2026 (3) TMI 762 - AT - IBC

Waterfall mechanism: belated, uncrystallised tax claims do not invalidate approved resolution plans and may reduce pro rata shares.

Where a resolution plan was approved under the insolvency framework, the article explains that the Resolution Professional did not err in declining to ... Validity of Resolution Professional in not considering/admitting the Income Tax Department's claim during the CIRP - Extinguishment of claims on approval of resolution plan - Resolution Professional - Claim verification and admission during CIRP - Operational creditor - priority of distribution under Section 53 waterfall mechanism - delay and failure to seek remedies before the Adjudicating Authority - Whether such non-consideration of the claim of the IT Department by the RP has led to reduction in amount receivable by the IT Deptt. under the resolution plan. Claim verification and admission during CIRP - HELD THAT:- The Tribunal found that the RP repeatedly requested supporting assessment orders to crystallise the tax claim and that the assessment order was first provided to the RP on 30.05.2024, after the CoC had approved the plan and after the RP had filed for plan approval. The RP had communicated pendency of plan approval to the Department, affording an opportunity to pursue admission before the Adjudicating Authority; the Department did not file an application then. Given the chronology and consistent email exchanges seeking documents, the Tribunal held that the delay in seeking admission was attributable to the Department and there was no laxity or irregularity on the part of the RP in dealing with the claim. [Paras 11, 12] No error was found in the RP's non-admission of the claim; the failure to pursue admission before the Adjudicating Authority rested with the Income Tax Department. Priority of distribution under Section 53 waterfall mechanism - claim verification and admission during CIRP - HELD THAT:- The Tribunal applied the statutory waterfall under Section 53 and the admitted facts of liquidation value, total plan value and allocations. The plan provided Rs. 20 lakhs with the CIRP costs taking first priority; after satisfying higher priorities, only a small pool remained for unsecured and government operational creditors. On the figures in the plan, even if the Department's claim had been admitted in full, its proportional share of the government creditors' pool would have been lower than the sum actually allocated to it. The Tribunal therefore concluded that the Department received more under the approved plan than it would have received had its claim been admitted and quantified in the admitted claims pool. [Paras 18, 19, 20, 21, 22] The Department did not suffer a reduction in recoverable amount; the allocation it received under the resolution plan was not less than what it would have obtained had its claim been admitted. Final Conclusion: The appeal is dismissed; the Tribunal found no infirmity in the impugned order, holding that the RP did not err in verification or non-admission of the tax claim and that the Department was not prejudiced in the quantum received under the approved resolution plan. Issues: (i) Whether the Resolution Professional erred in not considering/admitting the Income Tax Department's claim during the CIRP; (ii) Whether the non-admission or non-crystallisation of the Income Tax Department's claim resulted in the Department receiving a lesser amount under the approved resolution plan.Issue (i): Whether the Resolution Professional erred in not considering/admitting the Income Tax Department's claim during the CIRP.Analysis: The claim submission timeline shows requests by the RP for assessment orders to crystallise the demand and the assessment order was provided to the RP for the first time on 30.05.2024 after the CoC had approved the resolution plan and after the RP had filed the plan approval application. The RP had repeatedly sought supporting assessment orders through emails; the Appellant did not pursue available remedies before the Adjudicating Authority during pendency of the plan approval application despite being informed of the filing. The record does not establish any omission or irregularity by the RP in processing the claim prior to receiving the assessment order; the communication evidence reflects ongoing verification requests.Conclusion: The Resolution Professional did not err in not admitting the Income Tax Department's claim; no infirmity is found against the RP.Issue (ii): Whether the non-admission or non-crystallisation of the Income Tax Department's claim resulted in the Department receiving a lesser amount under the approved resolution plan.Analysis: The approved plan provided a total corpus of Rs. 20 lakhs with Rs. 13.5 lakhs allocated to CIRP costs, leaving Rs. 6.5 lakhs for other creditors. The admitted claims and amounts provided show that government operational creditors received a distribution consistent with Section 53 priority. A hypothetical admission of the IT claim would have increased the category claim pool and proportionately reduced individual shares; computation on record indicates that if the IT claim had been admitted in full the Department's share would have been approximately Rs. 75,000, whereas under the approved plan the Department received Rs. 1.5 lakh.Conclusion: The non-admission of the claim did not cause the Income Tax Department to receive a lesser amount; the Department received an amount greater than it would have received had the claim been admitted.Final Conclusion: The impugned order approving the resolution plan contains no legal or factual infirmity warranting interference; the appeal is therefore dismissed.Ratio Decidendi: Where a resolution plan is approved under the Insolvency and Bankruptcy Code, 2016 and distribution is governed by the waterfall mechanism in Section 53, claims not duly crystallised or admitted during CIRP do not establish error by the Resolution Professional if the RP sought required documents and the creditor failed to pursue available remedies; furthermore, approval of a plan and its distribution within the Section 53 priorities will not be set aside merely because a creditor's belatedly crystallised claim might numerically alter proportional shares.