Once Resolution Plan Is Approved; Government Cannot Make Any Further Claim

EMCO Limited Vs Joint Commissioner State Tax (Telangana High Court)

In the case of EMCO Limited vs. Joint Commissioner State Tax, Telangana High Court ruled that government departments cannot make claims post-approval of a resolution plan under the I&B Code. This decision underscores the binding nature of approved plans on all stakeholders, preventing surprise claims.

The scenario involved EMCO Limited as the corporate debtor undergoing liquidation, acquired by another company through auction. Despite discharging all liabilities, the GST department issued a show cause notice for tax dues post-transfer. The court held that such claims are extinguished with the approval of the resolution plan, as per Section 29 of the I&B Code and various legal precedents.

Lets suppose a company C1 is a corporate debtor goes into liquidation proceeding and another company C2 is an auctioner purchaser and it purchased C1 by bidding highest and discharged all his liabilities prior to the transfer date. Now the any government department let’s suppose GST department issues a Show Cause Notice under Section 73 to demand and recover a certain amount from C1(which is now comes under the ambit of C2) after the transfer date. Now the question here is whether a resolution plan which includes the liabilities of both operational and financial creditors has been approved can a government authority make a claim afterwards?

So the answer is “claim by government authorities after the resolution plan has been approved is not legal.” A resolution plan includes various detailed provision viz. Provision for payment of insolvency resolution process cost, provision for payment of debt of operational creditors (including government outstanding tax dues etc) and financial creditors. Section 29 of I&B code read with regulation 36 of the regulations states that it require the resolution plan should include information memorandum which shall have the details of corporate debtor so that the resolution applicant submitting a plan is aware of the assets and liabilities of the corporate debtor, including details of creditor and amount claimed by them. After satisfying all these conditions and seal of approval from the Adjudicating Authority the resolution plan is passed and binding upon all the stakeholders and no surprise claim can be made after the approval.

There are catena of judgments which supports the above contention:

1. 2024 (84) G.S.T.L. 243/(2024) 17 CENTAX 344 (Telangana) EMCO Limited Versus Assistant Commissioner, State Tax

Demand – Tax or ITC not involving fraud etc. – Company in liquidation – P1 company was corporate debtor in liquidation proceedings and as such was a going concern – P2 company was auction purchaser and acquired P1 company on a clean slate basis with all its liabilities that was of P1 company prior to transfer date, had now been fully extinguished as per order of NCLT – As per NCLT’s order, effective date of transfer was 20-06-2022 – Subsequently respondent authorities issued a show cause notice dated 29-09-2023 and proposed proceedings under Section 73 of CGST Act, 2017 – P1 immediately gave reply to said notice specifically mentioning that P2 had acquired P1 by an auction on clean slate basis; thus, proceedings under Section 73 ibid was not sustainable – However, respondent authorities passed impugned orders – Petitioners submitted that claims put forth by creditors and government departments showed that respondents had raised a total claim of Rs. 1.01 lakh and same was ordered to be paid by liquidator, thus, all other claims which were now being raised by department stood automatically extinguished in terms of order of NCLT – HELD: Order under Section 73 ibid issued by respondent was totally without jurisdiction and same deserved to be accordingly set aside [Section 73 of Central Goods and Services Tax Act, 2017/Telangana Goods and Services Tax Act, 2017]. [para 11]

2. [2021] 126 taxmann.com 132 (SC) Ghanshyam Mishra and Sons Pvt. Ltd. Versus Edelweiss Asset Reconstruction Co. Ltd.

79. In the Rajya Sabha debates, on 29.7.2019, when the Bill for amending I&B Code came up for discussion, there were certain issues raised by certain Members, the Hon’ble Finance Minister stated thus: “IBC has actually an overriding effect. For instance, you asked whether IBC will override SEBI. Section 238 provides that IBC will prevail in case of inconsistency between two laws. Actually, Indian courts will have to decide, in specific cases, depending upon the material before them, but largely, yes, it is IBC. There is also this question about indemnity for successful resolution applicant. The amendment now is clearly making it binding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. So, that is goint to be a major, major sense of assurance for the people who are using the resolution plan. Criminal matters alone would be proceeded against individuals and not company. There will be no criminal proceedings against successful resolution applicant. There will be not criminal proceedings against successful resolution applicant for fraud by previous promoters. So, I hope that is absolutely clear. I would want all the hon. Members to recognize this message and communicate further that this Code, therefore, gives that comfort to all new bidders. So now, they need not be scared that the taxman will come after them for the faults of the earlier promoters. No. Once the resolution plan is accepted, the earlier promoters will be dealt with as individuals for their criminality but not the new bidder who is trying to restore the company. So, that is very clear.

