When a company is unable to pay its debts and goes through the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016, a person called the Resolution Professional (RP) is appointed to take control of the company.
One of the most important responsibilities of the RP is to make sure that the company follows all the rules and laws laid down by the government. This is called statutory compliance.
- Who is a Resolution Professional?
A Resolution Professional is a qualified and licensed professional appointed to manage the affairs of a company when it goes through insolvency. The RP ensures that the company is managed properly and that efforts are made to either revive it or take it through liquidation, depending on the situation.
Initially, the National Company Law Tribunal (NCLT) appoints an IRP on the insolvency commencement date. The IRP’s role is to manage the debtor’s affairs and form the CoC.
The IRP convenes the CoC, which is comprised of various creditors of the debtor.
The CoC then selects the RP, who is responsible for conducting the CIRP and developing a resolution plan for the debtor.
The Committee of Creditors (CoC) comprising of financial creditors is the supreme decision making body during the CIRP. The Resolution Professional appointed by the National Company Law Tribunal (NCLT) is tasked with the implementation process under the directions of the CoC. However, Resolution Professional is responsible to comply with all statutory laws and also arrange to pay the tax during his period till the time resolution process is finally concluded.
- What is Statutory Compliance?
Statutory compliance means following all the laws and rules that apply to a business. These include:
- Tax laws and regulations thereunder (like GST, income tax, TDS, etc.)
- Labour laws and regulations thereunder (like provident fund, ESI, employee benefits, etc.)
- Environmental laws and regulations thereunder
- Company laws and regulations thereunder (like filings with the Registrar of Companies)
- Any other applicable government laws and regulations thereunder
If a company does not follow these laws, it may have to pay penalties, face legal action, or lose its reputation.
- Duties of RP in Statutory Compliance
Section 25 of Insolvency and Bankruptcy Code clearly provides the duties of Resolution Professional which is reproduced below:
Section 25. Duties of resolution professional.
(1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.
(2) For the purposes of sub-section (1), the resolution professional shall undertake the following actions, namely:—
(a) take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor;
(b) represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings;
(c) raise interim finances subject to the approval of the committee of creditors under section 28;
(d) appoint accountants, legal or other professionals in the manner as specified by Board;
(e) maintain an updated list of claims;
(f) convene and attend all meetings of the committee of creditors;
(g) prepare the information memorandum in accordance with section 29;
(h) invite prospective lenders, investors, and any other persons to put forward resolution plans;
(i) present all resolution plans at the meetings of the committee of creditors;
(j) file application for avoidance of transactions in accordance with Chapter III, if any; and
(k) such other actions as may be specified by the Board.
a) Taking Over Company’s Management
Once appointed, the RP takes charge of the day-to-day operations of the company. The RP ensures that the company keeps running smoothly and legally. This includes making sure all taxes and dues are paid on time.
b) Running the Business as a Going Concern
The RP must make sure the company continues its business operations during the insolvency process. This means:
- Filing GST and other tax returns
- Paying salaries and employee benefits
- Paying electricity, rent, and other regular expenses
Doing all this properly ensures the company retains its value and can attract potential buyers or investors.
c) Filing Reports with Authorities
The RP has to regularly send reports to:
- National Company Law Tribunal (NCLT)
- Insolvency and Bankruptcy Board of India (IBBI)
These reports include details of how the company is doing and whether it is following all legal requirements. If the company is not compliant, the RP must explain what steps are being taken to fix it.
d) Handling Notices and Government Queries
If the company receives any notices from the tax department, GST office, or other government agencies, the RP must respond properly. The RP must also cooperate with any inspections or audits that government authorities want to do.
e) Helping Potential Buyers
Before a buyer decides to invest in the company, they will check whether the company is following all laws. If the company is not compliant, the buyer may lose interest. The RP must make sure that all records are clean and up-to-date so the company looks attractive to buyers.
It has been clearly clarified in the circular issued by Insolvency and Bankruptcy Board of India vide Circular No. No. IP/002/2018 dtd 03.01.2018 w.r.t. Insolvency professional to ensure compliance with provisions of the applicable laws. Important clarification is reproduced below:
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- It is hereby directed that while acting as an Interim Resolution Professional, a Resolution Professional, or a Liquidator for a corporate person under the Code, an insolvency professional shall exercise reasonable care and diligence and take all necessary steps to ensure that the corporate person undergoing any process under the Code complies with the applicable laws.
