Doctrine Of Clean Slate: Headway In Insolvency Law?

Those creditors' claims which have not been satisfied fully will, to the extent of shortfall, cease to exist qua the corporate debtor. The intent of the statute to give an opportunity of revival is manifest from the distinction created by the statute between resolution and liquidation.

Very recently, a Division Bench of the Rajasthan High Court, rendered a significant ruling in the matter of Ultratech Cements Nathdwara Ltd. v. Union of India & Ors.^[1]

The petitioner, which was the successful resolution applicant in the Corporate Insolvency Resolution Process ('CIRP') initiated qua Binani Cements Ltd., had invoked the writ jurisdiction of the High Court against notices of demand issued by the Central Goods & Service Tax Department, Government of India, seeking recovery of dues of GST pertaining to the period prior to the petitioner taking over the reins of Binani Cements. These dues were raised post acceptance of the resolution plan, in which the statutory claim of about Rs. 72 crores, then raised by the GST Department were duly verified and collated by the RP.

Unmindful of the fact that the resolution plan of Ultratech approved by the COC and the NCLT had attained the imprimatur of the NCLAT as well as the Supreme Court in successive appeals, the management of Binani Cements having been taken over by Ultratech Cements, and the resolution plan having been executed in its entirety, the GST Department issued fresh demand notices, which were the subject matter of challenge before the Rajasthan High Court.

The judgment in Ultratech decides a seminal question regarding government entities raising fresh statutory demands of liability post the acceptance and implementation of the resolution plan.

The judgment in Ultratech relies primarily on the amendment to Section 31(1) of the Insolvency & Bankruptcy Code, 2016 ('IBC') which, post 16^th August, 2019, reads as follows:

31. Approval of resolution plan.—(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the 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 stakeholders involved in the resolution plan.

The Rajasthan High Court premises its decision on the larger principle laid down by the  Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors. reported at 2019(16) SCALE 319, as follows:

"66. Section 31(1) of the Code makes it clear that once a resolution plan is approved by the Committee of Creditors it shall be binding on all stakeholders, including guarantors. This is for the reason that this provision ensures that the successful resolution applicant starts running the business of the corporate debtor on a fresh slate as it were….

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67. For the same reason, the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with "undecided" claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. 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, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this count."

It is perhaps perplexing and a significant failure of modern day administration, that despite the position in law having been set in stone by unequivocal wordings in the statute coupled with an authoritative pronouncement by the Supreme Court in Essar (supra), the GST Department did not to draw the curtain with respect to Binani Cements and chose to re-agitate its claims. It was therefore justified that the Rajasthan High Court brandished the claims, and the resultant litigation as 'totally frivolous'.

As a matter of fact, when the Insolvency & Bankruptcy Code (Amendment) Bill, 2019, which inter alia amended Section 31(1) as above, was introduced by the Minister of Finance in the Rajya Sabha, the statement made on the floor of the house as regards a clean slate being made available to the successful resolution applicant, was as follows:

"There is also this question about indemnity for successful resolution applicant. The amendment now is clearly making it binding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. So, that is going to be a major, major sense of assurance for the people who are using the resolution plan. Criminal matters alone would be proceeded against individuals and not company. There will be no criminal proceedings against successful resolution applicant. There will be no criminal proceedings against successful resolution applicant for fraud by previous promoters. So, I hope that is absolutely clear. I would want all the Members to recognize this message and communicate further that this Code, therefore, gives that comfort to all new bidders. So, now, they need not be scared that the taxman will come after them for the faults of the earlier promoters. No. Once the resolution plan is accepted, the earlier promoters will be dealt with as individuals for their criminality but not the new bidder who is trying to restore the company. So, that is very clear."

The UNCITRAL^[2] Legislative Guide on Insolvency Law^[3] was prepared as a model reference for different countries to enact and strengthen their legislative regimes insofar as they pertained to insolvency laws. This guide also sheds valuable light on commercial certainty and bindingness of the plan in considering the aspect of discharge. Chapter VI of the guide titled 'Conclusion of Proceedings' contains sub-Chapter A titled 'Discharge'. Clause 2 of the above, deals with 'Discharge of debts and claims in reorganization'. The relevant paragraph therein reads as follows:

"14. To ensure that the reorganized debtor has the best chance of succeeding, an insolvency law can provide for a discharge or alteration of debts and claims that have been discharged or otherwise altered under the plan. This approach supports the goal of commercial certainty by giving binding effect to the forgiveness, cancellation or alteration of debts in accordance with the approved plan. The principle is particularly important to ensure that the provisions of the plan will be complied with by creditors that rejected the plan and by creditors that did not participate in the proceedings. It also gives certainty to other lenders and investors that they will not be involved in unanticipated liquidation or have to compete with hidden or undisclosed claims. Thus the discharge establishes unequivocally that the plan fully addresses the legal rights of creditors."

Therefore, it is an established international practice which lays the principle that a successful resolution application cannot be presented with any surprises post the acceptance of the resolution plan. Commercial viability in bidding for a company undergoing the CIRP process is assessed from every financial aspect before preparing the resolution plan. It cannot be expected of a resolution applicant to ride a blind horse, and prepare itself to be caught unawares, post its plan having been approved by the threshold majority of the COC.

The intent of the legislature to indemnify the resolution applicant from all angles is manifest from the fact that apart from indemnity from fiscal liability, there is now an express provision introduced by virtue of Section 32A, which grants immunity from criminal prosecution to a corporate debtor for offences committed prior to the commencement of the CIRP.

The doctrine of clean slate is necessitated to allay any concern on the part of the resolution applicant that any disputed or unsatisfied claims of creditors stand satisfied with the approval and execution of the resolution plan. These liabilities will cease to exist qua the corporate debtor and will not in any manner burden the entity after the culmination of the CIRP. Any interpretation not in consonance with this principle, not only runs counter to the express wordings of the statute but the entire schema of Chapter II of Part II of the Code which provides for resolution.

The doctrine of clean slate is a dogmatic principle in insolvency law. The recognition and enforcement of the clean slate principle by Indian courts is a testimony to the conducive approach of the system towards ensuring that the resolution applicants are indemnified in investing in companies undergoing CIRP, and at the same time ensuring that there is meaningful resolution of insolvency.

Views Are Personal Only.

(Rushab Aggarwal is an Advocate at the Supreme Court of India and the Delhi High Court.  He may be contacted at mail@rushabaggarwal.com)