Section 31 of Insolvency and Bankruptcy Code, 2016 (IBC) and its Judicial Implications
Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC) plays a crucial role in the corporate insolvency resolution process (CIRP), significantly impacting various stakeholders, especially tax authorities. Here’s a concise summary of its key implications and judicial interpretations:
Binding Nature of Resolution Plan (RP):
Once a resolution plan is approved by the National Company Law Tribunal (NCLT) under Section 31 of the IBC, it becomes binding on the corporate debtor and all stakeholders, including creditors and government authorities. This includes statutory dues owed to tax authorities.
Impact on Tax Claims:
Judicial interpretations, exemplified in cases like Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., emphasize that claims included in the approved resolution plan are frozen upon approval. Claims not included are extinguished, meaning tax claims not part of the plan lose their enforceability.
Validity of Tax Notices and Proceedings:
Assessment and Demand Notices: Post-approval of a resolution plan, assessment orders and demand notices issued are deemed invalid, as per rulings such as National Sewing Thread Co. Ltd. v. Dy CIT.
Reassessment Notices: Cases like Ireo Fiveriver (P.) Ltd. v. ITD clarify that attempts to issue reassessment notices for periods preceding plan approval are impermissible under IBC provisions.
Moratorium and Legal Proceedings:
Section 14 of the IBC imposes a moratorium upon commencement of CIRP, halting all legal proceedings, including tax proceedings, against the corporate debtor. This moratorium shields the debtor from fresh litigation during the resolution process.
Criminal Liability:
The decision in Vasan Healthcare (P.) Ltd. v. DIT (Investigation) asserts that criminal liability cannot be transferred to new management post-approval of the resolution plan. This shields new management from prosecution for offenses committed by previous management.
In summary, Section 31 of the IBC, backed by judicial interpretations, ensures that an approved resolution plan provides a comprehensive framework for debt restructuring and shields the corporate debtor from liabilities not expressly covered in the plan. This mechanism aims to facilitate the revival of distressed entities without burdening them with unresolved tax claims or criminal liabilities from the past, thereby promoting a smoother recovery and rehabilitation process under the IBC.
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