Challenging Tax Department Claims in Insolvency Proceedings

In a pivotal ruling in the Uttam Value Steels Pvt. Ltd. case, the Bombay High Court reaffirmed the supremacy of the Insolvency and Bankruptcy Code, 2016 (IBC) in extinguishing past claims, including tax liabilities, once a corporate debtor’s resolution plan is approved by the National Company Law Tribunal (NCLT). The company’s resolution plan, approved in May 2020, included a waiver of all tax dues and interest before the CIRP. Despite this, the Revenue issued notices claiming liabilities for periods before the insolvency process. Uttam Value Steels challenged these actions, arguing that Section 31 of the IBC made the plan binding on all creditors, including the government. The company argued no pre-CIRP claims could be revived, as it had emerged with a “clean slate.” The High Court emphasised: 1. Section 31 of the IBC: The resolution plan binds all stakeholders, including tax authorities. Claims not included in the plan are extinguished. 2. Supreme Court Precedents: Citing Ghanshyam Mishra v. Edelweiss, the court reiterated that all pre-CIRP claims are extinguished once the plan is approved. 3. Clean Slate Doctrine: A corporate debtor starts afresh, free of pre-existing liabilities unless included in the plan. The court found Revenue’s argument that their claims arose post-CIRP unconvincing, as the liabilities pertained to pre-CIRP periods. This ruling quashed the tax authorities’ actions and reinforced the protection provided by the IBC, ensuring that companies exiting CIRP are free from old claims. The judgment underscores the importance of addressing all pre-existing claims in the resolution plan and serves as a reminder to creditors to file claims in a timely manner during CIRP to avoid extinguishment. Once again, the IBC’s clean slate doctrine has proven crucial, enabling corporate debtors to focus on revival and future growth without the burden of past claims. Incorp Restructuring Services LLP (IPE) InCorp Global #InsolvencyLaw #IBC #CorporateLaw #TaxLaw #BombayHighCourt #CleanSlateDoctrine

Hon’ble Apex Court, in a judgment of 20 March 2025, reiterates the clean slate theory in the Insolvency matters. In this case, the tax authorities raised the tax demands on the corporate debtor after the approval of the Resolution Plan and, therefore, were not part of the approved Resolution Plan. No claims for tax demands were submitted to the Resolution Professional until the Resolution Plan was approved by the Adjudicating Authority (National Company Law Tribunal). The Hon’ble Apex Court reiterated that the declaration of law made in the case of Ghanshyam Mishra and Sons Pvt. Ltd [ (2021) 9SCC 657] that all dues, including the statutory dues owed to the Central Government, if not part of the Resolution Plan, shall stand extinguished. No proceedings could be continued with respect to such dues for the period prior to the date on which the adjudicating authority grants its approval under Section 31 of the Insolvency and Bankruptcy Code 2016. (Paragraph 102). The Hon’ble Court held that once the NCLT approves the Resolution Plan, no belated claim can be included that was not made earlier. If such demands are taken into consideration, the appellants (Successful Resolution Applicant) will not be in a position to recommence the business of the Corporate Debtor on a clean slate. The Court also referred to its decision in the case of the Committee of Creditors of Essar Steel India Limited vs Satish Kumar Gupta & Ors [ (2020) 8SCC 531] and extracted a portion of that judgment (paragraph 107) that reads, “ A successful resolution applicant cannot suddenly be 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 could throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. Takeaway: No fresh tax demands or any statutory due can be enforced against the corporate debtor, which has undergone CIRP for a period prior to the date on which the NCLT grants its approval to the plan submitted by the Successful Resolution Applicant. #incometaxindia #bcas #ctc #supremecourt #ibccode

Supreme Court / NCLAT Supreme Court has criticized the NCLAT for disregarding its binding precedent in the corporate insolvency resolution process (CIRP) of Tehri Iron and Steel Casting Ltd. The court ruled that once a resolution plan is approved by the National Company Law Tribunal (NCLT), any claims not included within it stand extinguished and cannot be revived later. Overturning NCLAT’s 2021 decision, the SC set aside fresh tax demands by the Income Tax Department for assessment years 2012-13 and 2013-14, which were raised after NCLT had approved the resolution plan in May 2019. A bench of Justices Abhay S Oka and Ujjal Bhuyan termed NCLAT’s reasoning “perverse” for dismissing the appellants’ challenge and imposing costs on them. It reaffirmed that under Section 31(1) of the IBC, an approved resolution plan is binding on all creditors, including government authorities. The court emphasized that allowing belated claims would hinder the revival of distressed companies, defeating the purpose of IBC. This ruling strengthens the finality of approved resolution plans and prevents fresh claims from disrupting insolvency resolutions. Rgds. LSTN.

Reaffirming IBC’s Primacy Over Tax Laws: Insights from a Recent ITAT Ruling In a recent ruling, the Income Tax Appellate Tribunal (ITAT) reinforced the overriding effect of the Insolvency and Bankruptcy Code, 2016 (IBC) over the Income Tax Act in matters concerning tax recovery during insolvency proceedings. The question before the ITAT whether tax recovery sought to be made by the revenue authorities against a corporate debtor undergoing liquidation was valid. Despite ongoing liquidation proceedings under the IBC, the tax authorities sought to enforce recovery actions. The ITAT held that once the liquidation process under the IBC is initiated, the recovery of tax dues must align with the IBC's waterfall mechanism, effectively nullifying the revenue's direct recovery efforts. Key Takeaways: 1. Clarity on IBC Proceedings: The IBC has been clear from the start: its provisions override any other law that conflicts with its objectives. Yet, multiple tax authorities continue to pursue recovery actions independently, often overlooking the IBC's mandate. The IBC has been clear from the start: its provisions override any other law that conflicts with its objectives. This ensures a uniform and predictable process, which is critical for maintaining the integrity and continuity of the debtor as a going concern, thereby maximizing value for all stakeholders. 2. Regulatory Override: In addition to tax, various judicial precedents have repeatedly emphasized that the IBC's non-obstante clause in Section 238 overrides other legal provisions. Regulatory authorities cannot independently enforce claims outside the resolution framework approved by the NCLT. Failure to adhere could lead to void orders, confusion due to multiple proceedings, and elongated timelines. 3. Tax Recovery: It has been firmly established that tax dues, like any other unsecured debt, must follow the waterfall mechanism outlined in Section 53 of the IBC. This means tax departments must file their claims timely and await their turn in the distribution queue, and not assumed a privileged stance. Katalyst Advisors #IBC #NCLT #tax #NCLAT #litigation #IndiaInc #ITAT #InsolvencyLaw