Recently, the Andhra Pradesh High Court in Patanjali Foods Limited v. Assistant Commissioner ST FAC and Others (Writ Petition No: 28529/2023 and Writ Petition No: 4944/2024) pronounced a significant judgement having far reaching impact on rights of a successful resolution applicant under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) vis-à-vis the power of the sovereign to levy and recover taxes from a person who is undergoing the corporate insolvency resolution process (‘CIRP’). The author has the privilege to appear and argue the matter before the Hon’ble High Court.
The issue before the High Court was whether once a resolution plan is approved by the NCLT under IBC can the State Tax department raise demand from the corporate debtor for the period upto the date of passing of the order by the NCLT. The High Court after considering the rival submissions relying upon the decision of the Supreme Court in Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company[2021] 126 taxmann.com 132/166 SCL 237 (SC) allowing the writ petition held that any demand upto the date of approval of the resolution plan by the NCLT shall stand extinguished and quashed the assessment orders passed by the State Tax department.
To understand the significance of the decision let us delve into the concept of taxation, the power of the state to levy tax, the rationale behind introduction of IBC including its overriding nature over all other statutes including tax laws.
In Jindal Stainless Ltd. v. State Of Haryana [2016] 75 taxmann.com 137 (SC) the Constitution Bench of the Supreme Court after considering a number of decisions inter-alia held that power to levy tax is a sovereign power of the state to run the government effectively, however the same must be exercised within the constitutional limitation as legislatively recognized and duly provided under Article 265 of the Constitution which states that “No tax shall be levied or collected except by authority of law”.
That the primary objectives of IBC can be understood from the decision of Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India[2019] 101 taxmann.com 389/152 SCL 365 (SC) as follows:
| 1. | Maximization of value of assets of corporate person; | |
| 2. | Revival and running of corporate person as a going concern; | |
| 3. | Promoting entrepreneurship by bringing back the corporate person to life; | |
| 4. | Timely resolution to support development of credit markets; | |
| 5. | Increase in investment as funds would come back into the economy leading to overall higher economic growth and development of the Indian economy; and | |
| 6. | Liquidation to be used as a last resort |
It can be seen from the above that IBC is a path breaking legislation with far reaching impact and the same cannot be understood from a narrow perspective but the broader impact of revival of corporate person on the economy. Perhaps it is due the above broad base impact of IBC and the revival of corporate person being the utmost objective that the legislature has carefully chosen to insert a non-obstante clause in section 238 of IBC which overrides all other laws (tax laws being no exception) thereby clearly laying down the supremacy of IBC. It is in this context that section 31 of IBC provides that once resolution plan is approved by the NCLT it shall be binding on inter-alia the corporate debtor including the Central Government, any State Government, or any local authority to whom any statutory dues are owed. The relevant text of the said provisions thus:
31. Approval of resolution plan. –
(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.
238. Provisions of this Code to override other laws.– The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
That from the above discussion, though the state has the sovereign power to levy taxes in a democratic polity, the same can be restricted in accordance with law and the power to levy tax is not absolute but subject to constitutional and statutory restrictions.
In Innoventive Industries Limited v. ICICI Bank [2017] 84 taxmann.com 320/143 SCL 625 (SC) it was held by the Supreme Court that IBC is a complete code dealing exhaustively with the matters dealt with therein and the decisions in other acts would not apply contrary to IBC.
That recognizing the binding nature of resolution plan and the overriding impact of IBC over all others laws the Supreme Court in a series of decisions has held that once the resolution plan is approved the same attains quietus for all times to come and there cannot be any demand or recovery from the corporate debtor outside the CIRP which once approved extinguishes all claims and liability of the corporate debtor till the date of approval by NCLT. Suffice it would be to place reliance on two decisions of the Supreme Court to understand the above principle.
First, Ghanshayam Mishra (above) wherein it was held that:
“102. In the result, we answer the questions framed by us as under:
102.1. That once a resolution plan is duly approved by the Adjudicating Authority under sub-section (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;
102.2. 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect.
102.3. Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.”
Second, in Committee of Creditors Of Essar Steel India Ltd. v. Satish Kumar Gupta [2019] 111 taxmann.com 234 (SC) the larger bench of the Supreme Court inter-alia held:
“105. Section 31(1) of the Code makes it clear that once a resolution plan is approved by the Committee of Creditors it shall be binding on all the stakeholders, including the guarantors. This is for the reasons that this provision ensure that the successful resolution applicant starts running the business of the corporate debtor on a fresh slate as it were. ….”
107. For the same reason, the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the resolution profession and by the Adjudicating Authority / Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly by faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what is to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate as has been pointed out by us hereinabove……”
That from the above jurisprudence, it would be safe to conclude that once a resolution plan is approved by the NCLT all claims including tax dues whether admitted or disputed, crystallized or uncrystallized upto the date of NCLT Order stands permanently extinguished and no person or authority would be entitled to agitate or demand the same from the corporate debtor recognizing the doctrine of clean slate and the primacy of IBC over all other laws.
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