Assignment of Tax Dues as Debt to Private Parties during Insolvency – A Paradigm Shift under IBC?

Background:

The recent decision of the Hon’ble National Company Law Appellate Tribunal (NCLAT) in Ellison Oil Field Services Pvt. Ltd. Versus CITOC Ventures Pvt. Ltd. & Ors. - 2025 (9) TMI 1164 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI has sparked a significant debate on the nature and assignability of statutory dues in insolvency proceedings.

The ruling has, for the first time, recognized that sovereign tax dues, once admitted as claims under the Insolvency and Bankruptcy Code, 2016 (IBC), can be assigned to private parties and that such assignees qualify as operational creditors entitled to full participation and voting rights in the Committee of Creditors (CoC).

This decision marks a transformative development in insolvency jurisprudence, expanding the contours of what constitutes “debt” under the IBC and opening new avenues in India’s distressed debt market.

Facts of the Case

• SES Energy Services India Pvt. Ltd. was admitted into CIRP on 25.11.2022.
• The Assistant Commissioner (GST & Excise) filed a claim as an operational creditor.
• Later, the department assigned this debt to CITOC Ventures Pvt. Ltd. via an Assignment Deed (13.12.2023).
• CITOC’s voting rights in the Committee of Creditors (CoC) increased after assignment.
• Ellison Oil Field Services challenged this assignment before NCLT, arguing that sovereign dues cannot be assigned.
• NCLT, Mumbai rejected the plea on 21.08.2024, leading to appeal before NCLAT

Issues before the Tribunal

• Whether statutory tax dues owed to the Government can be assigned to private parties during CIRP?
• Whether such assignees can be recognized as operational creditors under the IBC?
• Whether CoC decisions taken with the enhanced voting share of such assignees remain legally valid?

Core Legal Issue

Whether sovereign tax dues, once admitted as claims under CIRP, can be assigned to private entities, and whether such assignees qualify as operational creditors under the IBC?

Arguments Advanced

Appellant’s Contentions

• Tax dues are sovereign in nature and represent an inalienable right of the State; hence, they are non-assignable.
• Allowing assignment would commercialize sovereign authority, enabling private entities to purchase control in the CoC through assigned government dues.
• The assignment deed is contrary to public policy and therefore unenforceable under Section 23 of the Indian Contract Act, 1872.
• CoC decisions influenced by such assignments should be declared void ab initio.

Respondents’ Submissions

• Under Section 3(11) and Section 5(21) of the IBC, “debt” includes dues payable under any law for the time being in force, encompassing tax dues.
• There is no statutory prohibition under the IBC or the Central Goods and Services Tax Act, 2017, against the assignment of such debts.
• Assignment of debt is a recognized commercial practice under the Transfer of Property Act, 1882.
• The assignee steps into the shoes of the assignor and is entitled to all rights, including CoC participation and voting.

Judgment and Reasoning

The Hon’ble NCLAT upheld the NCLT’s decision, recognizing the assignment of tax dues as valid and enforceable under the IBC framework. The Appellate Tribunal’s reasoning rested on the following key findings:

1. Nature of Statutory Dues: Once a tax department lodges a claim in CIRP, the amount crystallizes into a “debt” within the meaning of Section 3(11) of the IBC. Its sovereign character, therefore, transitions into that of a recoverable liability governed by the Code.
2. Assignability of Debt: Neither the IBC nor any other legislation prohibits assignment of statutory or sovereign dues. The principle of free transferability of debts applies unless specifically restricted by law.
3. Status of the Assignee: The assignee of a valid debt steps into the shoes of the assignor and is entitled to identical rights and obligations under the IBC, including recognition as an operational creditor under Section 5(20) and participation in the CoC.
4. Validity of CoC Decisions: Since the assignment was legally valid, all CoC decisions taken with the voting participation of CITOC Ventures were held binding and unimpeachable.

Ratio Decidendi:

• Tax dues, once admitted in insolvency proceedings, lose their sovereign immunity and become assignable debts.
• The assignee of such dues is a legitimate operational creditor entitled to all consequential rights under the IBC, including voting in the CoC.
• The IBC’s objectives of value maximization and resolution efficiency justify the recognition of such assignments, promoting liquidity in the insolvency ecosystem.

Implications:

Possible Challenges Ahead

• Constitutional Questions: Whether sovereign dues can be commercialized consistent with Article 265 and fiscal sovereignty principles
• Statutory Conflicts: Tax laws such as the GST Act or Income Tax Act do not expressly permit assignment, which could lead to legislative intervention.
• CoC Governance Risks: Potential conflicts of interest or misuse through strategic acquisition of assigned debts for CoC control.

Practical Takeaways:

Conclusion

The NCLAT’s judgment in Ellison Oil (cited supra) represents a paradigm shift in Indian insolvency jurisprudence, blurring the traditional boundary between sovereign and commercial debt. By recognizing the assignability of tax dues, the Tribunal has expanded the scope of operational debt, thereby strengthening the secondary market for distressed assets.

While the decision aligns with the IBC’s objectives of value maximization and creditor empowerment, it simultaneously invites policy and constitutional scrutiny regarding the commercialization of sovereign claims. A definitive pronouncement from the Supreme Court or a legislative clarification may be needed to harmonize this innovation with the overarching principles of fiscal sovereignty and insolvency integrity.

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