Final Approval of Resolution Plan Extinguishes All Prior Claims

In a decision delivered by Delhi High Court on June 24, 2024 in the case of The National Sewing Thread Company Limited v. Deputy Commissioner of Income Tax (2024 DHC 4771-DB) it was held that once a resolution plan is approved by the adjudicating authority, the claims not included in the resolution plan stand extinguished, and the same is binding on all stakeholders, including the Central and State governments.


This case involves a challenge to the assessment order, issued by the Deputy Commissioner of Income Tax (the respondent) by the National Sewing Thread Company Limited (the petitioner) under Section 143(3) of the Income Tax Act, 1961. The petitioner in this case, had its Resolution Plan for revival and restructuring approved by the National Company Law Tribunal (NCLT), Chennai, on December 6, 2021. Despite this, the respondent issued an assessment order and notices under the provisions of the Income Tax Act, 1961. It was contended by the petitioner that these notices and the order were legally untenable as they contradicted the Insolvency and Bankruptcy Code, 2016 (the IBC), which envisages the revival of a company on a “Clean Slate Basis.”


Thus, the issue in this case was whether the respondent’s issuance of the assessment order and subsequent notices were valid and enforceable in light of the NCLT’s approval of the Resolution Plan for the petitioner company under the IBC, 2016.


On hearing the contentions of both parties to the case, the court observed that upon final approval of the Resolution Plan by the NCLAT, all past claims and liabilities that did not form a part of the Resolution Plan were extinguished as of the date of the approval. The Court also observed that upon approval of the Resolution Plan, a new management took over the petitioner-company, for the implementation of the Resolution Plan as per the scheme of IBC, on a “Clean Slate Basis.” The Court thus held that, once a Resolution Plan is duly approved by the adjudicating authority under Section 31(1) of the IBC, 2016, the claims as provided in the Resolution Plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government, or any local authority, guarantors, and other stake holders.

Thus, the court disposed of the case by reiterating that the Resolution Plan’s approval by the NCLT results in the extinguishment of all previous claims and liabilities not included in the plan, thereby quashing the assessment order and the notices issued by the respondent.