Govt can't chase old tax dues after insolvency plan is approved

A company paid crores to buy a bankrupt firm. Then the tax department showed up demanding old dues.

The buyer had done everything right. It bid for a company in the insolvency process. It paid the money. It got the resolution plan approved by the National Company Law Tribunal (NCLT — the special court that handles corporate bankruptcy cases). The plan listed every creditor and every rupee they would get. The NCLT stamped it. The deal was done. On the buyer's desk, the stack of demand notices from tax authorities and state departments began to pile up — thin, official envelopes that threatened to undo everything.

Then the government arrived. Tax authorities. State departments. Local bodies. They all wanted money the old company owed before the insolvency began. Money that was never mentioned in the approved plan. Money the buyer never agreed to pay.

The question reached the Supreme Court: Could the government chase those old dues even after a resolution plan was approved? The answer changed how every bankrupt company in India gets sold.

When the tax notice arrived

The story begins with several companies that went through the Corporate Insolvency Resolution Process (CIRP — the formal process under the Insolvency and Bankruptcy Code, 2016, where a bankrupt company is either revived or liquidated). In each case, a resolution plan was approved by the NCLT under Section 31 of the IBC (the section that makes an approved plan binding on everyone involved).

One of the companies was OMML. Its insolvency process started on August 3, 2017, before the NCLT's Kolkata bench, when the CIRP was initiated and an Interim Resolution Professional (IRP — the person appointed to manage the company during the insolvency process) was appointed. Ghanashyam Mishra and Sons Pvt Ltd (GMSPL) submitted a resolution plan. Approved on June 22, 2018. GMSPL paid the money and took over the company.

But Edelweiss Asset Reconstruction Company Ltd (EARC), a financial creditor, appealed to the National Company Law Appellate Tribunal (NCLAT — the appellate court for insolvency cases). On April 23, 2019, the NCLAT partially allowed the appeal. It made observations that suggested rejected claimants could pursue their claims elsewhere even after the plan was approved.

That was the opening the government authorities needed. Across multiple cases — including Binani Cement (where the NCLAT approved UltraTech Cement's resolution plan on November 14, 2018, and UltraTech later filed a writ petition before the High Court of Allahabad on July 6, 2020, which was dismissed on the ground of alternative remedy) and Electrosteel Steels (where a writ petition was filed before the High Court of Jharkhand and dismissed) — tax departments and state governments started sending demand notices for pre-insolvency dues that were never part of the approved resolution plans.

The courtroom fell silent when the tax department's lawyer stood up. The argument was simple: statutory dues were sovereign claims, he said, untouchable by the IBC. Across the aisle, the resolution applicant's counsel held a single sheet — the approved plan — and argued that its finality was the very reason his client had bid at all.

The question that hung over every bankruptcy sale

The core issue was simple but devastating for buyers: If a resolution plan is approved by the NCLT, listing every claim and every payment, can a government authority later show up and demand money for old tax dues that were not included in the plan?

The successful resolution applicants — the companies that had paid good money to buy bankrupt firms — argued that the whole point of the IBC was to give a "fresh start." If every government department could come knocking after the plan was approved, no one would ever buy a bankrupt company. The revival objective of the IBC would be dead.

The government authorities argued the opposite. Statutory dues — taxes, fees, levies — were different from commercial debts, they said. The IBC could not extinguish the government's right to recover money owed under tax laws. These were sovereign claims that survived the insolvency process.

The Supreme Court consolidated all these matters under Civil Appeal No. 8129 of 2019 (along with connected matters). It had to decide: Does Section 31 of the IBC bind everyone — including the Central Government, state governments, and local authorities? And are claims not included in an approved resolution plan completely dead, or can they be revived later?

What the IBC actually says

The Insolvency and Bankruptcy Code, 2016, was designed to be a complete code — a single law that governs the entire process of resolving corporate insolvency. Section 31 says that once the NCLT approves a resolution plan, it is "binding on the corporate debtor, its members, creditors, guarantors and other stakeholders involved in the resolution plan."

The key phrase is "other stakeholders." The government argued that tax authorities were not "stakeholders" in the insolvency process — they were sovereign bodies collecting dues under separate laws.

