Can Income Tax Authorities Recover Dues from a Bankrupt Company?

Income tax authorities, like other creditors, have the right to recover dues from a company that is undergoing bankruptcy or insolvency proceedings under the Insolvency and Bankruptcy Code (IBC). However, the recovery of tax dues follows a specific process and depends on the company's financial condition and the stage of the insolvency process. The priority of these dues in the distribution of assets is governed by the provisions of the IBC.

Can Income Tax Authorities Recover Dues from a Bankrupt Company?

Income Tax as an Unsecured Creditor

Tax Liabilities: Income tax dues (such as corporate tax, GST, and penalties) are typically classified as unsecured operational debts under the IBC. Therefore, income tax authorities can claim recovery of outstanding taxes from the company’s assets during the insolvency resolution process.

Position in the Waterfall Mechanism: According to Section 53 of the IBC, government dues such as tax liabilities are treated as unsecured creditors and rank lower in terms of payment priority. They are paid only after the dues of secured creditors (like banks and financial institutions) are settled.

Filing Claims in Insolvency Proceedings

During the insolvency resolution process, income tax authorities are required to file their claims with the Insolvency Resolution Professional (IRP). The tax authorities will file their claims like any other creditor and will be part of the committee of creditors (CoC).

Income tax dues are considered part of the unsecured creditors' claims and will be addressed based on the available assets after fulfilling the claims of higher-priority creditors (such as secured creditors).

Moratorium and Recovery Actions

Moratorium Period: Once insolvency proceedings are initiated, a moratorium is imposed under the IBC. This means that no recovery action can be taken by any creditor, including income tax authorities, against the company’s assets during the moratorium period. The moratorium prevents the initiation of new legal proceedings and halts existing suits or actions against the company.

Tax Recovery During Moratorium: Income tax authorities are restricted from taking direct recovery actions during the moratorium, which typically lasts for 180 days (extendable by 90 days). However, they can file claims and participate in the resolution process.

Resolution Plan and Income Tax Dues

The company undergoing insolvency may submit a resolution plan that includes the treatment of all outstanding liabilities, including income tax dues. The resolution plan can propose a settlement or restructuring of debts, including taxes.

If the resolution plan is approved by the Committee of Creditors (CoC) and the National Company Law Tribunal (NCLT), it may provide a partial waiver or reduction in income tax dues. However, the tax authorities have to agree to this in the course of the negotiations.

Liquidation Process

If the company is unable to come to a resolution or if the insolvency resolution process fails, the company may enter the liquidation stage under the IBC.

In the liquidation process, the assets of the company are sold, and the proceeds are distributed among the creditors in the order of priority. Income tax dues, being unsecured operational debts, are paid only after the claims of secured creditors and financial creditors are settled. This means that the tax authorities may receive only a fraction of the total tax liability based on the available assets.

Tax Liabilities After Insolvency

Post-Insolvency Tax Liabilities: Any income tax or GST dues that arise after the initiation of insolvency proceedings are considered post-insolvency liabilities. These liabilities are not covered by the insolvency resolution process and are treated as fresh claims to be settled under normal tax recovery procedures.

For example, if the company continues to operate during insolvency, any taxes generated post-initiation (such as for the year in which insolvency proceedings began) must be paid as they accrue.

Example

Let’s say ABC Pvt. Ltd. owes ₹5 crore in corporate income tax and ₹2 crore in GST to the government. The company initiates insolvency proceedings under the IBC due to financial distress.

• Income Tax Authorities will be classified as unsecured creditors.
• During the moratorium period, they cannot initiate recovery actions or file new lawsuits to recover the dues.
• As part of the resolution plan, the tax authorities may agree to restructure the dues or settle for a portion of the amount owed.
• If the company is liquidated, income tax dues will be paid only after the secured and financial creditors have been satisfied. If there are insufficient assets, the government may receive only a partial payment or none at all.

Conclusion

Income tax authorities can recover dues from a bankrupt company, but the process is subject to the Insolvency and Bankruptcy Code (IBC). During insolvency proceedings, income tax authorities must file claims and participate in the resolution process. As unsecured creditors, government dues are settled after higher-priority debts (such as secured creditors). While direct recovery actions are prohibited during the moratorium period, income tax authorities can negotiate settlements or wait until liquidation, where the priority of claims and available assets will determine the extent of recovery.