- It is clarified that if a corporate person during any of the aforesaid processes under the Code suffers any loss, including penalty, if any, on account of non-compliance of any provision of the applicable laws, such loss shall not form part of insolvency resolution process cost or liquidation process cost under the Code. It is also clarified that the insolvency professional will be responsible for the non-compliance of the provisions of the applicable laws if it is on account of his conduct.
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- Importance of Compliance for Successful Resolution
If the RP does not ensure proper compliance, the company may:
- Face heavy penalties and interest
- Get into legal trouble
- Lose trust of investors and buyers
- Reduce chances of successful revival
On the other hand, good compliance builds investor confidence and helps in smooth resolution.
Therefore, considering above provisions of law and specific clarification issued, it is utmost duty of the resolution professional to ensure statutory compliance since he is acting and have the powers of Board of Directors and also authorized to appoint accountants, legal or other professionals in the manner as specified by Board.
It is important to note the responsibilities of statutory dues arising on account of IBC process, which has been tabulated below:
| Particulars | Responsibility of tax compliances and liability to pay the tax |
| Prior to appointment of Resolution Professional | The Board of Directors and responsible Principal Officers for statutory compliances. However only personal penalty can be levied on them for the duty demand during the period and duty demand is payable by the company, if claim by the respective department is made with resolution professional and included in resolution plan.
It means only those liabilities which has been included in resolution plan and approved by NCLT, those liability will have to be paid to the respective government department by the company who takes over i.e. new management. |
| During the moratorium set in U/s 14 of IBC till approval of Resolution Plan U/s 31 of IBC. | Resolution Professional is solely responsible for 100% statutory compliances and failure to comply the same, if any demand arises and not disclosed in the resolution plan will be the sole responsibility of Resolution Professional only in terms of provisions of Section 25 read with clarification issued under the circular No. IP/002/2018 dtd 03.01.2018 and such penalties and taxes, if any will not be considered as resolution professional cost. |
| New Management as per the resolution plan approved by Hon’ble NCLT. | The new management will be responsible only to the extent of liabilities accepted which were disclosed and approved by NCLT. Thereafter any liabilities arises for the period after taking over by the new management, new management will be responsible. |
It is very clear that even though assessment or adjudication for the period prior to taking over by new management can take place subsequently which may takes substantially more years, still action for recovery proceeding against the new management and the amounts confirmed by any order is not to be recovered from the new management but a legal lien is to filed with the resolution professional for such outstanding amounts.
It is important to note that the judgement of the Hon’ble Supreme court held in the matter Ghanashyam Mishra & Sons v. Edelweiss ARC (2021) 9 SCC 657 that “All dues including statutory dues owed to the Central Government, any State Government or any local authority… shall stand extinguished if not part of the resolution plan approved by the Adjudicating Authority”.
Further, Section 238 – Provisions of this Code to override other laws “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”
The overriding effect under Section 238 of the Insolvency and Bankruptcy Code (IBC), 2016 can apply to other statutes like the Income Tax Act, 1961, Customs Act, 1962, and Central Goods and Services Tax (CGST) Act, 2017, but with certain judicially recognized limitations and nuances.
It is important to note the important decisions on the over-riding effect as provided under Section 238 of Insolvency and Bankruptcy Code 2016.
- Innoventive Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407″
The Supreme Court held that Section 238 gives IBC an overriding effect over any other inconsistent legislation. Further, Appellant submits that the Hon’ble Supreme Court in Ghanashyam Mishra & Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited [2021) 9 SCC 657] has emphatically held that once a Resolution Plan is approved by the Adjudicating Authority, it is binding on all stakeholders, including the Central Government, State Government, and local authorities. Further, the Hon’ble Apex Court held that all dues, including statutory dues owed to any government or governmental authority, that are not part of the approved Resolution Plan, stand extinguished and cannot be enforced post-approval.
It has been well clarified by the Hon Bench of NCLT in the case of Bank of Maharashtra Vs Fabtech Projects and Engineers Ltd.
The bench head the counsel appearing for the application and is of the considered view that these particular paragraphs has certain ambiguity and is not in line with the Hon’ble Apex Court order issued dtd 13.04.2021 in Ghanshyam Mishra and Sons Pvt Ltd V Edelweiss Asset Reconstruction Company Limited, (Civil Appeal No. 8129/2019) reported in 2021 SCC online SC 313. Accordingly, paras (ii) and (iii) in the operative part of the said order therefore stand replaced as follows:
“On the date of approval of the Resolution Plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan.
