By Mayank Kumar (June 25, 2021)
Edited by: N. Raja Singh, Partner
In the landmark judgment of Ghanashyam Mishra and Sons Pvt Ltd (“GMSPL”) through the Authorised Signatory v. Edelweiss Asset Reconstruction Company Limited (“EARCL”) dated 13th April, 2021 in Civil Appeal No. 8129 of 2019 , the Hon’ble Supreme Court of India (“Supreme Court”) has followed and reaffirmed the ‘clean slate theory’ and held that after a successful conclusion of Corporate Insolvency Resolution Process (“CIR Process”) under the Insolvency and Bankruptcy Code, 2016 (“IB Code”) and acquisition of the Corporate Debtor by a successful Resolution Applicant (“SRA”), the dues of all creditors, whether part of the Resolution Plan or not stand extinguished being bound by the treatment meted out to them under the Resolution Plan. This paves a way forward for the new management to come at the helm of affairs of the Corporate Debtor and revive its business without being saddled with fresh/ undecided claims/ proceedings.
Question of Law
The important question of law which was raised for adjudication are as follows:
● Whether any creditor including the Central/ State Government or any local authority is bound by the Resolution Plan once it is approved by the Hon’ble Adjudicating Authority under Section 31(1) of the IB Code?
● Whether the amendment to Section 31 of IB Code by the Insolvency and Bankruptcy Code, (Amendment) Act, 2019 is clarificatory/ declaratory or is it substantive in nature?
● Whether after approval of the Resolution Plan by the Hon’ble Adjudicating Authority, a creditor including the Central/ State Government or any local authority is entitled to claim or initiate any proceedings for recovery of any of the dues from the Corporate Debtor, which are not a part of the resolution plan approved by Hon’ble Adjudicating Authority?
While responding to the aforementioned questions the Hon’ble Supreme Court analysed the scheme and purpose of the IB Code and reiterated that the principal objective of the IB Code is the revival of a Corporate Debtor and to keep the Corporate Debtor as a going concern so that its business can be continued as usual in the greater interest of the economy of the country. Reliance was placed on Kalpraj Dharamshi and another v. Kotak Investment Advisors Ltd & Anr , K. Sashidhar v. Indian Overseas Bank & Ors and Maharashtra Seamless Ltd v. Padmanabhan Venkatesh & Ors to drive home the fact that Hon’ble Adjudicating Authority (“AA”) does not have the power to interfere with the wisdom of the Committee of Creditors (CoC) when it comes to the matter of approval of the Resolution Plan by the virtue of Section 31 and Section 61(3) of the IB Code.
Expanding more on the provisions of Section 31 of IB Code the Hon’ble Supreme Court held that the bare perusal of Section 31 shows that once the CoC approves a resolution plan the claims provided in the resolution plan stands frozen and after approval by the AA, the same will be binding on the Corporate Debtor and all its stakeholders and creditors (including Central/ State Government or local authorities). Such a provision is necessary since after a resolution plan is approved, there should be no surprises and the resolution applicant should be allowed to start managing the affairs of the Corporate Debtor on a fresh slate.
Furthermore, it was also held that once a resolution plan is approved by the AA under Section 31(1) of the Code, all such claims which were not a part of the resolution plan at the time of approval, stand extinguished. As a consequence, no person should be allowed or would be entitled to initiate or continue any recovery proceeding in respect of such claims.
Answering the second question as stated above, the Hon’ble Supreme Court held that Section 7 of the IB Code (Amendment) Act, 2019 to the Section 31 IBC, 2016 is both clarificatory and declaratory in nature, i.e., it will apply even to the pending claims/ proceedings being effective from the date on which the IB Code, 2016 has come into force.
Additionally, the Hon’ble Supreme Court clarified that from the harmonious construction of Section 3(10), Sections 5(20) and Section 5(21) of the IB Code it can be explicitly seen that the dues owed and payable to the Central/ State Government or any local authority, would fall within the ambit of ‘operational debt’ and that they would be covered under the term ‘creditor’, more specifically ‘operational creditor’. This in effect means that even if the amendment of 2019 is not taken into consideration, the resolution plan once approved will still be binding on the creditors and stakeholders, which needless to say includes central/ state governments and local authorities.
The judgment gives much needed relief for all resolution applicants who are facing/ about to face multifarious claims/ litigations initiated by disgruntled creditors (including central/ state authorities and departments) seeking payment of their dues despite the CIR Process having successfully concluded with the approval of the plan of the said resolution applicants having been approved by the AA under Section 31 of the IB Code.
This judgment further strengthens the concept of “clean slate” which will go a long way in restricting and restraining the various creditors/ stakeholders including the central/ state governments, authorities and departments from pursuing recovery of their dues against the new management of the Corporate Debtor despite successful conclusion of CIR Process.
1 2021 SCC OnLine SC 313.
2 2021 SCC OnLine SC 204
3 24 (2019) 12 SCC 150
4 (2020) 11 SCC 467