Based on the provided scenario and legal precedents, the conclusion is clear: once a resolution plan for a corporate debtor, which includes provisions for the settlement of debts to both operational and financial creditors, has been approved by the Adjudicating Authority, government authorities cannot make any further claims against the new owner. The resolution plan comprehensively addresses all existing liabilities, including tax dues owed to government departments, ensuring that all claims are settled before the transfer. This plan, once approved, is binding on all stakeholders, preventing any subsequent claims from being made by government authorities.

FULL TEXT OF THE JUDGMENT/ORDER OF TELANGANA HIGH COURT

Since all three writ petitions are in respect of the same assessees/petitioners, the issue involved also being identical in nature and the grounds of challenge also being identical, we proceed to decide the three writ petitions by this common order.

2. Heard Mr. karan Talwar, learned counsel for the petitioners, Mr. K. Raji Reddy, learned Senior Standing Counsel for Income Tax Department appearing for respondent Nos.1 to 3 and Mr. K. Arvind Kumar, Central Government Counsel appearing for respondent No.4.

3. The challenge in all the three writ petitions is to the order issued by respondent No.1 under Section 73 of the SGST/CGST Act 2017. The challenge is primarily on the ground that the notices have now been issued, petitioner No.1 Company which has gone into liquidation and petitioner No.2 is the Company which has acquired the liquidated Company, the main contention of the learned counsel for the petitioners was that petitioner No.1 was the corporate debtor in the liquidation proceedings and as such was a going concern and petitioner No.2 was the auction purchaser and acquired the said petitioner No.1 Company on a clean slate basis with all its liabilities that was of petitioner No.1 Company prior to the transfer date, have now been fully extinguished as per the order of the order of the National Company Law Tribunal, Mumbai Bench, Court II (for short ‘the NCLT’).

4. As per the NCLT’s order dated 09.08.2021, the effective date of transfer was 20.06.2022. Subsequent to the petitioner No.2 having acquired the assets of the petitioner No.1 Company by way of liquidation proceedings and the order of the NCLT, the respondent authorities issued a show cause notice dated 29.09.2023 and proposed the proceedings under Section 73. The petitioner No.1 immediately gave a reply to the show cause notice specifically mentioning that petitioner No.1 was the corporate debtor which was a going concern and petitioner No.2 was the firm which has acquired petitioner No.1 by way of an auction on a clean slate basis. With all liabilities whatsoever having been extinguished, proceedings under Section 73 proposed to be initiated was not sustainable and was liable to be closed. The respondent authorities in spite of taking note of the contentions that the petitioners had raised in reply to the show cause notice, proceeded and passed three impugned orders which are under challenge in these writ petitions.

5. Learned counsel for the petitioners took the Court to the claim put forth by all the financial creditors and operational creditors and other stakeholders who were other than financial creditors and the operational creditors and where the various departments of the Government who were the operational creditors as of February, 2023, showed that the respondents in the instant cases i.e. the tax departments under the State Government had raised a total claim of Rs.1,01,070/- and the said claim was put forth before the NCLT which was ordered to be paid by the liquidator. Apart from the aforesaid Rs.1,01,070/- raised from the department, there was no other claim raised by any of the departments which are pending before any of the authorities concerned and as such all other claims if at all those which are now been raised by the departments which are under challenge in these writ petitions all would stand automatically extinguished in terms of the order of the NCLT and it is for this reason that the instant writ petitions have been filed.

6. Learned counsel for the petitioners referred to the decision of this Court in W.P.No.23436 of 2006 decided on 23.01.2024 which arose from an approval of a resolution plan by the NCLT and prayed for applying the same principle in the instant cases also. Apart from the said judgment, he also relied upon a recent decision of the Gujarat High Court on the said subject in the case of KRBL Limited v. State of Gujarat¹ wherein the Gujarat High Court while allowing the petition, set aside the order passed by the department in the said case.

7. Learned counsel for the respondents on the other hand fairly conceded to the fact that petitioner No.1 is a liquidated Company that is a going concern and the petitioner No.2 was the acquired Company acquiring all the assets of the liquidated company by way of e-auction that was conducted and where the petitioner No.2 was the highest bidder. Learned counsel for the respondents did not dispute the fact that the entire liabilities which stood on the corporate debtor prior to the order of the NCLT including those which were claimed and those which were not claimed all stood extinguished so far the Company which had acquired the assets of the corporate debtor.

