Tax Department Can't Create Charge On Property Of Corporate Debtor During Currency Of Moratorium Imposed By NCLT: Himachal Pradesh HC
The Himachal High Court held that once the corporate debtor is directed to be liquidated by the NCLT u/s 33(5) of Insolvency & Bankruptcy Code (IBC), no legal proceeding could be instituted by or against him by the Tax Authorities.Thus, the High Court clarified that the red entry/charge created by the Revenue Department on the property of the petitioner-company during the currency of...
The Himachal High Court held that once the corporate debtor is directed to be liquidated by the NCLT u/s 33(5) of Insolvency & Bankruptcy Code (IBC), no legal proceeding could be instituted by or against him by the Tax Authorities.
Thus, the High Court clarified that the red entry/charge created by the Revenue Department on the property of the petitioner-company during the currency of the moratorium imposed by the NCLT, would be void in law.
Prior approval of the Adjudicating Authority under Section 33(5) of IBC, 2016 is mandatory before initiating any legal proceedings on behalf of the Corporate Debtor under Liquidation.
The Division Bench of Justice M.S. Ramachandra Rao (Chief Justice) and Justice Satyen Vaidya observed that “The plea of the respondents that the tax dues claimed by them will have priority as a “Crown Debt”, therefore, cannot be accepted, and their action in continuing the said red entry/charge on account of dues recoverable from erstwhile management of the 1st petitioner-Company under the H.P. Vat Act, 2005, HPGST Act, 2017 and the CST Act, 1956, would be clearly illegal & arbitrary”.
Facts of the case
The petitioner company/ assessee was engaged in the business of manufacturing and trading of Inverters & Batteries and has its factory premises in Himachal Pradesh. For running its operations, it had availed various facilities from financial creditors and also with SBI. On account of default in adherence to the financial discipline by the erstwhile management of the Company, the SBI initiated Corporate Insolvency Resolution Process (CIRP) of petitioner u/s 7 of IBC, 2016 before the NCLT. Resultantly, a Resolution Professional was appointed replacing the earlier management which stood suspended, and by operation of Section 14 of the IBC, 2016 a moratorium was imposed. Pursuant to the initiation of the CIRP process, expressions of interest were invited from prospective resolution applicants, but to no avail.
Observation of the High Court
The Bench found that the first petitioner company, who was unable to pay its dues to Financial Creditors, was made subject to a Corporate Insolvency Resolution Process by one of its Creditors, i.e., SBI u/s 7 of IBC.
Further, moratorium was imposed by the NCLT prohibiting any action/proceedings against the Corporate Debtor or enforcing any security interest created by the Corporate Debtor in respect of its property, added the Bench.
The Bench stated that as per Section 14(4) of IBC, the order of moratorium would have effect from the date of such order till the completion of the CIRP.
Since the provisions of the IBC had overriding effect on all laws in view of Section 238, it was not permissible for the respondents to create a charge on the property of the petitioner-company during the currency of the moratorium in violation of the provisions of the IBC, observed the Bench,
The Bench also clarified that when the IBC permits Sale of Assets of a Company in Liquidation as a going concern under Regulation 32(e) & 32A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulation, 2016, and in such an e-auction conducted by the Liquidator, the current management made a plan for acquisition and the same was approved by the NCLT, then all the claims of the respondents stood extinguished.
The respondents are also estopped from continuing the red entry/charge on the properties of the first petitioner-company, since they had never objected to the acquisition plan submitted by the current management of the first petitioner-company and that they had also not challenged the said order passed by the NCLT, added the Bench.
The Bench reiterated the legislative intent to extinguish all debts owed to the Central Government or any State Government or any Local Authority including the Tax Authorities, when once an approval was granted to Resolution Plan by the NCLT.
The Bench explained the “Clean Slate” principle of IBC as per amended Section 31 of the IBC, which stated that taking over Corporate Debtor under a Resolution Plan, will also apply to taking over by way of acquisition plan.
Therefore, the High Court allowed Assessee's petition and issued Mandamus directing the fourth respondent to remove its charge/red entries/ claim for the tax dues of the erstwhile management of the first petitioner company on the properties of the said petitioner from the revenue record.
Counsel for Petitioner/ Assessee: Aalok Jagga and Vedhant Ranta
Counsel for Respondent/ Revenue: Anup Rattan and Rakesh Dhaulta
Case Title: Su-Kam Power System Ltd. & Another versus State of Himachal Pradesh & Others
Citation: 2024 LiveLaw (HP) 59
Case Number: CWP No.422 of 2024