Appeal dismissed upholding tax debt assignment after CIRP Form B admission; moratorium bars GST execution, assignment valid

NCLAT (PB) dismissed the appeal and upheld the assignment of a tax debt by the tax authority (R2) to a third party (R1). The Tribunal held that once the tax demand crystallised and R2 filed a claim in Form B during CIRP, the claim was properly admitted by the RP for Rs. 2,71,44,043; execution under the GST/MGST Acts was barred by the CIRP moratorium. Upon becoming an operational creditor, R2 validly assigned the debt to R1, who agreed to full reimbursement. The appeal lacked merit, though the Tribunal noted the SRA's plan treating tax dues as nil and flagged reassessment of tax assignment/discount issues.

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ISSUES PRESENTED AND CONSIDERED

1. Whether a tax demand assessed by a tax authority, which crystallised before or during Corporate Insolvency Resolution Process (CIRP), can be assigned by that authority to a private assignee in the absence of an express provision in the relevant State GST statute and notwithstanding Article 265 of the Constitution.

2. Whether, upon admission of a claim by a tax authority in CIRP and imposition of moratorium under Section 14 of the Insolvency and Bankruptcy Code (Code), the tax demand transforms into an operational debt such that the tax authority becomes an operational creditor and may legally assign that debt to a third party, with consequences for Committee of Creditors (CoC) composition and voting.

3. Whether the Resolution Professional (RP) and the Adjudicating Authority (Tribunal) committed jurisdictional error or breached Regulation 28(2) or other duties by recognizing and recording the assignment and reconstituting the CoC on that basis, and whether such reconstitution vitiates subsequent CoC decisions (including plan approval).

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Legality of assignment of a tax demand under constitutional and statutory law

Legal framework: Article 265(Constitution) prohibits levy or collection of tax except by authority of law; the State GST statute (MGST Act) prescribes levy, collection and specified recovery mechanisms (Sections 9, 32, 76, 79); Rules provide procedures for demands and recovery. The Code governs claims, classification as operational debt (Section 5(21)), and recognizes assignment of operational debt (definition of operational creditor, Section 5(20)).

Precedent treatment: No specific precedent in the judgment overruled or followed; parties relied on established principles that taxes are sovereign functions and recoveries must follow fiscal statutes, and on IBC jurisprudence that operational debts may be assigned.

Interpretation and reasoning: The Court distinguishes two states of the same money: (a) where the tax is sought to be collected under tax law from a non-insolvent debtor - tax statutes and officers exclusively govern collection, and assignment to private parties would impermissibly delegate sovereign power; and (b) where the corporate debtor has been admitted into CIRP and moratorium under Section 14 operates - enforcement under tax statutes is barred and the tax demand, insofar as it is a claim in CIRP proceedings, becomes an operational debt within the Code's machinery. Once converted to an operational debt admitted in CIRP, the creditor may exercise rights under the Code, including assignment, subject to compliance with RP/Regulatory procedures (e.g., intimation under Reg.28(2)).

Ratio vs. Obiter: Ratio - where a tax demand is admitted as a claim in CIRP and moratorium prevents statutory recovery, the tax claim operates as an operational debt under the Code and may be assigned by the creditor as a debt; Obiter - broader implications for assignments made by tax authorities outside CIRP context and policy concerns about discounting of tax receivables are noted for reconsideration.

Conclusion: Assignment of the admitted tax claim to a private assignee during CIRP does not violate Article 265 or the MGST Act in the circumstances where statutory recovery is barred by moratorium and the claim stands admitted under the Code; the assignment in such circumstances is permissible as assignment of an operational debt.

Issue 2 - Characterisation of the tax demand as operational debt and consequences for operational creditor status and assignability

Legal framework: Definitions and scheme of the Code - "claim" (Section 3(6)), "debt" (Section 3(11)), "operational debt" (Section 5(21)), and "operational creditor" (Section 5(20)); Regulations governing submission and collation of claims (Regulation 7) and disclosure/notice obligations upon assignment (Regulation 28(2)).

Precedent treatment: The Court relies on statutory definitions and the integrated scheme of the Code rather than distinguishing older tax-collection precedents; submissions citing cases invalidating illegally constituted CoC were noted but applied factually.

Interpretation and reasoning: Once a tax demand is filed as a claim in Form B and collated by the RP, it constitutes a "claim" under the Code; where the claim is a liability in respect of dues payable to government it falls within the definition of operational debt. Consequently, the revenue authority becomes an operational creditor for purposes of CIRP and the Code's provisions on assignment of debts and transferee rights apply. The assignee thereby acquires the assignor's rights as an operational creditor provided the assignment is legally effected and brought to the RP/Adjudicating Authority's notice as required.

Ratio vs. Obiter: Ratio - tax claims admitted in CIRP are operational debts within the Code and may be assigned to another person who becomes an operational creditor; Obiter - policy/practical considerations about whether tax authorities should assign claims and the implications of discounting are raised but not decided.

Conclusion: The characterisation of the assessed tax demand as operational debt was correct once the claim was admitted in CIRP; the assignor therefore had the capacity to assign its debt and the assignee acquired voting rights in CoC in accordance with the Code and Regulations.

Issue 3 - Validity of RP/Tribunal actions in recording assignment, reconstituting CoC, and effect on plan approval

Legal framework: Regulation 28(2) (intimation to AA about change in composition), RP duties in collating claims, Section 14 moratorium, and the Code's scheme for voting and plan approval by CoC.

Precedent treatment: Authorities on vitiation of CoC decisions by illegal constitution were relied upon by the appellant, but the Court examined factual sufficiency of error in reconstitution rather than applying a categorical rule.

Interpretation and reasoning: The RP received the assignment documentation, notified the CoC, filed the requisite application under Section 60(5) to take the reconstitution on record, and the Tribunal took the reconstitution on record. Regulation 28(2) was complied with by intimating the Adjudicating Authority. There was no demonstrated error by the RP in collation or by the Tribunal in recording the change. The Court observed that the assignee had paid the admitted amount in full and that no legal injury to the assignor was shown; subsequent approval of the plan by the CoC was therefore not vitiated by the reconstitution grounded on a valid assignment recorded before the CoC decisions.

Ratio vs. Obiter: Ratio - where assignment of an admitted operational claim is validly effected and brought to the RP/Adjudicating Authority's notice in accordance with Regulations, the RP/Tribunal's recording of reconstitution does not vitiate CoC decisions taken thereafter; Obiter - factual situations where assignment may be impermissible or where procedural non-compliance affects plan validity are left open.

Conclusion: There was no jurisdictional error or breach of Regulation 28(2) by the RP or the Tribunal in recognizing the assignment, reconstituting the CoC and taking subsequent CoC decisions; impugned challenge to those actions fails.

Additional observations (obiter)

The Court observed concerns meriting separate attention: (a) significant admitted claims to tax authorities in the CIRP data and instances where certain governmental dues (e.g., income tax) were treated as nil in a proposed plan, raising questions of parity and policy; (b) presence of discount provisions in the assignment agreement suggests practical effects of assignment (reduction of receivables) that warrant re-examination from policy and statutory perspectives. These observations do not form part of the operative ratio.

Final disposition

The appeal was dismissed: the Tribunal's rejection of the challenge to the assignment and recognition of the assignee as CoC member was upheld; no costs awarded; pending I.A.s closed.

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