Himachal Pradesh High Court Affirms Clean Slate Theory, Declares Tax Authorities' Charge Over Properties After Acquisition Plan Void And Illegal

Brief Facts

The corporate debtor was admitted into the Corporate Insolvency Resolution Process (CIRP) by National Company Law Tribunal (NCLT) Principle Bench, New Delhi on April 5, 2018. The Committee of Creditors (CoC) decided to liquidate the company when no resolution plan was approved. The liquidation of the company was ordered by the NCLT on April 3, 2019.

Amount of Rs. 354.11 crores was claimed by Department of State Taxes and Excise, Government of Himachal Pradesh before appointed liquidator. The tax authorities marked a charge and red entry on the properties of the corporate debtor without giving any notice of the same which effectively debarred selling or transfer of the assets. The present writ petition was filed against this illegal action taken by the tax authorities.

Resolution Plan Approved By NCLT

The present management of the corporate debtor participated in e-auction and emerged as the highest bidder. The management offered to buy the corporate debtor as a going concern for Rs. 49.95 crores. It was proposed in the acquisition plan that after the distribution of proceeds as per section 53 of the IBC, all liabilities- including operational creditors and statutory dues-shall be deemed to have been settled. This plan was approved by the NCLT on May 11, 2022 and entire consideration amount was deposited with the liquidator. A certificate of sale was also issued on May 31, 2022 which completed transfer of the company officially.

High Court Decision

The High Court observed that creating the charge on the properties of the corporate debtor that too when moratorium under section 14 of the IBC was in operation was illegal and in direct violation of provisions of the IBC. The court held as under:

“53 Since the provisions of the said Code had overriding effect on all laws in view of Section 238 of the Code, it was not permissible for the respondents to create a charge on the property of the Corporate Debtor during the currency of the moratorium vide order dt. 07.01.2020 in violation of the provisions of the IBC. Therefore, ex facie, the said order is void in law”.

As per section 33(5) of the IBC once a company is in liquidation, no proceedings by or against the corporate debtor can be initiated therefore red entries made by the tax authorities were ex-facie void. The court observed that:

“54 This is also because under Section 33(5) of the Code, after the Corporate Debtor was directed to be liquidated by the NCLT on 03.04.2019 under Section 33(5) of the Code, no legal proceeding could be instituted by or against the Corporate Debtor. This also renders the red entry/charge created on the property of the Corporate Debtor on 07.01.2020 void in law”.

The court reiterated clean slate theory which was established by the Supreme Court in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. (2021) 9 SCC 657. This theory provides that that once a resolution is approved by NCLT, all debts including debts owed to the central or state government stand extinguished and the company is given to successful resolution applicant as if there were no liabilities owed by the company. As per section 31 of the IBC, this theory extends to acquisition plans also. The court stated as under:

“59 Thus, as held in the decision of the Supreme Court in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. & Ors. (2021) 9 SCC 657, the legislative intent was 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”.

“60 As per the amended Section 31 of the Code, the said principle of taking over Corporate Debtor under a Resolution Plan, will also apply to taking over by way of acquisition plan. This is referred to as the “Clean Slate” principle of IBC”.

The court further held that the tax authorities were estopped from raising their claims at this stage when the company had already been sold as a going concern. They did not raise their claims when the acquisition plan was approved by the NCLT which was further confirmed by the NCLAT on February 3, 2023. Later, this plan was also approved by the Supreme Court on August 7, 2023. During the course of entire proceedings, no claim was raised by them therefore they are estopped from raising it now.

The court rejected the argument that crown debt had priority over other debts. The court held as under:

“61 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 Corporate Debtor under the Himachal Pradesh Value Added Tax Act, 2005, Himachal Pradesh Goods and Services Tax Act, 2017 and the CST Act, 1956, would be clearly illegal & arbitrary”.

Conclusion

The High Court concluded that the tax authorities had no right to create charge on the properties of the corporate debtor as their claims had already been extinguished under the provisions of the IBC. They were also directed to remove the red entries made on the properties.

Case Title: Su-Kam Power System Ltd. and Anr.v.State of Himachal Pradesh and Ors.

Citation: 2024 LiveLaw (HP) 65

Court: High Court, Himachal Pradesh

Case Reference: CWP No.422 of 2024

Judgment Date: 21/08/2024

Click Here To Read/Download Order Or Judgment