NCLT Cannot Declare Assessment Orders Void Ab Initio Under IBC Section 33(5): Kerala High Court - 2024-01-30

Kerala High Court Overturns NCLT Order, Affirms Tax Assessment Powers During Moratorium

Ernakulam, Kerala – In a significant judgment delivered on January 30, 2024, the Kerala High Court emphatically stated that the National Company Law Tribunal (NCLT) lacks the authority to declare tax assessment orders as void ab initio under Section 33(5) of the Insolvency and Bankruptcy Code (IBC). The ruling came in response to a writ petition filed by the Deputy Commissioner (Works Contract), Kerala State Goods and Services Tax Department, challenging an order by the NCLT, Kochi Bench.

Background of the Case

The case arose from an assessment order issued by the GST Department against M/s Albana Engineering (India) Private Limited, a company undergoing liquidation under the IBC. Albana Engineering was admitted into the Corporate Insolvency Resolution Process (CIRP) in 2019, and a moratorium was in effect until December 2, 2021, when a liquidation order was passed. During this moratorium period, the GST Department assessed the company's records for the financial year 2015-16 and determined a tax liability of over ₹11.76 crore.

The Resolution Professional of Albana Engineering then approached the NCLT seeking permission to appeal against this assessment order. However, the NCLT, Kochi Bench, went beyond the scope of the application and declared the assessment order itself as void ab initio, stating it was passed in violation of the moratorium under Section 14(1)(a) of the IBC.

Legal Question Before the High Court

The central question before Justice Dinesh KumarSingh of the Kerala High Court was: "whether the NCLT is empowered to declare the assessment order as void ab initio under Section 33(5) of IBC?"

Court's Observations and Rationale

The High Court unequivocally rejected the NCLT’s order. Justice Singh highlighted that while Section 14 of the IBC imposes a moratorium on initiating recovery proceedings against a corporate debtor during CIRP, and Section 33(5) extends this protection during liquidation, these sections do not prohibit the determination of tax liabilities.

Referring to the Supreme Court’s judgment in Sundaresh Bhatt , Liquidator of ABG Shipyard v. Central Board of Indirect Taxes & Customs , the High Court reiterated that the moratorium aims to prevent coercive actions and parallel proceedings, allowing the corporate debtor breathing space for resolution or liquidation. The Supreme Court in Sundaresh Bhatt had clarified that authorities could still initiate assessment or reassessment of duties during the moratorium, but not recovery proceedings.

> "From the provisions of Section 14 of the IBC it is evident that Section 14 prescribes a moratorium on the initiation of CIRP proceedings and its effects... Moratorium under Section 14 is to ensure the curtailing of parallel proceedings and reduce the possibility of conflicting outcomes in the process. Section 14(1)(a), (b) and (c) of the IBC shields and protects against pecuniary attacks against the Corporate Debtor. This is to provide the Corporate Debtor with breathing space to allow it to continue as a going concern and rehabilitate itself."

The court emphasized that the NCLT exceeded its jurisdiction by declaring the assessment order void ab initio. Justice Singh remarked strongly on the NCLT's order:

> "This Court finds the impugned order passed by the National Company Law Tribunal, Kochi Bench, as preposterous and untenable. The Company Law Tribunal has no power and authority under the IBC to declare an assessment order as void ab initio and non est in law. Such an order only reflects the competence of the persons who are manning such an important Tribunal. The Order shows the lack of basic understanding of the law. Instead of considering the application by the 2nd respondent for permission to file an appeal against the assessment order, the National Company Law Tribunal, Kochi Bench, has assumed the jurisdiction of the Constitutional Court to declare the assessment order as void ab initio."

Decision and Implications

The Kerala High Court set aside the NCLT order, terming it "unsustainable." The matter was remitted back to the NCLT, Kochi Bench, to consider the Resolution Professional's application for permission to appeal against the assessment order on its merits.

This judgment clarifies the extent of the moratorium under the IBC, reinforcing that while recovery actions are stayed, the statutory authorities retain the power to determine and assess liabilities, including tax liabilities, even during the moratorium period. The ruling serves as a reminder of the defined jurisdictional boundaries of the NCLT and underscores the importance of adhering to established legal principles within the framework of the IBC.