requirements prescribed under the CGST Act. However, such IRP/RP are generally appointed for the temporary period of 180 days, subject to further extension of CIRP and would not be in charge of the Corporate Debtor after completion of CIRP, in such circumstances the ambiguity prevails regarding the filing of annual returns under the CGST Act. Further, Section 27 of the Code empowers the COC to replace the RP during the CIRP and in case of such replacement, would the new RP be liable for any default or non-compliance committed by the previous IRP/RP.

4.6 Ambiguity in language may result in discrimination-The Notification and the Circular allows the registered person receiving supplies from the Corporate Debtor undergoing CIRP to claim the ITC on the invoices issued on erstwhile GSTIN from date of commencement of CIRP till the date of new registration or 30 days from the date of this notification, whichever is earlier. Therefore, such Registered Person would be unable to claim the ITC on supplies received from the Corporate Debtor undergoing CIRP after the expiry of 30 days from the date of notification. However, no such restrictions have been imposed on the supplies received by the Corporate Debtor undergoing CIRP and they are free to claim the ITC on all the supplies received after the commencement of CIRP and till the date of new registration. There exist no intelligible differentia in making such discrimination and it would affect the outward supplies of the Corporate Debtor undergoing CIRP.

4.7 Does not cover liquidator- The Code provides for liquidation of the Corporate Debtor if no resolution plan is agreed during the CIRP, inter alia. However, the Code further emphasizes that the Liquidator should endeavor to sell the business of the Corporate Debtor as a going concern¹⁴ and thus, in order to achieve such object the liquidator may also be required to carry out necessary business transaction on the behalf of the Corporate Debtor to ensure continued business operations. In such circumstances, the similar issue would also be faced by the Liquidator while carrying out the business operations of Corporate Debtor. However, the Department has neither included the Liquidator within the ambit of the Notification nor has provided any other mechanism to tackle the similar hurdles of liquidator.

5. Conclusion

Thus, the need that arose for segregating the position of the corporate debtor before CIRP from the position after CIRP could be understood from the background discussed above. However, the Government could have considered developing other mechanism to accommodate the grievances of the Corporate Debtor undergoing CIRP by incorporating the changes in the Portal. Nevertheless, the Government is required to issue further clarifications to remove the above discussed ambiguities and difficulties to develop a robust alternative mechanism.