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

In an important judgment delivered by the Himachal Pradesh High Court, the claims and red entries of the state tax department over the properties of Su-Kam Power Systems Ltd.(Corporate Debtor) were quashed. The corporate debtor was sold as a going concern under the provisions of the Insolvency and Bankruptcy Code (IBC). The court held that once the company was acquired and resolution plan was approved, all prior claims including claims of the tax authorities are extinguished. 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...

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

Mohd Malik Chauhan

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