SC slams NCLAT for ignoring precedent, calls move ‘perverse’

The Supreme Court has criticised the National Company Law Appellate Tribunal (NCLAT) for disregarding a binding precedent set by the apex court to the effect that once a resolution plan is approved by the National Company Law Tribunal, claims not included within it cannot be revived later.

The apex court also termed the tribunal’s decision “perverse” in a judgement that has far-reaching consequences -- simply because it reinforces the sanctity of the resolution process, paving the way for all parties involved to move forward after resolution, without worrying about the past.

A bench of justices Abhay S Oka and Ujjal Bhuyan held that NCLAT could not have ignored a judgment of the Supreme Court merely because it was not cited during the initial proceedings before the National Company Law Tribunal (NCLT).

“The reason given by NCLAT that the decision of this Court cannot be considered as it was not cited before the NCLT is perverse,” held the bench in a judgment last week.

The judgment overruled NCLAT’s 2021 decision and set aside additional tax demands imposed by the Income Tax Department while asserting that once a resolution plan is approved by NCLT, any claims not included within it stand extinguished and cannot be revived later.

The dispute arose in connection with the corporate insolvency resolution process (CIRP) of Tehri Iron and Steel Casting Ltd under the Insolvency and Bankruptcy Code, 2016 (IBC). Vaibhav Goel and Madhu Goel, who were joint resolution applicants, submitted a resolution plan on January 21, 2019. This plan was approved by NCLT on May 21, 2019.

The plan took into account a liability of ₹16.85 crore owed to the Income Tax Department for the assessment year 2014-15, listing it under “contingent liabilities.” However, after the approval of the resolution plan, the Income Tax Department issued fresh demand notices on December 26 and 28, 2019, concerning earlier assessment years 2012-13 and 2013-14. These demands were not raised before the resolution professional during CIRP.

When the appellants challenged these fresh tax demands before NCLT, the tribunal dismissed their application as “frivolous” and even imposed a cost of ₹1 lakh on them. An NCLAT bench led by justice Anant Bijay Singh subsequently upheld this ruling on November 25, 2021, prompting the appellants to approach the Supreme Court.

The Supreme Court found serious flaws in NCLAT’s reasoning and declared its ruling legally unsustainable. The bench held that NCLAT had wrongly disregarded the 2021 Ghanashyam Mishra judgment, which held that once a resolution plan is approved, all claims not forming part of the plan are extinguished and cannot be subsequently revived.

“The decision of this Court was brushed aside by the NCLAT, firstly on the ground that the said decision was not relied upon before NCLT and, secondly, on the ground that the appellants have not challenged the resolution plan. Unfortunately, NCLAT has ignored the binding precedent and the legal effect of the approval of the resolution plan,” the bench stated.

Calling the reasoning of NCLAT “perverse,” the bench maintained that under Section 31(1) of IBC, once a resolution plan is approved, it becomes binding on all creditors, including government authorities like the Income Tax Department. “The subsequent demand raised by the first respondent (revenue) for the assessment years 2012-13 and 2013-14 is invalid,” the judgment held.

This ruling reaffirmed the finality and sanctity of approved resolution plans under IBC, ensuring that creditors, including tax authorities, cannot raise fresh claims outside the resolution framework.

The bench made it clear that any belated claims raised after the approval of a resolution plan would create hurdles in the revival of distressed companies and defeat the very purpose of the insolvency resolution process.

“Once the resolution plan is approved by NCLT, no belated claim can be included therein that was not made earlier. If such demands are taken into consideration, the appellants will not be in a position to recommence the business of the corporate debtor on a clean slate,” the court held.