The institution of a lawsuit against a debtor company during the moratorium is prohibited IBC U/S 14: ITAT


The Income Tax Appeal Tribunal (ITAT) in Mumbai has ruled that bringing an action against the debtor company during the moratorium period is prohibited under Section 14 of the Tax Code. insolvency and bankruptcy.

The petition was filed by Capman Conpro Pvt. ltd. and Vighnahartha Corrugators Pvt. ltd. in their capacity as financial creditors of Global Softech Ltd. (“Corporate Debtor”), pursuant to Article 7 of the Code read together with Rule 4 of the Insolvency and Bankruptcy Rules (Application to Arbitration Authority), 2016 before the Honorable Arbitration Authority, i.e. National Company Law Tribunal, Ahmadabad Bench, Ahmadabad (NCLT) for initiating the Corporate Insolvency Resolution Process (CIRP) of the debtor company. The matter is pending before the insolvency practitioner under the Insolvency and Bankruptcy Code 2016 (Code), and the standstill period has been declared pursuant to section 14 of the Code. The standstill period applies from the date of this order until the completion of the company’s insolvency resolution process.

It is relevant to note that, in accordance with the provisions of Article 14 of the Code, the institution of proceedings or the continuation of proceedings or pending proceedings against the debtor legal person, including the execution of any judgment, decree or order in court, tribunal, arbitration board or other authority is prohibited during the moratorium period.

The appeal was filed by Revenue is a prosecuting institution against the corporate debtor, which is prohibited under section 14 of the Code. Hon’ble Supreme Court in case of Alchemist Asset Reconstruction Co. Ltd. vs. Hotel Gaudavan (Pvt.) Ltd. [2017] 88 202 ruled that even arbitration cannot be initiated after the imposition of the u/s 14(1)(a) moratorium has come into effect and that it is not is in law and could not have been authorized to continue.

Furthermore, it has been observed by ITAT that the Honorable Supreme Court in the case of Prof. CIT v. Monnet Ispat & Energy Ltd. [SLP (C) No.6487 of 2018] recognized the primacy and supremacy of the provisions of the Code over any other law in the event of contrary provisions, by virtue of a non-obstinate clause contained in article 238 of the Code. It is further relevant to note that under section 178(6) of the Act, as amended, the Code has overriding effect. Furthermore, in accordance with Article 31 of the Code, the resolution plan as approved by the adjudicating authority binds the debtor company and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. Thus, it will prevent state authorities, regulatory bodies, including direct and indirect tax departments, from questioning the resolution plan. Therefore, there is no reason to keep this appeal pending.

The Coram of Sri Prashant Maharishi, Accounting Member and

Sri Sandeep Singh Karhail, Judicial Member, argued that “we reject the appeal filed by the tax authorities with the freedom for the valuation agent to file the appeal again after the end of the moratorium period upon reactivation of the debtor company in accordance with the resolution plan approved by the contracting authority or when appointing the liquidator, as the case may be”.

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