GST Demand for Pre-Sale Dues Invalid Against Company Sold as Going Concern Under IBC.

Issue

Whether a GST demand under Section 73 for tax periods prior to the sale of a corporate debtor as a “going concern” during liquidation can be enforced against the successful purchaser, or if such dues are extinguished under the “clean slate” principle of the Insolvency and Bankruptcy Code (IBC).

Facts

• The petitioner, Rabirun Vinimay Pvt. Ltd., purchased a company (corporate debtor) as a “going concern” through the liquidation process under the IBC.

• Subsequent to the sale, the GST authorities issued a demand order under Section 73 against the company.

• The demand pertained to the financial years 2017-18 to 2019-20, which was the period prior to the petitioner acquiring the company.

• The petitioner challenged the demand, arguing that as a purchaser under the IBC liquidation process, they acquired the company on a “clean slate” basis and cannot be held liable for pre-existing statutory dues.

Decision

• The Calcutta High Court quashed and set aside the GST demand order.

• Relying on its earlier ruling in Kashvi Power Steel Pvt. Ltd., the Court held that the purchaser of a corporate debtor sold as a going concern in liquidation cannot be burdened with past liabilities.

• The Court affirmed that the “clean slate” principle applies: once the sale is complete, all historic dues (including tax arrears) stand extinguished as far as the purchaser is concerned.

• It emphasized that the primary objective of the IBC is corporate revival, which would be defeated if the new management were saddled with past debts.

• The Court clarified that the tax department’s remedy for recovering such pre-sale dues is restricted to the waterfall mechanism under Section 53 of the IBC (claiming from the liquidation estate), and they cannot pursue the successful buyer.

Key Takeaways

• Clean Slate in Liquidation: The “Clean Slate” doctrine protects buyers not just in Resolution Plans but also in liquidation sales where the entity is sold as a “going concern.” The buyer acquires a debt-free entity.

• Extinguishment of Past Dues: Statutory dues (GST, Income Tax, etc.) relating to the period before the sale are legally extinguished qua the new management. The department cannot recover these from the revived company.

• Revival Over Recovery: The judgment prioritizes the IBC’s goal of reviving keeping the corporate entity alive over the Revenue’s individual recovery rights, channeling the latter solely through the liquidation waterfall.

• No “Successor Liability” for Pre-CIRP Dues: This ruling acts as a strong precedent that the general principle of successor liability in tax laws is overridden by the specific provisions and objectives of the IBC.