Rainbow Papers Ruling Not Ground To Reopen Approved Resolution Plan Over Belated Tax Dues: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has observed that the Supreme Court's ruling in Sales Tax Officer v. Rainbow Papers Limited does not permit reopening of an approved resolution plan at the instance of a government department that failed to challenge the rejection of its claim at the appropriate stage.

In Rainbow Papers, the Supreme Court had held that statutory government dues could qualify as secured debts and could not be ignored in a resolution plan.

Dismissing twin appeals filed by the State Tax Officer, a Bench of Judicial Member Justice N. Seshasayee and Technical Member Arun Baroka underlined that finality of an approved resolution plan cannot be unsettled merely because the claim relates to government dues.

“Today the plan is approved, and we cannot reopen the plan to accommodate the prayer of the appellant. Lethargy before the judicial forum does not always accommodate leniency especially when it halts and holds the interest of stakeholders to the resolution process to ransom,” the tribunal observed.

The Committee of Creditors had approved the resolution plan for revival of Steamline Industries Limited on December 12, 2019. Nearly two years later, on November 3, 2021, the State Tax Officer lodged a claim of Rs. 1.33 crore based on an assessment made during the moratorium period. The Resolution Professional rejected the claim on November 24, 2021 on the ground of delay. The department did not challenge this rejection before the Adjudicating Authority.

The resolution plan was subsequently approved by the National Company Law Tribunal on August 11, 2023, applying the clean slate principle. Aggrieved by the approval, the department approached the appellate tribunal.

Before the NCLAT, the department argued that in view of the Supreme Court's decision in Rainbow Papers, its claim, being government dues, ought not to have been rejected merely on the ground of delay.

The appellate tribunal rejected this submission. It noted that in Rainbow Papers, the appellant had challenged the relevant proceedings at the appropriate stage. In contrast, the State Tax Officer in the present case had failed to challenge the Resolution Professional's rejection despite having the opportunity to do so.

“The law aids the one who is vigilant,” the bench observed, adding that although the Supreme Court in Rainbow Papers had expressed displeasure over resolution plans that ignore government dues, the judgment is “still not an authority for reopening a resolution plan for the benefit of one who is proved to have been lackadaisical in approaching the judicial fora.”

The tribunal further cautioned that permitting such conduct would render no resolution plan safe and prevent insolvency proceedings from ever attaining finality.

However, the bench clarified that if the approved resolution plan has reserved any amount towards contingent claims and such amount remains available, the successful resolution applicant may consider the department's claim.

Subject to this observation, the appeals were dismissed with no order as to costs.