The Madurai Bench of the Madras High Court has held that a buyer acquiring a company as a going concern during liquidation also acquires its attendant liabilities, and GST dues arising during CIRP or liquidation do not automatically stand extinguished. The Court explained that when a corporate debtor is sold as a going concern during liquidation, the business continues as a functional enterprise and the purchaser acquires the undertaking along with its identified liabilities.
The High Court clarified that the Supreme Court’s ruling in Ghanshyam Mishra & Sons Pvt Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. [(2021) 9 SCC 657], cannot be automatically applied to every going-concern sale undertaken during liquidation proceedings. Thus, GST dues arising during the moratorium, CIRP, or liquidation period do not automatically disappear merely because the corporate debtor is subsequently sold as a going concern.
The Court also emphasized that Section 85 of the GST enactments contemplates joint and several liability in cases of business transfer, indicating that a transferee may also be answerable for outstanding tax dues connected with the transferred business.
Briefly, the petitioner, EMC Limited, was subjected to GST proceedings for the tax period 2021-22, culminating in a demand order under Section 73 of the GST enactments raising tax, interest and penalty liabilities. The company challenged the demand contending that its liabilities stood extinguished after insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC), and subsequent sale of the company as a going concern pursuant to the liquidation process approved by the NCLT. The petitioner argued that in view of the Supreme Court’s decision in Ghanshyam Mishra & Sons v. Edelweiss Asset Reconstruction Company Ltd. [(2021) 9 SCC 657], all past claims not lodged during the insolvency process stood wiped out under the ‘clean slate’ principle.
The State Tax Department opposed the writ petition and argued that the GST liabilities in question arose after commencement of the Corporate Insolvency Resolution Process (CIRP) and therefore were not protected by the clean slate doctrine. According to the Department, where a corporate debtor is sold as a going concern during liquidation, the purchaser acquires not only the assets but also the liabilities attached to the business.
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A Single Judge Bench of Justice C. Saravanan observed that undertook an extensive examination of the IBC, particularly the provisions governing liquidation and sale of a corporate debtor as a going concern under Regulations 32 and 32A of the IBBI (Liquidation Process) Regulations. The Court observed that when a company is sold as a ‘going concern’, the transaction is fundamentally different from a simple sale of assets. In such sales, the corporate entity continues to exist, its business survives, and the purchaser acquires the enterprise as an ongoing commercial unit.
The Court observed that a buyer purchasing a corporate debtor as a going concern does not merely acquire assets. The buyer also assumes the liabilities that form part of the identified business package. Such acquisition is a commercial decision involving an assessment of both benefits and risks. Therefore, liabilities cannot be selectively discarded while retaining the advantages of the business.
The Court further observed that liabilities incurred during the moratorium period, CIRP, or liquidation process cannot automatically be written off merely because the corporate debtor was later sold as a going concern. According to the Court, the ‘clean slate’ principle recognized in insolvency jurisprudence cannot be mechanically extended to every going-concern sale conducted during liquidation.
Additionally, the Court noted that Section 85 of the GST enactments specifically creates joint and several liability on transfer of business. Under that provision, both the transferor and transferee can remain liable for unpaid taxes, interest and penalties relating to the transferred business.
Although the Court rejected the petitioner’s principal contention regarding extinction of GST liability, it found that the petitioner had not effectively placed its case before the tax authorities, including possible contentions based on Section 85 of the GST enactments. Consequently, the Court remitted the matter for fresh adjudication.
