Simplified Explanation of the Judgment
In a significant ruling, the Patna High Court has clarified that once a corporate debtor’s resolution plan is approved under the Insolvency and Bankruptcy Code (IBC), all past claims not included in the resolution plan stand extinguished—including indirect tax demands raised by state tax authorities.
This case involved a steel manufacturing company with operations in Bihar. The Commercial Taxes Department had issued three separate tax assessments for the financial year 2016-17, demanding payment of taxes, interest, fines, and penalties under the Bihar Entry Tax Act, 1993, and the Bihar Value Added Tax Act, 2005. These demands amounted to over ₹96 lakh in total.
The company challenged these assessments, arguing that the tax liabilities related to a period before its Corporate Insolvency Resolution Process (CIRP) began. The company had undergone CIRP under the IBC, and its resolution plan had been approved by the National Company Law Tribunal (NCLT) on 5 September 2019. According to the approved resolution plan, all prior government dues, unless explicitly included in the plan, stood extinguished.
The company’s main contention was that the tax authorities did not submit their claims during the CIRP despite public notice and opportunity, and as such, they forfeited their right to demand payment post-resolution. They cited the Supreme Court’s decisions in Ghanashyam Mishra & Sons Pvt. Ltd. and Essar Steel India Ltd., both of which reinforce the principle that once a resolution plan is approved, all previous claims not part of it cannot be enforced.
In response, the Bihar Commercial Taxes Department argued that their assessments were based on discrepancies found during an audit for the relevant year and that the company remained liable even after the CIRP, especially since the business continued under the same trade name.
However, the Patna High Court firmly rejected this stance. The court observed that the resolution plan had clearly stated that all dues under indirect tax laws for any period prior to the effective date (5 September 2019) would stand extinguished. As the tax claims in question related to the financial year 2016–17, and were not included in the approved resolution plan, the court held that the state tax department’s demands were no longer enforceable.
The court also observed that the principles laid down by the Supreme Court were binding and left no room for interpretation—the resolution plan, once approved by the adjudicating authority, binds all stakeholders, including government departments.
Accordingly, the Patna High Court quashed all three impugned assessment orders and demand notices.
Significance or Implication of the Judgment
This judgment carries major implications for businesses undergoing insolvency proceedings and for government authorities seeking recovery of dues:
- For businesses: The decision reinforces that once a resolution plan is approved under the IBC, they can operate free from legacy claims not accounted for in the plan.
- For tax departments: It’s a reminder that all claims must be timely submitted during the CIRP. If they fail to do so, they cannot later pursue recovery.
- For the public and investors: It enhances the predictability and sanctity of resolution plans, encouraging smoother revival of financially distressed companies.
Overall, the ruling upholds the IBC’s objective of giving resolution applicants a clean break, ensuring that no old liabilities hinder the revival of the corporate debtor.
Legal Issue(s) Decided and the Court’s Decision with Reasoning
- Whether the tax demands raised after CIRP can be enforced against the corporate debtor for periods prior to the resolution plan’s approval?
- Court’s Finding: No. All such claims stand extinguished if not included in the approved resolution plan.
- Are indirect tax claims by the state government barred under Section 31 of the IBC post-approval of the resolution plan?
- Court’s Finding: Yes. The resolution plan is binding on all creditors, including government departments.
- Was the assessment order passed after the resolution plan’s effective date valid?
- Court’s Finding: No. The court quashed it since it pertained to dues for periods before the effective date.
Judgments Referred by Parties
- Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, (2020) 8 SCC 531
- Ghanashyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657
- Uttam Value Steels Ltd. v. Assistant Commissioner of Income Tax, Bombay HC (2022)
- Adhunik Metaliks Ltd. v. State of Odisha, Orissa HC (2022)
Judgments Relied Upon or Cited by Court
- Ghanashyam Mishra & Sons Pvt. Ltd., (2021) 9 SCC 657
- Uttam Value Steels Ltd., Bombay High Court, August 28, 2024
- Adhunik Metaliks Ltd., Orissa High Court, W.P. (C) No. 1553 of 2022
Case Title
Bhushan Power and Steel Limited v. State of Bihar & Ors.
Case Number
CWJC No. 4624 of 2022 (with CWJC Nos. 4637 and 4785 of 2022)
Coram and Names of Judges
Hon’ble Mr. Justice Rajeev Ranjan Prasad
Hon’ble Mr. Justice Ramesh Chand Malviya
Names of Advocates and Who They Appeared For
- For Petitioner(s):
- Mr. Sunit Kumar, Advocate (in CWJC No. 4624 and 4637)
- Mr. Siddhartha Prasad, Advocate (in CWJC No. 4785)
- For Respondent(s):
- Mr. Vikash Kumar, Standing Counsel (SC-11 and SC-5)
Link to Judgment
eda291fe-2d92-4f7c-9051-b87f48c3f034.pdf
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