Under the Insolvency and Bankruptcy Code, 2016 ("Code"), a resolution plan once approved by an Adjudicating Authority becomes a statutory binding on all stakeholders, including the Government authorities. A corporate debtor is released from the clutches of its past liabilities and dues. 

The importance of the insolvency resolution process ("CIRP") is that not only is the corporate debtor to be put back on its feet, but that the resolution applicant whose plan is accepted must be able to start on a fresh slate. 

Having said so, recently, the Hon'ble Rajasthan High Court, in  Ultra Tech Nathdwara Cement Ltd. ("UltraTech"), (formerly known as Binani Cements Ltd.) vs. Commissioner, Central Goods And Service Tax and Central Excise Commissionerate and Ors., held that no demands can be raised by any statutory body (in this case the GST authorities), for a period prior to the approval of resolution plan, and after the resolution plan is successfully being executed.

Brief facts of the case

The instant matter arose out of claims made by GST authorities towards dues pertaining to the period prior to the CIRP, despite resolution plan being fully implemented.

The erstwhile corporate debtor (assessee in facts of the present case), Binani Cement had suffered huge losses and was unable to pay the debts to its financial creditor, Bank of Baroda due to which it was dragged into the CIRP process under the Code. Consequently, Binani Cements was acquired by the Aditya Birla Group-owned cement company, UltraTech through the CIRP.

The primary issue in the dispute was with respect to the notices which were issued to UltraTech by the GST Department of Rajasthan for all the old unpaid dues of Binani Cement which were challenged by UltraTech.

The GST Department contended that it was not heard by the committee of creditors ("CoC") before finalising the resolution plan and as such, it was not bound by it. The successful resolution applicant, Ultratech on the other hand argued that that the Code is a special statute law, which has been enacted to maximise the value of assets and keep the company as a going concern and to ensure that company does not go into liquidation.

The Court after hearing the parties held that the purpose of the Code is revival and providing a resolution applicant to take over the company on a clean slate. The Court held that the demand notices given by the GST authorities are "totally illegal and arbitrary manner while pressing for demands raised vide the notices which are impugned in this writ petition and any other demands which they may contemplate for the period prior to the resolution plan being finalized. The demand notices are ex-facie illegal, arbitrary and per-se cannot be sustained and therefore the demands pending as on the date of finalization of the resolution plan issued/raised by the respondents Central Goods and Service Tax Department, Govt. of India are quashed and struck down"

Analysis of the above judgement:

Liabilities pertaining to the period prior to the approval of resolution plan and their treatment: - 

The response to the above lies in Section 31 of Code, wherein it has been provided that the resolution plan "shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan

The inclusion of government dues, which did not originally form part of the Code and was inserted only in August, 2019, gives an indication that the same was included in the Code owing to the practical situations that were emerging during the CIRP process and which cropped up while approval of resolution plans.

In addition to the above, the Apex Court also in the matter Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors1 had held that a successful resolution applicant cannot suddenly be faced with undecided claims after the resolution plan being submitted by him. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid, it leaves no room for doubt that no creditor can later on make claims or demand any sum pertaining to a period prior to passing of resolution plan.

Hence, where the claims submitted by such statutory creditors which have been considered and dealt with in the resolution plans, with haircuts, the creditor shall not be in position to again claim the sum, or a part of the sum that pertains to a period prior to commencement of CIRP.

In fact, the recently inserted section 32A2 of the Code also gives immunity to a corporate debtor from the liability/ prosecution for an offence committed prior insolvency commencement, once a resolution plan is approved. The very fact that this provision was inserted so as to incentivise the potential resolution applicants to give plans for stressed companies and avoid liquidation. 

In a notification dated March 21,20203 the IPR/RP has to now apply for new GSTIN in the principal place of business of the corporate debtor within thirty days of his appointment. The IRP/RP will be treated as a distinct person. In case, if the IRP/RP is registered before the date of notification, then such IRP/RP has to apply within thirty days from the date of the commencement of the notification.  

The Ministry of Finance Department vide their Circular dated March 23,20204 in accordance with the provisions of the Code and various legal pronouncements on the issue had also clarified that no coercive action can be taken against the corporate debtor with respect to the dues for period prior to insolvency commencement date. 

The dues prior to the commencement of CIRP will be treated as operational debt and claims may be filed in accordance with the provisions of the Code.

Position of operational creditors

The recent judicial pronouncements one has seen the clear demarcation, qua the financial and operational creditors (OC's) being made and their respective treatments received under the plan.

Despite the claims of OC's being determined in the resolution plans, the OC's have no rights to vote or decide upon approval of the plan as per the existing provisions of the Code.

To address the issue of voting by OC's the Insolvency Law Committee's recent report in February, 2020 ("Report") had suggested that a resolution plan, which can alter rights of an OC's, and which is eventually binding on every creditor of the corporate debtor, the Committee discussed and deliberated whether, it would be beneficial to provide OC's with voting powers in meetings of the CoC, in order to ensure that the provisions of the Code are aligned with global best practices.

However, the Committee for the moment did not find it prudent to confer voting rights on the OC's and deferred their findings in their Report to a later date, subject to their further assessment.

The purpose of Code is revival and to being the company back on its feet with the help of a resolution plan. If time and again the statutory authorities create a roadblock by demanding prior payments before the CIRP when the same has already been settled under the aegis of an approved resolution plan it would in our view not only defeat the purpose of enactment of the Code, but also disincentivise the potential resolution applicants to bid for such companies.


1 CIVIL APPEAL NO. 8766-67 OF 2019

2 Ins. by Act No. 1 of 2020, sec.10 (w.e.f. 28-12-2019)

3 Notification No. 11/2020 – Central Tax

4 Revenue Central Board of Indirect Taxes and Customs GST Policy- Circular No. 134/04/2020-GST

Originally published April 20, 2020.

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