Once a Resolution Plan is Approved under the Insolvency and Bankruptcy Code, Any Governmental Claims Not Included in the Plan Are Extinguished

The High Court held that once a resolution plan is approved under the Insolvency and Bankruptcy Code, any governmental claims not included in the plan are extinguished, rendering subsequent charges against the corporate debtor’s property void.

The Himachal Pradesh High Court Division Bench led by Chief Justice M.S. Ramachandra Rao and Justice Satyen Vaidya reviewed a Petition and observed that once a resolution plan is approved under the Insolvency and Bankruptcy Code, any governmental claims not included in the plan are extinguished, rendering subsequent charges against the corporate debtor’s property void.

In the matter concerning the petitioners, the 1st petitioner, a company incorporated under the Companies Act, faced legal challenges related to charges against its properties due to outstanding dues from its previous management. These dues were under the Himachal Pradesh Value Added Tax Act, the Central Sales Tax Act, and the Himachal Pradesh Goods and Services Tax Act. The 1st petitioner engaged in manufacturing and trading in inverters and batteries and had obtained financial facilities from several creditors, notably the State Bank of India. Due to financial defaults by the erstwhile management, the State Bank initiated a Corporate Insolvency Resolution Process (CIRP), leading to the company's admission into CIRP on April 5, 2018, accompanied by a moratorium and the replacement of the management by a Resolution Professional.

As the CIRP progressed, the creditors opted for liquidation, which the NCLT approved on April 3, 2019, appointing a Liquidator tasked with potentially continuing the business. The Department of State Taxes & Excise filed a substantial claim for unpaid taxes against the Liquidator. Subsequently, the government marked red entries against the company's properties for the dues, which raised concerns regarding adherence to principles of natural justice and the provisions of the Insolvency and Bankruptcy Code (IBC), particularly given the lack of notice to the Liquidator.

The Liquidator recognized the government's claim as that of an "Operational Creditor" and later invited bids for the company, with the 2nd petitioner emerging as the highest bidder with a proposal of ₹49.95 crore. The acquisition plan included provisions for settling operational creditor claims through the sale proceeds. On May 11, 2022, the NCLT approved the acquisition plan, leading to the completion of the sale and the issuance of a Certificate of Sale.

Despite the completion of these legal processes, the respondents persisted in asserting their claims, prompting the petitioners to seek judicial intervention through a writ petition. They argued that the acquisition plan was binding and that the actions of the respondents in maintaining charges against the properties were illegal and arbitrary. The petitioners relied on the Supreme Court's ruling in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asst Reconstruction Company Limited and Others, REEDLAW 2021 SC 04534, which clarified that any governmental dues not included in an approved resolution plan would be extinguished upon such approval, reinforcing the IBC’s intent to provide a "clean slate" for corporate debtors post-resolution.

Upon reviewing the case, the court found that the actions taken by the respondents violated the IBC and the moratorium provisions, rendering the charges on the properties void. Therefore, the court issued a Writ of Mandamus directing the removal of the respondents' charges, confirming that their claims regarding tax dues were indeed extinguished following the acquisition. The petition was allowed, and any pending miscellaneous applications were disposed of accordingly.

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