8. Having heard the contentions put forth on either side and on perusal or records, at this juncture, it would be necessary to take note of the relevant portion of the order dated 09.09.2022 passed by the NCLT which reads as under:

9. In the light of the aforesaid order of the NCLT, it would now be relevant to take note of the decision of the Hon’ble Supreme Court in the case of Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited² which reads as under:

“65. Bare reading of Section 31 of the I&B Code would also make it abundantly clear, that once the resolution plan is approved by the Adjudicating Authority, after it is 61 satisfied, that that the resolution plan as approved by CoC meets the requirements as referred to in subsection (2) of Section 30, it shall be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders. Such a provision is necessitated since one of the dominant purposes of the I&B Code is, revival of the Corporate Debtor and to make it a running concern.

66. The resolution plan submitted by successful resolution applicant is required to contain various provisions, viz., provision for payment of insolvency resolution process costs, provision for payment of debts of operational creditors, which shall not be less than the amount to be paid to such creditors in the event of liquidation of the Corporate Debtor under section 53; or the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in subsection (1) of section 53, whichever is higher. The resolution plan is also required to provide for the payment of debts of financial creditors, who d not vote in favour of 62 the resolution plan, which also shall not be less than the amount to be paid to such creditors in accordance with subsection (1) of section 53 in the event of a liquidation of the Corporate Debtor. Explanation 1 to clause (b) of subsection (2) of Section 30 of the I&B Code clarifies for the removal of doubts, that a distribution in accordance with the provisions of the said clause shall be fair and equitable to such creditors. The resolution plan is also required to provide for the management of the affairs of the Corporate Debtor after approval of the resolution plan and also the implementation and supervision of the resolution plan. Clause (3) of subsection (2) of Section 30 of I&B Code also casts a duty on RP to examine, that the resolution plan does not contravene any of the provisions of the law for the time being in force.

67. Perusal of Section 29 of the I&B Code read with Regulation 36 of the Regulations would reveal, that it requires RP to prepare an information memorandum containing various details of the Corporate Debtor so that the resolution applicant submitting a plan is aware of the 63 assets and liabilities of the Corporate Debtor, including the details about the creditors and the amounts claimed by them. It is also required to contain the details of guarantees that have been given in relation to the debts of the corporate debtor by other persons. The details with regard to all material litigation and an ongoing investigation or proceeding initiated by Government and statutory authorities are also require to be contained in the information memorandum. So also the details regarding the number of workers and employees and liabilities of the Corporate Debtor towards them are required to be contained in the information memorandum.

68. All these details are required to be contained in the information memorandum so that the resolution applicant is aware, as to what are the liabilities, that he may have to face and provide for a plan, which apart from satisfying a part of such liabilities would also ensure, that the Corporate Debtor is revived and made a running establishment. The legislative intent of making the resolution plan binding on all the stakeholders after it gets 64 the seal of approval from the Adjudicating Authority upon its satisfaction, that the resolution plan approved by CoC meets the requirement as referred to in subsection (2) of Section 30 is, that after the approval of the resolution plan, no surprise claims should be flung on the successful resolution applicant. The dominant purpose is, that the should start with fresh slate on the basis of the resolution plan approved.

69. This aspect has been aptly explained by this Court in the case of Committee of Creditors of Essar Steel India Limited through Authorised Singatory (supra).

“107. For the same reason, the impugned NCLAT judgment [Standar Chartered Bank v. Satish Kumar Gupta, 2019 SCC OnLine NCLAT 388] IN holding that claims that may exist apart from those decided on merits by the resolution professional 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 be faced with “undecided” claims after the resolution plan submitted by him has been accepted as 65 this would amount to a hydra head popping up which would 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 has 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 by us hereinabove. For these reasons, NCLAT judgment must also be set aside on this count.”

70. In view of this legal position, we could have very well stopped here and held, that, the observation made by NCLAT in the appeal filed by EARC to the effect, that EARC was entitled to take recourse to such remedies as are available to it in law, is impermissible in law.