It has been re-emphasis the ratio laid down in the following decisions that the tax liabilities of prior period of taking over of new management under the Insolvency and Bankruptcy Law will be only to the extent of claimed liabilities and duly approved by NCLT in the resolution plan.
- In this case of the CESTAT, Eastern Bench, Kolkata Nally Sayaji engineering ltd versus. Commissioner of CGST & C. EX., Bolpur, 2023 (385) E.L.T. 415 (Tri. – Kolkata)
The appellant, against whom a Service Tax demand had been raised, was undergoing proceedings under the Insolvency and Bankruptcy Code, 2016. Upon approval of the resolution plan by the Hon’ble NCLT, it was held that all claims and demands pertaining to the period prior to the closing date stood fully discharged in terms of the resolution plan. Consequently, no fresh proceedings or recovery actions could be initiated against the appellant in respect of such past liabilities. The approved resolution plan, being binding on all stakeholders including statutory authorities like the Central Government, rendered the pending appeal infructuous. Hence, the Tribunal declared itself functus officio, having no further jurisdiction in the matter from the date of such approval. This decision was rooted in the provisions of Section 73 read with Sections 77 and 78 of the Finance Act, 1994, and Rule 22 of the CESTAT (Procedure) Rules, 1982.
- In this case of The Supreme Court of India Commissioner of C. Ex. & S.T., Bhavnagar Versus. Reliance Naval and Engineering Ltd.
In this case, the assessee, involved in the fabrication of cranes and dry docks used in ship and vessel manufacture and maintenance, was undergoing liquidation under the Insolvency and Bankruptcy Code, 2016. The High Court had ruled in favor of the assessee, allowing Cenvat Credit on capital goods, inputs, and input services, holding that cranes were not immovable property and that dry docks qualified as inputs. When the Revenue appealed, it was brought to the Supreme Court’s notice that the assessee was already under CIRP, and that the resolution plan approved by the NCLT had made provisions for creditors who had filed claims. As the Revenue had not lodged any claim for the disputed amount, the demand could not survive, following the ratio laid down in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss ARC. Consequently, the appeal was dismissed, though the question of law on the merits was kept open. The case was examined under Rule 3 read with Rules 2(a), 2(l), and 2(m) of the Cenvat Credit Rules, 2004, and Section 31 of the IBC, 2016.
- In this case of High Court of Karnataka at Bengaluru, Union of India versus. Ruchi soya industries ltd. 2021 (377) E.L.T. 659 (Kar.)
In the matter concerning recovery of customs duty from an importer who later entered insolvency proceedings under the Insolvency and Bankruptcy Code, 2016, it was held that the provisions of the IBC, by virtue of Section 238, override all other laws in case of inconsistency. Even prior to the 2019 amendment to Section 31, statutory dues payable to the Central Government were treated as operational debts under Section 3(10), and the Government was recognized as an operational creditor under Section 5(20). Thus, if the Central or State Government or any Local Authority fails to file a claim or participate in the resolution process, or if their dues are not incorporated into the approved resolution plan under Section 31, such dues stand extinguished. Any recovery proceedings for the pre-approval period would therefore automatically lapse. This interpretation aligns with the supremacy of the IBC over statutes like the Customs Act, 1962, including Sections 142 and 142A therein.
- In this case of The Supreme Court of India, Ruchi soya Industries ltd. Versus. Union of India.
In this case, the appellant underwent a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016, culminating in the approval of a resolution plan by the NCLT in accordance with due process. The Customs Department, despite public notices issued under Sections 13 and 15 of the Code, failed to submit its claim to the Resolution Professional. Relying on the Supreme Court’s landmark ruling in Ghanashyam Mishra & Sons Pvt. Ltd. v. Edelweiss ARC [2021) 9 SCC 657], it was held that once the resolution plan was approved, all prior claims stood extinguished, and any claim not included in the plan could not survive. As such, the customs department’s demand was deemed unsustainable, and the amount deposited earlier during the appeal process was ordered to be refunded with interest. This decision reaffirmed the binding nature of approved resolution plans under Section 31 of the IBC, 2016.
In view of the above, it is utmost important to safeguard the interest of resolution professional that Resolution Professional should exercise his rights provided under the provisions of IBC to appoint experts accountant, tax experts and legal professionals to ensure the statutory compliances otherwise there will be likelihood chances of tax liability arising during the period of resolution professional on the resolution professional only and the same cannot be included in the resolution process cost and it will have to be borne by him only.
