New claims by revenue cannot be entertained for period covered by resolution plan

[Kamal Aggarwal]

In a recent judgement of M/S. SREI EQUIPMENT FINANCE LTD., VERSUS DEPUTY COMMISSIONER OF COMMERCIAL TAXES, BANGALORE, DEPUTY COMMISSIONER OF COMMERCIAL TAXES, BANGALORE - 2024 (9) TMI 1394 - KARNATAKA HIGH COURT, the Hon’ble High Court of Karnataka has held that the proceedings initiated under section 73 of the KGST Act, 2017 are clearly without jurisdiction in the light of the undisputed fact that the Resolution Plan has already been approved by the National Company Law Tribunal (‘NCLT’).

In this matter, the petitioner filed a writ petition before the Hon’ble High Court of Karnataka against the order passed by the revenue dated 29.04.2024 in relation to the FY 2018-19 and initiation of proceedings in relation to the financial year 2019-20.

The petitioner contended that upon approval of the Resolution Plan by the NCLT on 11.08.2023, all prior claims by the respondents pertaining to 2018-19 and 2019-20, including the impugned order and proceedings would stand extinguished.

The petitioner relied upon the judgement of the Hon’ble Supreme Court in the matter of GHANASHYAM MISHRA AND SONS PRIVATE LIMITED THROUGH THE AUTHORIZED SIGNATORY VERSUS EDELWEISS ASSET RECONSTRUCTION COMPANY LIMITED THROUGH THE DIRECTOR & ORS. - 2021 (4) TMI 613 - SUPREME COURT wherein the issue of whether a corporate entity's liabilities are extinguished after undergoing the Corporate Insolvency Resolution Process was addressed by the Apex Court and the following conclusion was drawn:

“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. The 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 the 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.

103. In the light of what has been held by us hereinabove, we now proceed to decide individual matters."

Based on the above settled position, the Hon’ble High court held that the claims against the petitioner by the revenue are invalid, as the resolution plan had already been approved by the NCLT. Consequently, the order and proceedings related to the periods before the approval of Resolution Plan stand quashed. This underscores the binding nature of approved Resolution Plans under the Insolvency law.

On the basis of the decision of Hon’ble Supreme Court in Ghanshyam Mishra (supra) and the overriding provision of Insolvency and Bankruptcy Code, 2016, the Hon’ble High Court of Andhra Pradesh in the matter of PATANJALI FOODS LIMITED VERSUS THE ASSISTANT COMMISSIONER ST FAC AND OTHERS, DEPUTY COMMISSIONER STATE TAX AND OTHERS. - 2024 (9) TMI 1348 - ANDHRA PRADESH HIGH COURT has negated the argument that since the State of Andhra Pradesh was not a party to the insolvency proceedings, the plan is not binding on it, in the following manner:

“12. The contention of the learned Government Pleader for Commercial Taxes that the order of NCLT is not binding on the State of Andhra Pradesh in view of Section 88 of the GST Act would have to be negatived in as much as Section 238 of the Insolvency and Bankruptcy Code provides for a non-obstante clause overriding all other laws.

13. The further contention of the learned Government Pleader for Commercial Taxes that the order would not be binding as no notice had been given to the State of Andhra Pradesh prior to passing of the said order would also have to be negatived as such the plea only, can be taken for setting aside the said order. It must be held that as long as the said order holds, it would not be open for any person, who is bound by the order, to contend that such an order is not binding.”

Thus, once a resolution plan is approved by NCLT, the claims specified in that plan become binding and will be applicable to the corporate debtor, its employees, members, creditors (including the Central and State Governments, local authorities), guarantors, and other stakeholders. Any claims not included in the approved resolution plan will be considered null and void as of the approval date, and no party may initiate or pursue legal action related to those excluded claims. The fact that a said authority or the creditor was not a party to the said proceedings is of no consequence.