71. As held by this Court in the case of Pr. Commissioner of Income Tax vs. Monnet Ispat and Energy Ltd.10, in view of provisions of Section 238 of I&B Code, the provisions thereof will have an overriding effect, in there is any inconsistency with any of the provisions of the law for the time being in force or any instrument having effect by virtue of any such law. As such, the observations made by NCLAT to the aforesaid effect, if permitted to remain, would frustrate the very purpose for which the I&B Code is enacted.

72. However, in Civil Appeal arising out of Special Leave Petition (Civil) No.11232 of 2020, Writ Petition (Civil) No.1177 of 2020 and Civil Appeals arising out of Special Leave Petition (Civil) Nos.71477150 of 2020, the issue with regard to the statutory claims of the State Government and the Central Government in respect of the period prior to the approval of resolution plan by NCLT, will have to be considered.

73. Vide Section 7 of Act No.26 of 2019 (vide S.O.2953 (E), dated 16.8.2019 w.e.f 16.8.2019), the following words have been inserted in Section 31 of the I&B Code. “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”

74. As such, with respect to the proceedings, which arise after 16.8.2019, there will be no difficulty. After the 67 amendment, any debt in respect of the payment of dues arising under any law for the time being in force including the ones owed to the Central Government, any State Government or any local authority, which does not form a part of the approved resolution plan, shall stand extinguished.

…

79. In the Rajya Sabha debates, on 29.7.2019, when the Bill for amending I&B Code came up for discussion, there were certain issues raised by certain Members, the Hon’ble Finance Minister stated thus:

“IBC has actually an overriding effect. For instance, you asked whether IBC will override SEBI. Section 238 provides that IBC will prevail in case of inconsistency between two laws. Actually, Indian courts will have to decide, in specific cases, depending upon the material before them, but largely, yes, it is IBC.

There is also this question about indemnity for successful resolution applicant. The amendment now is clearly making it binding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. So, that is goint to be a major, major sense of assurance for the people who are using the resolution plan. Criminal matters alone would be proceeded against individuals and not company. There will be no criminal proceedings against successful resolution applicant. There will be not criminal proceedings against successful resolution applicant for fraud by previous promoters. So, I hope that is absolutely clear. I would want all the hon. Members to recognize this message and communicate further that this Code, therefore, gives that comfort to all new bidders. So now, they need not be scared that the taxman will come after them for the faults of the earlier promoters. No. Once the resolution plan is accepted, the earlier promoters will be dealt with as individuals for their criminality but not the new bidder who is trying to restore the company. So, that is very clear.

(emphasis supplied)”

10. Recently, a similar matter came up for before the Gujarat High Court in the case of KRBL Limited (supra) wherein the Division Bench vide its judgment dated 22.09.2023 heavily relying upon the judgment of the Hon’ble Supreme Court in the case of Ghanashyam Mishra and Sons Private Limited (supra) in paragraph Nos.5.18 to 6 held as under:

“5.18 Reading of the aforesaid paras would indicate that once having relinquished its interest under Section 52, the State cannot continue the insistence of maintaining the charge in the revenue records and its claim will have to stand in priority.

5.19 The argument of the State that since the asset was sold on a condition of “AS IS WHERE IS BASIS”, the charge of the State was rightly recorded is misconceived as the deed already records that the purchaser shall not be liable for payment of any outstanding dues of the government. This too was, in the opinion of the Court a clause that would relieve the petitioner of the liability to pay tax dues. In light of the decision in the case of Ghanshayam Mishra and Sons Private Limited (supra), the petitioner was entitled to a clean slate.

5.20 Even otherwise as per Section 100 of the Transfer of Property Act, a charge cannot be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of such charge. The State moved in to get a charge registered on 15.12.2022 much later.

6. For the aforesaid reasons, petition is allowed. The order dated 05.01.2022 is set aside.”

11. Taking into consideration the authoritative decision of the Hon’ble Supreme Court in the case of Ghanashyam Mishra and Sons Private Limited (supra) and also the view taken by the Gujarat High Court in the case of KRBL Limited (supra) and the recent decision of this Court in W.P.No.23436 of 2006, we have no hesitation in holding that the order under Section 73 (Annexure P1) issued by respondent No.1 in the three writ petitions is totally without jurisdiction and the same therefore deserves to be and are accordingly set aside/quashed.

12. In the result, the writ petitions are allowed. However, there shall be no order as to costs. Consequently, miscellaneous petitions pending if any, shall stand closed.

Note:

¹ R/Special Civil Application No.19804 of 2022 decided on 22.09.2023

² (2021) 9 SCC 657