The Madras High Court has held that the acquisition of a corporate debtor as a going concern through liquidation does not entitle its new management to automatically escape GST liabilities by invoking the “clean slate” principle under the Insolvency and Bankruptcy Code, 2016.

The bench of Justice C. Saravanan, sitting at the Madurai Bench, distinguished a going-concern sale during liquidation from a successful corporate insolvency resolution process culminating in an approved resolution plan. The Court held that the purchaser acquires the corporate debtor’s assets and liabilities as a package under the regulatory framework governing such sales.

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The Court remitted the matter for fresh adjudication, subject to the petitioner depositing 25% of the disputed tax liability within 30 days of receiving the order.

The petitioner challenged an order dated December 30, 2025, passed under Section 73 of the GST enactments pursuant to a show cause notice issued in Form DRC-01 on September 3, 2025.

The demand comprised tax of ₹49,59,993, interest of ₹33,02,132, interest on delayed reporting of invoices of ₹9,149, late fees of ₹900, and a penalty of ₹4,95,999. The total demand was ₹87,68,173.

The company sought quashing of the demand and a direction treating all proceedings arising from the show cause notice as abated and extinguished in view of the National Company Law Tribunal’s order approving its sale as a going concern.

The NCLT, Kolkata, had admitted insolvency proceedings against the company on November 12, 2018. Since the corporate insolvency resolution process did not result in an approved resolution plan, liquidation was ordered on November 21, 2023.

The company was subsequently acquired as a going concern by Salasar Techno Engineering Limited. The NCLT approved the sale on October 22, 2024, with effect from May 16, 2024.

The petitioner relied principally on the Supreme Court’s decision in Ghanshyam Mishra & Sons v. Edelweiss Asset Reconstruction Company Limited, (2021) 9 SCC 657, to contend that its earlier liabilities stood extinguished.

It argued that the clean slate principle should extend to a going-concern acquisition during liquidation even though there had been no approval of a resolution plan.

According to the petitioner, the CGST Department had earlier approached the NCLT, but its application was disposed of as infructuous following the liquidation order, with a direction to approach the liquidator for consideration of its claim.

The petitioner further submitted that the liquidator had written to the jurisdictional State Tax authority on December 9, 2023, calling upon the department to submit its claim by December 21, 2023. Despite this communication, the department allegedly failed to lodge its claim.

On that basis, the company invoked the overriding effect of the IBC under Section 238 and maintained that the department could no longer pursue the demand.

It also alleged a violation of natural justice, contending that the adjudication order relied on Section 88 of the GST enactments although that provision had not been cited in the show cause notice. The company argued that this contravened Section 75(7), and that its submissions had not been properly considered.

The tax department opposed the petition on the ground that the disputed GST dues arose after commencement of the corporate insolvency resolution process.

It argued that the clean slate theory could not be used to extinguish GST liabilities accruing while the company continued to operate during CIRP.

The department relied on the interplay between Sections 14 and 17(2)(e) of the IBC, and maintained that statutory GST compliance obligations continued during insolvency.

It also submitted that tax liabilities arising during CIRP could not necessarily be quantified and lodged within the claim-submission period under the insolvency framework, given the separate timelines prescribed for GST proceedings.

The Court examined Regulations 32 and 32A of the IBBI (Liquidation Process) Regulations, 2016, alongside Regulation 39C of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

It held that these provisions must be read together when determining the consequences of selling a corporate debtor as a going concern.

The Court explained that the framework contemplates identification of the assets and liabilities to be sold together. Where the committee of creditors has not undertaken that exercise, the liquidator must identify the relevant group of assets and liabilities under the applicable regulations.

Applying this reasoning, the Court held that the NCLT’s approval concerned the sale of the company as a going concern, rather than a sale of assets alone without liabilities.

Justice Saravanan observed that the buyer takes a calibrated commercial risk when acquiring a corporate debtor under this mechanism. Consequently, the buyer or the new management cannot avoid past or current liabilities, including liabilities incurred during the moratorium, CIRP or liquidation, merely because ownership has changed.

The Court also emphasised that the corporate debtor’s identity survives a going-concern sale, with funds being infused to continue its business.

The Court held that the petitioner could not obtain the claimed relief merely by relying on Ghanshyam Mishra.

It reasoned that the Supreme Court decision did not address the specific situation of a going-concern sale under Regulations 32(e) or 32(f), read with Regulation 32A and Regulation 39C.

The Court therefore considered the NCLT’s reference to relief in accordance with Ghanshyam Mishra insufficient to establish that the disputed liabilities had been extinguished.

It distinguished a going-concern sale from other modes of realising assets during liquidation, such as standalone asset sales, slump sales, collective sales of assets or sales in parcels.

In the latter situations, the Court explained, the proceeds are distributed according to Section 53 of the IBC and liquidation may culminate in dissolution of the corporate entity. By contrast, it held that Section 53 did not apply in the context of the going-concern sale examined in this case.

The judgment expressly disagreed with the approach adopted by the Calcutta High Court in Kashvi Power & Steel Private Limited v. West Bengal State Electricity Distribution Company Limited and Rabirun Vinimay Private Limited v. Union of India.

Those decisions had been relied upon to support the application of clean slate protection in the context of going-concern acquisitions during liquidation.

Justice Saravanan considered that interpretation inconsistent with the scheme of the relevant insolvency regulations.

The Court also distinguished the Madras High Court’s decision in Agniti Industrial Parks Private Limited v. Superintendent of CGST & Central, noting that the claims there related to a period before commencement of liquidation. It referred to decisions addressing tax liabilities arising during CIRP, including Aqua Terra Coke and Energy Limited and Transafe Services Limited.

The Court additionally referred to Section 85 of the GST enactments concerning liability upon transfer of a business.

Section 85(1) provides for joint and several liability of the transferor and transferee, wholly or to the extent of the transfer, for tax, interest and penalty due up to the time of transfer. The provision covers liabilities determined before the transfer but remaining unpaid, as well as those determined afterwards.

Section 85(2) addresses the transferee’s liability for supplies made after the transfer and the requirement to seek amendment of registration where applicable.

These provisions formed part of the Court’s consideration of the company’s continuing exposure to GST proceedings following the acquisition.

Although the Court rejected the company’s claim that the demand proceedings stood extinguished, it granted an opportunity to contest the matter on merits.

Noting that the petitioner had not filed an effective reply before the department and might have a case requiring consideration under Section 85, the Court remitted the matter for de novo adjudication on the following conditions:

• The petitioner must deposit 25% of the disputed tax liability within 30 days of receiving a copy of the order.
• Within the same period, it must submit a detailed reply to the September 3, 2025 show cause notice, treating the impugned adjudication order as an addendum to that notice.
• The tax authority must decide the matter on merits within three months thereafter.

The writ petition was disposed of with these directions, without costs.

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