2024 (5) TMI 728 - HC - Insolvency and Bankruptcy

CIRP - waterfall mechanism - extinguishment of demand for reason of the State Tax Authorities not moving the National Company Law Tribunal (NCLT) for inclusion of their demand in the resolution plan, as a debt payable by the Company-a Corporate Debtor under the IBC - HELD THAT - The petitioner was incorporated as a Special Purpose Vehicle to carry out the work of upgradation of Hazipur-Muzaffarpur section of the existing NH-77 within the State of Bihar on Build Operate and Transfer (BOT) (annuity-basis) under the National Highway Development Project Phase-III. The agreement executed by the petitioner with the NHAI is produced as Annnexure-P/1 dated 24.02.2010. It was by Annexure-P2 dated 03.01.2020 that the NCLT, New Delhi, admitted the petitioner into the CIRP in terms of the IBC - Annexure-P/2 is dated 03.01.2020 and till the approval of the resolution plan on 10.05.2022 there was a moratorium under Section 14 of the IBC. It has to be noticed that this does not preclude the State Tax Authorities from proceeding with the assessment, which can be proceeded with, but no recovery can be effected. The State or the Central Government or any local authority definitely is reserved with the right to approach the Resolution Professional with their claims which the Resolution Professional is obliged to include in the resolution plan. There is also an appeal provided from the order of the NCLT to the National Company Law Appellate Tribunal which can be availed by any creditor whose claims have not been included by the resolution professional. In the present case there is no challenge against the resolution plan as approved by the COC followed up with the approval of the adjudicating authority; the NCLT. The State does not have a case that they have approached the R.P. within the period provided and before the resolution plan was approved by the COC and then by the NCLT. There is no recovery initiated or assessment order passed before the resolution plan is approved - The order of the NCLT was approved finding that, even the dues to the Central or the State Government payable into the respective consolidated funds stand on a different footing; covered only under Section 53(1)(e) of the IBC, in a liquidation proceeding. The debts owed to secured creditors who have relinquished their security interest have a better claim under Section 53(1)(b); at par and along with the dues of the workmen for the just prior 24 months period; both of which have pre-eminence from that of a secured creditor who does not give up the security interest. Even the financial debts owed to unsecured creditors by virtue of Section 53(1)(d) of the IBC has a better claim than the dues to the Central Government and the State Government falling under Clause-(e) of Section 53(1) of the IBC. Both the writ petitions are allowed restraining the State from proceeding for recovery under the impugned assessment orders.

Summary

Issues Involved:
1. Extinguishment of tax demands under BGST Act due to non-inclusion in the resolution plan under IBC.
2. Validity of tax assessment and recovery proceedings during CIRP moratorium.
3. Status of statutory dues and secured creditor under IBC.

Summary:

Issue 1: Extinguishment of Tax Demands under BGST Act
The petitioner, a company under CIRP u/s IBC, challenged the tax demands raised under the BGST Act for the assessment years 2020-21 and 2022-23. The petitioner argued that these demands were extinguished as the State Tax Authorities did not move the NCLT to include their demands in the resolution plan. The court referenced the Supreme Court decision in Ghanshyam Mishra & Sons Private Ltd. v. Edelweiss Asset Reconstruction Company Ltd., which held that once a resolution plan is approved by the NCLT, all claims not included in the plan are extinguished and no proceedings can be initiated or continued for such claims.

Issue 2: Validity of Tax Assessment and Recovery Proceedings During CIRP Moratorium
The State argued that the moratorium u/s 14 of the IBC did not preclude them from proceeding with the assessment, though recovery could not be effected. The court noted that the first notice was issued after the resolution plan was approved, and the assessment was within the time provided under the BGST Act. However, the court emphasized that the claims for the assessment years were not included in the resolution plan, thus standing extinguished.

Issue 3: Status of Statutory Dues and Secured Creditor under IBC
The State contended that u/s 82 of the BGST Act, a statutory charge on the assets of the assessee made the government a secured creditor, referencing the Supreme Court decision in State Tax Officer v. Rainbow Papers Ltd. The court distinguished this case, noting that the State did not challenge the resolution plan or approach the RP within the stipulated period. The court reiterated that statutory dues, if not included in the resolution plan, are extinguished as per the IBC, supporting the petitioner's stance with precedents from Ghanshyam Mishra, CoC of Essar Steel India Limited, and M/s Ruchi Soya.

Conclusion:
The court held that the tax demands for the years 2020-21 and 2022-23 stood extinguished as they were not part of the resolution plan approved by the NCLT. The writ petitions were allowed, restraining the State from proceeding with recovery under the impugned assessment orders. The court did not address the exemption on annuity, as it was not argued before them.