The Supreme Court looked at the definition of "creditor" under Section 3(10) of the IBC. It includes anyone to whom a debt is owed. And "operational debt" under Section 5(21) includes debts owed to the government in respect of taxes, duties, and cess. The court said: If the government is owed money, it is a creditor. If it is a creditor, it is a stakeholder. And if it is a stakeholder, Section 31 binds it.

The court also pointed to Section 14 of the IBC (the moratorium — a legal freeze that stops all recovery actions once the insolvency process begins). During the moratorium, no creditor can sue the company or recover any debt. The whole point is to give the resolution professional time to find a buyer and prepare a plan that deals with all claims.

If the government could skip the moratorium and later recover dues not in the plan, the moratorium would be meaningless.

The 2019 amendment that changed everything

In 2019, Parliament amended Section 31 of the IBC through Section 7 of Act 26 of 2019. The amendment explicitly said that an approved resolution plan is binding on the Central Government, state governments, and local authorities. It also said that no proceedings for recovery of dues not included in the plan can be initiated or continued after approval.

The government authorities argued that this amendment was prospective — it applied only to plans approved after 2019. The plans in these cases were approved before the amendment. So, they said, the old law applied, and their claims survived.

The Supreme Court rejected that argument. It held that the 2019 amendment was "clarificatory and declaratory" in nature. It did not create a new rule. It merely made explicit what was already implicit in the original statutory scheme. The IBC, from its inception, intended that an approved resolution plan would bind all stakeholders and extinguish all claims not included in it.

The court cited its own judgment in the Essar Steel case (Committee of Creditors of Essar Steel India Ltd v. Satish Kumar Gupta, 2020), where it had already held that a resolution plan is binding on all stakeholders, including government authorities.

Why the court said no to government claims

The Supreme Court's reasoning was practical as well as legal. In its ratio decidendi — the binding principle of the judgment — the court held: "Thrusting additional liability on a successful resolution applicant beyond what is in the approved plan renders the plan unworkable and frustrates IBC's revival objective." That single sentence, buried in the judgment, became the shield that every future buyer would hold.

If successful resolution applicants could be saddled with additional liabilities after the plan was approved, the entire resolution process would become unworkable. No one would bid for a bankrupt company if they could not know the full cost of buying it.

The resolution plan is prepared based on the Information Memorandum (a detailed document prepared under Regulation 36 of the IBBI (CIRP) Regulations, 2016, that lists all known liabilities of the company). The resolution applicant bids based on that information. If the government can later spring hidden claims on the buyer, the plan becomes financially unviable. The revival objective of the IBC — to save companies and preserve jobs — would be frustrated.

The court also noted that the IBC is a complete code. It overrides other laws. If a tax law says the government can recover dues, but the IBC says those dues are extinguished after plan approval, the IBC prevails. Parliament intended the IBC to be the final word on corporate insolvency.

The court cited a string of precedents to reinforce this view: Innoventive Industries Ltd. v. ICICI Bank (2018), which established the primacy of the IBC over other statutes; K. Sashidhar v. Indian Overseas Bank (2019), on the finality of the commercial decision of the Committee of Creditors; Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh (2020), on the binding nature of approved plans; and Kalpraj Dharamshi v. Kotak Investment Advisors (2021), which reiterated that the IBC is a complete code. Each precedent tightened the noose around the government's argument.

What this means for every bankruptcy sale

The judgment settled the law. Once a resolution plan is approved by the NCLT under Section 31, it binds everyone — including the Central Government, state governments, and local authorities. All claims that are not part of the approved plan stand extinguished. No creditor, including the government, can initiate or continue any proceeding for recovery of dues not included in the plan.

The operative order of the court was clear: the appeals were allowed; the observations of the NCLAT permitting rejected claimants to pursue claims elsewhere were set aside; governmental authorities were bound by approved resolution plans; and non-plan dues were extinguished.

For resolution applicants — the companies that buy bankrupt firms — this is a shield. They can bid knowing that the plan they negotiate and pay for is the final word on what they owe. No surprise tax demands. No hidden government claims. The price they pay is the price.

For government authorities, the message is clear: If you have a claim against a company in insolvency, you must file it during the resolution process. You cannot skip the process and chase the buyer later. The IBC gives you a seat at the table — but if you do not show up, you lose your right to collect.

THE PLAY: When buying a bankrupt company, the approved resolution plan is your complete and final liability schedule — no government authority can demand old dues not included in it.

The tax notices were withdrawn. The buyer kept the company. The plan worked as designed.