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Reiteration of clean slate theory : Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.

Abanti Bose

September 27, 2021

4099

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This article is written by Abhilekh Tiwari, pursuing Certificate Course in National Company Law Tribunal Litigation from LawSikho. The article has been edited by Aatima Bhatia (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Table of Contents

Introduction

Hon’ble Supreme Court of India, on April 13^th, 2021 held in the matter of Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. that post-approval of the resolution plan, no creditor including any government or tax authority will have any claim against the corporate debtor.

Resolution professional after being appointed makes a public announcement inviting all the claims from the creditors. Thereafter, resolution applicants put forth their prospective resolution plans which are then approved by the Committee of Creditors. Once the resolution plan is approved, no further claims can be put forth before the Resolution Professional. It has been iterated in this judgement that the creditors including government and tax authorities are also not entitled to recover any claim post-approval of the resolution plan.

Factual background

Multiple Special Leave Petitions were filed before the Supreme Court arising from the cases Electrosteel Steels Ltd. v. State of Jharkhand and Ors., M/s Monnet Ispa & Energy Ltd. and Anr. v. State of Odisha and Anr., Ultratech Nathdwara Cement Ltd. v. State of Uttar Pradesh and Ors. and Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. The facts of all these cases are pretty similar as in communications issued to the operational creditors, mainly tax authorities, that post-approval of the resolution plan, all the pending recovery actions the Corporate Debtor shall stand withdrawn. The tax authorities did not participate in the Corporate Insolvency Resolution Process (CIRP) and hence the High Court held that the resolution plan is not binding on the State Government. Hence, the appeal was made before the Supreme Court.

Issues raised before the court

Whether post-approval of the resolution plan, any creditor inclusive of the Central or State Government is bound by it under Section 31(1) of the Insolvency and Bankruptcy Code, 2016 (IBC)?
Whether post-approval of the resolution plan, any recovery proceedings can be filed by any creditor including Central Government or State Government?
Whether the amendment to Section 31 is clarificatory or substantive in nature?

Relevant provision

Section 31(1) of the IBC states if a resolution plan is approved in accordance with Section 30 and the Adjudicating Authority is satisfied, then the plan shall be binding upon employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

Section 3(10) of the IBC states the definition of Creditor as any person to whom the debt is owed and includes financial or operational creditor, secured or unsecured and any decree-holder.

Section 5(20) of the IBC states the definition of Operational Creditor as any person to whom an operational debt is owed or assigned or transferred to that person.

Section 5(21) of the IBC states the definition of Operational Debt as any claim pertaining to goods or service, employment-related debt or any statutory dues payable to Central or State Government or any local authority.

Point 7 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (no. 26 of 2019), states that after the words member, creditors the following words are to be inserted: “including the Central Government, any State Government or any local authority to whom a debt in respect of payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed”.

Analysing the decision of the court

Issue 1 and 2

Section 31(1)

The bare reading of Section 31(1) makes it clear that the post-approval of resolution plan if approved by the Adjudicating Authority then the resolution plan would be binding on all the stakeholders including the Corporate Debtor and its members, creditors, employees and guarantors. There are various details stated in the information memorandum under Regulation 36 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) so that the prospective resolution applicants can refer to all the liabilities and then prepare a resolution plan which can ensure extinguishment of the liabilities and make the Corporate Debtor running again.

Speech made in parliament

The Hon’ble Supreme Court referred to the speech made in parliament while interpreting the amendment made to Section 31. It was clear through the speech made by the Finance Minister on July 27^th, 2019 that the amendment was binding on the Government and hence post-approval of the resolution plan, the government cannot make any claims. It is hence clear that no differential treatment towards Central or State Government can be made for filing their claims.

Mischief rule

The Supreme Court stated that the mischief that was carried on before the amendment was sought to be removed. Due to ambiguity in the wordings of Section 31(1) of the IBC, the Central and State Government continued the proceedings despite the approval of the resolution plan which was certainly not the legislative intent and was a mere misinterpretation of the Section. It was observed by the legislature that certain tax authorities were not abiding by the IBC on the ground of omission in Section 31(1). The mischief rule seeks to remove mischief that was carried out previously through legislation or amendment. The mischief of misinterpretation of Section 31(1) was sought to be removed through the 2019 amendment.

Legislative intent

It was stated by the Supreme Court that the legislative intent of Section 31(1) of the IBC was to hold all the claims so that the resolution applicant began with a ‘clean slate’. If the clean slate theory is not acknowledged then the purpose of the code will be defeated. The resolution plan can never be successful if time and again new claims will arise. Clean slate theory in the context of IBC means that the business is revived and will begin with a fresh start.

Harmonious construction of certain Sections

Any statute must be read as a whole to infer its true meaning. Harmoniously referring to the definition of Creditors, Operational Creditors and Operational Debt under Section 3(10), 5(20) and 5(21) of the IBC respectively, Supreme Court pointed out that the debts owed to the Central or State Government are covered under the category of ‘Operational Debt’. And hence, even if Section 31(1) does not specifically state about the Central or State Government, they are within the broad category of ‘creditor’ as under Section 3(10) of the IBC and the definition of Operational Creditor under Section 5(20) include the government authorities as well. Furthermore, the term ‘other stakeholders’ in Section 31(1) would anyway bring tax authorities or any other creditor to whom statutory or other dues are owed.

Reliance on Essar Steel v. Satish Gupta and Ors.

Earlier in the case of Essar Steel v. Satish Gupta and Ors., it was held by the Supreme Court that the successful resolution applicant cannot be suddenly faced with undecided claims post the approval of the resolution plan. If the claims are presented post-approval of the resolution plan then it would be difficult for the resolution applicant to run the business of Corporate Debtor.

Issue 3

The Supreme Court referred to the Statement of Objects and Reasons of the Amendment Bill through which it was evident that the amendment was clarificatory in nature. The amendment clarified that the approved resolution plan will be binding on the Central and State Government or any local authority to whom the debt is owed including tax authority. Since the amendment is clarificatory in nature, it has to be applied retrospectively.

Analysis of the case

The main objective of IBC is to revive the financially distressed company and return the debt owed to the creditor in a timely manner. If time and again new claims pop up then it would eventually become impossible to revive the Corporate Debtor in a timely manner. However, it should be noted that if the liability is yet to be crystalised then the government authority will not be sending the claim and hence to prevent the giving up of the amount there should be an option of sending a contingent claim.

Conclusion

The Supreme Court finally upheld the clean slate theory and clarified that the successful resolution applicant will be required to proceed with the existing claim and no claim can be imposed on the successful resolution applicant post the approval of the resolution plan. Despite Section 31(1) of the IBC do not specifically state about the Central and State Government being bound by the resolution plan, however, applying the doctrine of harmonious construction while reading the definitions of Creditor, Operational Creditor and Operational Debt and further focusing on the term ‘other stakeholders’ under Section 31(1), it can be inferred that the Central and State Government or any other authority including the tax authorities are covered within the ambit of Section 31(1) of the IBC and are hence bound by the resolution plan.

References

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