RESOLUTION PLAN SACROSANCT — CLAIMS STAND EXTINGUISHED IF THEY DO NOT FORM PART OF THE APPROVED RESOLUTION PLAN

Rhia Marshall & Vatsala Khandelwal

A recent judgement of the Supreme Court of India affords clarity on the treatment of unsatisfied claims after the approval of the resolution plan. The decision once and for all puts to rest the issue of continuing proceedings before various judicial forums, proving to be a drawback for prospective resolution applicants. This ruling of the Supreme Court decidedly establishes that the overriding purpose of IBC is to enable the revival of the business of the corporate debtor with a clean slate.

Under the Insolvency and Bankruptcy Code, 2016 [‘IBC’], once a defaulting entity, the corporate debtor, is admitted into the corporate insolvency resolution process [‘CIRP’], the resolution professional invites and collates crystallised claims of various creditors of the corporate debtor. Thereafter, prospective resolution applicants submit their resolution plan, setting out, inter alia, the treatment of the claims admitted by the resolution professional. A successful resolution plan is approved by the Adjudicating Authority i.e. the National Company Law Tribunal after satisfying itself that the resolution plan approved by the Committee of Creditors meets the requirements under the IBC. Under Section 31, the resolution plan is then binding on the Corporate Debtor, its employees, members, creditors, guarantors and other stake holders involved in the resolution plan.

The legislative intent behind section 31 was to extinguish any remaining debts/ claims which do not form part of the resolution plan. Despite this, the Central / State Government authorities, local authorities and tax authorities continued proceedings in respect of debts owed to them. If such proceedings are permitted, a resolution applicant could be faced with claims after the resolution plan has been accepted, and which were not factored into the resolution plan, which in turn, could throw the entire CIRP into jeopardy.

In order to cure this mischief, an amendment was made in Section 31 of the IBC, with effect from 16 August 2019 [‘the Amendment’] to clarify that the resolution plan will be binding on the Corporate Debtor, its employees, members, creditors, “including Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed” guarantors and other stake holders involved in the resolution plan.

The treatment of the unsatisfied claims of creditors, being Central/ State Government, local authorities has been addressed by a three judge bench of the Supreme Court in the case of Ghanshyam Mishra v. Edelweiss Asset Reconstruction Company Limited.

Factual Background

The Supreme Court clubbed together a batch of matters with the common issue of whether upon approval of a resolution plan by the Adjudicating Authority, a creditor may be entitled to initiate proceedings for recovery of any dues, which do not form a part of the successful resolution plan.

In all three matters presented before the Supreme Court, the Adjudicating Authority had approved the resolution plan in accordance with the IBC. Upon appeal before the National Company Appellate Law Tribunal [‘NCLAT’], each of the three resolution plans was upheld in the concerned matters. However, the NCLAT in each of the matters carved out for certain classes of creditors, the liberty to initiate proceedings to recover unsatisfied claims against the corporate debtor despite the implementation of the successful resolution plan. Aggrieved by these decisions and the resultant surge in legal proceedings against the new entity (previously the corporate debtor), the successful resolution applicants in each of the three matters moved the Hon’ble Supreme Court.

Another question which arose before the Supreme Court was in relation to treatment of dues, not included in the resolution plan, if they pertain to a period wherein petitions under section 7 have been admitted prior to 16 August 2019, i.e. prior to the Amendment coming into force.

The Decision

The Supreme Court adopted the ‘clean slate theory’, whereby once a resolution plan is duly approved by the Adjudicating Authority under Section 31 of the IBC, the claims as provided in the resolution plan stand frozen and remain binding on each of the creditors. Accordingly effective from the date of the approval of the resolution plan by the Adjudicating Authority, all such claims which relate to the period prior to the date of approval of the resolution plan, and which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to the unaccepted or unsatisfied claims.

The Court stated that “the legislative intent behind this is, to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims”, to enable a new management to begin with afresh to revive the business of the corporate debtor.

The Supreme Court also clarified that the words “other stakeholders” in Section 31(1) would squarely cover the Central Government, State Government or local authorities. Accordingly, the Supreme Court held that the Amendment is clarificatory and declaratory in nature and therefore has retrospective operation. It was further clarified that even if the Amendment was not effected, the Central / State Government and local authorities would be bound by the resolution plan once approved by the Adjudicating Authority.

Analysis

Permitting recovery proceedings to be initiated by certain classes of creditors of a corporate debtor after the conclusion of the CIRP, will lead to endless legal proceedings, and essentially defeat the purpose of resolution envisaged within IBC. Moreover, such liberties would conflict with the assumptions and the calculations that the resolution plan is founded upon, rendering the plan ineffectual or unviable, thereby having an effect contrary to the resuscitation of the corporate debtor, as intended by IBC.

The Supreme Court placed reliance on its earlier decisions where the Hon’ble Court had explored the object of IBC. One such decision being in the matter of Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta & Ors, where the Hon’ble Supreme Court stated that “all claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate.”

A reading of the Supreme Court’s earlier decision in the matter of Swiss Ribbons v. Union of India & Ors., helps establish the legislative intent behind IBC, being to economically rehabilitate the corporate debtor and for that purpose, the timelines protect the corporate debtor’s assets from further dilution. For this purpose, IBC allows for the settlement of debts at a reduced value.

For more information please contact:

Rhia Marshall, Partner, Disputes, rhia.marshall@jmp.law

Murtaza Somjee, Partner, Disputes and Insolvency, murtaza.somjee@jmp.law

Vatsala Khandelwal, Associate, Disputes and Insolvency, vatsala.khandelwal@jmp.law

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Rhia Marshall

Rhia Marshall

Partner, Dispute Resolution, Jerome Merchant + Partners

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