Claims Not Filed During CIRP Process Cannot Survive After Resolution Plan Approval: Karnataka High Court In Patanjali Foods Case

In a significant ruling the Karnataka High Court in the case of Patanjali Foods Limited (formerly Ruchi Soya Industries Ltd.) v. Commissioner of Central Excise and Service Tax, reaffirmed that once a Corporate Insolvency Resolution Process (CIRP) is completed under the Insolvency and Bankruptcy Code (IBC), any claims not submitted during the process are permanently extinguished. The court overturned a Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruling, which had held that the excise duty claim against Patanjali Foods had abated, and declared that the excise demand stood extinguished. The decision further clarified that Rule 22 of the CESTAT Rules does not apply to cases where the company continues operations after a CIRP.

The dispute arose from an excise duty demand made by the Commissioner of Central Excise and Service Tax, Mangaluru, against Ruchi Soya Industries Ltd., which was engaged in the manufacturing of edible oils. The ₹80.6 million demand, issued in 2012, pertained to excise duty on RBD Palm Stearin, a by-product, for the period from July 2009 to August 2011. Of this amount, ₹29.7 million had already been paid, leaving a balance of ₹50.9 million.

Before the demand could be fully settled, Ruchi Soya Industries Ltd. entered insolvency proceedings. On December 8, 2017, the National Company Law Tribunal (NCLT), Mumbai, initiated the CIRP against Ruchi Soya under Section 7 of the IBC. The tribunal appointed an Interim Resolution Professional (IRP) and called upon all creditors to file their claims. Subsequently, a resolution plan was approved on July 24, 2019, under which Patanjali Foods Limited took control of Ruchi Soya’s operations. The business of Ruchi Soya continued, and its name was changed to Patanjali Foods.

Following the CIRP, Patanjali Foods filed a miscellaneous application with the CESTAT, arguing that the excise duty claim had been extinguished since it was not included in the resolution plan, and no claim had been filed by the revenue authorities during the CIRP. The company cited Section 32A of the IBC, which extinguishes all claims against the corporate debtor not included in the resolution plan.

However, the CESTAT, in its order dated November 9, 2023, rejected the application, holding that the appeal had abated under Rule 22 of the CESTAT (Procedure) Rules, 1982. Rule 22 provides for the abatement of proceedings in the event of a company's insolvency, unless an application is made for the continuation of such proceedings by or against the corporate debtor’s successor.

Aggrieved by the order, Patanjali Foods filed an appeal before the Karnataka High Court, contending that the excise duty claim had been extinguished under the IBC and that Rule 22 should not apply, as Ruchi Soya’s business had continued after the CIRP.

The key legal question was whether the excise duty demand, which was not included in the resolution plan and for which no claim was filed during the CIRP, could still be enforced. Patanjali Foods argued that the IBC supersedes other laws and that once the resolution plan is approved, any claims not submitted during the CIRP are extinguished. The company further contended that Rule 22 of the CESTAT Rules, which provides for the abatement of appeals in cases of company insolvency, did not apply, as Ruchi Soya’s business had not been liquidated but rather continued under new ownership.

The revenue, on the other hand, did not dispute the position of law established by the Supreme Court in Ghanshyam Mishra v. Edelweiss Reconstruction Company Ltd. and Ruchi Soya Industries Ltd. v. Union of India, where the court held that claims not part of the resolution plan are extinguished. However, the revenue argued that Patanjali Foods should not be entitled to a refund of the ₹29.7 million already appropriated before the CIRP began.

The Karnataka High Court, presided over by Justices S.G. Pandit and C.M. Poonacha, examined the facts of the case, along with the legal principles laid down by the Supreme Court in Ghanshyam Mishra and Ruchi Soya Industries.

The court noted that under Section 31(1) of the IBC, once a resolution plan is approved by the adjudicating authority, all claims against the corporate debtor, unless included in the resolution plan, are extinguished. It referred to the Supreme Court’s ruling in Ghanshyam Mishra, which clarified that all statutory dues owed to government authorities, including excise duty, are extinguished if they are not included in the resolution plan. The court stated:

"On the date of approval of the resolution plan by the adjudicating authority, all such claims which are not a part of the resolution plan shall stand extinguished."

The court further held that Rule 22 of the CESTAT Rules was not applicable, as it pertains to cases where a company is wound up, not where it continues operations under a resolution plan. The court emphasized that Ruchi Soya’s business was not being wound up but had continued under Patanjali Foods, and therefore, the appeal could not be abated under Rule 22.

The High Court relied heavily on the Supreme Court’s interpretation of the IBC in Ghanshyam Mishra and Ruchi Soya Industries Ltd.. In these cases, the apex court had held that once a resolution plan is approved, creditors cannot initiate or continue any proceedings to recover dues that were not part of the resolution plan. The court reiterated that the IBC was designed to ensure that the approved resolution plan provides finality to the claims, giving the corporate debtor a fresh start.

The court further examined a similar case from the Gujarat High Court, where it was held that claims against Patanjali Foods (formerly Ruchi Soya) were extinguished following the resolution plan’s approval since the revenue had failed to file a claim during the CIRP.

In its final order, the Karnataka High Court set aside the CESTAT’s ruling and held that the excise duty demand of ₹50.9 million stood extinguished. The court, however, upheld the revenue’s contention that Patanjali Foods was not entitled to a refund of ₹29.7 million, which had already been appropriated prior to the commencement of the CIRP.

"The demand of ₹50,915,106 made by the revenue against the assessee pursuant to the Order-in-Original... has abated and stood extinguished."

This decision reaffirms the IBC’s supremacy in dealing with insolvency matters and underscores the importance of creditors, including government agencies, filing their claims during the CIRP to preserve their rights. Any claims not filed during the process are permanently extinguished, providing certainty to the resolution process and allowing companies to move forward with a clean slate.

Date of Decision: September 30, 2024

Patanjali Foods Limited v. Commissioner of Central Excise and Service Tax​.