A court has stayed a GST demand raised for a pre-IBC resolution plan period.

A court has stayed a GST demand raised for a pre-IBC resolution plan period.

Issue

Can the GST department raise and recover a tax demand for a period that is prior to the approval of a company’s resolution plan under the Insolvency and Bankruptcy Code (IBC), especially when the department failed to file a claim for that demand during the insolvency process?

Facts

• A significant GST demand of ₹98.83 crore was raised on Bhushan Power and Steel Ltd. (BPSL). The demand pertained to the period from July 2017 to January 2020.
• BPSL had undergone a Corporate Insolvency Resolution Process (CIRP), and its resolution plan was formally approved by the NCLT/NCLAT, becoming effective on February 17, 2020.
• The entire period of the GST demand was before the resolution plan became effective.
• Crucially, the GST authorities had failed to lodge any claim for this potential tax liability with the Resolution Professional during the CIRP. They raised the demand notice only after the plan was already approved and the company was under new management.
• BPSL challenged the demand in the High Court, arguing that under the IBC, once a resolution plan is approved, all prior, unclaimed liabilities are permanently wiped out.

Decision

The Orissa High Court, in an interim order, ruled in favour of the assessee.

• The court relied on the binding precedents set by the Supreme Court in the landmark cases of Ghanashyam Mishra & Sons and JSW Steel Ltd., which established the “clean slate” theory.
• Finding that the assessee had a strong prima facie case, the court granted an interim stay on the recovery of the entire ₹98.83 crore demand, pending a final decision in the matter.

Key Takeways

1. The “Clean Slate” Doctrine is the Law: Once a resolution plan is approved under the IBC, the company gets a “clean slate.” All debts and liabilities from the period before the plan’s approval, including statutory dues like taxes, are permanently extinguished if they are not part of the approved plan. This principle is the settled law of the land.
2. Creditors Must Be Vigilant: All creditors, including government bodies like the GST and Income Tax departments, have a responsibility to be diligent and to file their claims with the Resolution Professional during the CIRP. If they fail to file a claim on time, their right to recover those dues is lost forever.
3. The IBC Overrides Tax Laws: The provisions of the Insolvency and Bankruptcy Code, 2016, have an overriding effect on other statutes, including tax laws. The primary goal of the IBC—to revive a struggling company and give it a fresh start—takes precedence over the recovery of old government dues.
4. Interim Stays Provide Immediate Protection: When a tax demand is issued in clear violation of a settled legal principle (like the “clean slate” doctrine), the High Courts can and will grant an interim stay. This protects the company from coercive recovery actions while the case is being heard on its final merits.