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"Undecided Claims" And The Fresh Slate Doctrine Under The Insolvency & Bankruptcy Code, 2016

Arkaj Kumar & Ramya Aggarwal
1 July 2020 12:19 PM GMT
Undecided Claims And The Fresh Slate Doctrine Under The Insolvency & Bankruptcy Code, 2016
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As ArcelorMittal's payments trickle into the bank accounts of the Creditors of Essar Steel India Limited, a proof of concept emerges for the wonders of the Insolvency Bankruptcy Code for the financial health of the economy at large.[1] As one of the first 12 companies put through the Corporate Insolvency Resolution Process[2] ("CIRP"), Essar Steel represents an arduous success story; but like every other story where the sun sets at the end of the road, this too has a class of individuals left in the dark. While finally approving the enormous resolution plan vide its decision in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Others[3], in November 2019, the Hon'ble Supreme Court was also pleased to hold that with the approval of the Resolution Plan, the Successful Resolution Applicant would be entrusted with the reigns of the Corporate Debtor, sans all liabilities.

Seemingly innocuous, and affirmatively well-intentioned, the Hon'ble Supreme Court crystalised a principle which had often been taken for granted; that upon the completion of the CIRP, the Successful Resolution Applicant would begin operating the Corporate Debtor on a 'Fresh Slate', for the plan would be binding on all stakeholders, and guarantors. The relevant portions of the judgment, laying out the doctrine are as under:

86. 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.

...

88. 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.

(emphasis supplied)

This article attempts to explore this fresh slate doctrine in-depth, assess its impact on the future CIRP proceedings, and also explore the possible issues that may arise from the same with respect to certain classes of persons. Specific emphasis will be laid upon persons whose claims were rejected by the IRP due to the pendency of a dispute before a court, tribunal or arbitral tribunal; and whether such an interpretation to the insolvency process can extinguish their right to a remedy, for the sole purpose of providing a "fresh slate" to the successful resolution applicant.

At the outset, it is imperative to trace the origins of this understanding of the insolvency process as a 'fresh slate'. The Insolvency Code was enacted as a beneficial legislation[4], to remedy the history of unsuccessful debt recovery legislation in India. It was noticed that these legislations were heavily favoring corporate debtors which resulted in huge outstanding debts.[5] The objective of the code is inter alia to maximise the value of assets of such persons so that they are efficiently run as going concerns. The Code ensures the revival of the Corporate Debtor and is aimed to put the Corporate Debtor back on its feet.[6] The Hon'ble Supreme in Swiss Ribbons v. Union of India[7] observed that the Code aims to protect the interest of the corporate debtor specifically and not the erstwhile promoters/management of the corporate debtor. It can be inferred that in pursuance of the objective of the Code to protect the Successful Resolution Applicant, the Hon'ble Court in Satish Kumar Gupta (supra) introduced the concept of "fresh slate". However, it must be noted that the BLRC Report's recommendations[8] with respect to "fresh starts", were reserved to individual bankruptcy, and were not extended to corporations. This was premised on the understanding that "individuals cannot be liquidated, only firms can"[9], and consequently, any move towards individual bankruptcy would be infructuous without the offering of a fresh start at the end of the process. Having reached a dead-end in the Indian context, it may be profitable to look outwards towards other jurisdictions.

The American jurisprudence on the issue is perhaps the first to break free from the traditional understanding of debtors and creditors' rights to recovery, and the age-old notion of debt-waiver being the sole prerogative of the creditor. The American law on bankruptcy can undeniably be held to be the germination of the doctrine of fresh starts through bankruptcy. Reference in this regard may be had to the seminal decision of the United States Supreme Court in Local Loan Co. v. Hunt[10], which while placing reliance on another 1915 decision of the U.S. Supreme Court in Williams v. United States Fid. & Guar. Co[11] clearly laid down the ends and the purpose behind the doctrine of Fresh Start. The Court held that the purpose of the same is that it "gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Notably, in its original construction too, this doctrine was reserved for individuals and not corporations, and was premised on the understanding that the purpose of bankruptcy was to prevent destitution and not to enable it.

Having found no guidance for this unprecedented application of the doctrine to corporations who have undergone an insolvency resolution process, we may safely establish that the Hon'ble Court was driven by its understanding of the circumstances unique and germane to the Indian Context, and must be assessed as such. In this respect, an analysis may be undertaken of the application of the fresh slate doctrine. In Satish Kumar Gupta (supra) it is clarified that the Successful Resolution Plan is binding on "all stakeholders", in step with the statutory mandate under Section 31(1) of the Act. Interestingly, the word stakeholder does not find mention in the definition section of the Code, thus compelling an extrapolation of the same from the existing defined stakeholders in the Code. That being the case, it is safe to assume that the following classes of persons would positively be part of "stakeholders" for the purposes of Section 31(1):

  • Corporate Debtor;
  • Financial Creditors;
  • Operational Creditors;
  • Statutory Authorities;
  • Resolution Applicant;
  • Guarantors;
  • Employees and Members of the Corporate Debtor; and
  • other stakeholders involved in the administration of the CIRP.

​Notably, the given ambit of stakeholders is mum about the status of individuals who have claims pending or undecided against the Corporate Debtor. To streamline understanding for the purposes of this article, a creditor with pending claims is one whose claim is rejected by the IRP at the beginning of the CIRP. Such a person, though maybe a creditor in common parlance, fails to satisfy the criteria for qualifying as a valid creditor under CIRP as their claim qualifies as "disputed claim" under Section 8 and 9 of the Code.

This is because, in order for such persons to qualify as stakeholders under Section 31(1), they must satisfy the standard enshrined under Sections 3(10) of the Code. The definition of a creditor is an omnibus definition, which is qualified temporally, to the extent that the debt must be realised at the time the corporation acquires the colour of a Corporate Debtor. This is manifest from a reading of 3(10), which includes within its ambit "decree holder". Thus, it is clear that Section 3(10) of the Code does not extend the standard of coverage to individuals currently embroiled in a legal dispute with the Corporate Debtor.

When read with the scope and applicability of an approved resolution plan, as mandated by Section 31(1) of the Code, we find that there appears a lacuna for such persons, who are embroiled in a legal dispute with the corporate debtor before the initiation of the CIRP; such that they do not qualify as creditors under Section 3(10) of the Code, are simultaneously barred from pursuing a constructive solution to the dispute by the operation of Section 14(1) of the Code, and yet are treated as "stakeholders in the resolution process" per the dictum in Satish Kumar Gupta (supra). Thus, creating a situation whereby not only are their claims extinguished without participation in the CIRP, but they are also left remedy-less against the same.

Given the above situation, an analysis of the law and the remedies available, or lack thereof in the light of the judgment of Satish Kumar Gupta (supra) needs to be undertaken. The issue at hand can be best put in the words of HMJ. Arindam Sinha of the Hon'ble High Court of Calcutta, reproduced as under:

Whether, when plaintiff is seeking a decree [on mesne profits], not having such decree yet, it will be included in definition of creditor given in clause (10) of section 3? Creditor given meaning is, any person to whom a debt is owed and includes, inter alia, a decree holder. It is not decree-holder in respect of its claim for [mesne profits]. As such, is it then a creditor within the meaning? Only if it is, can meaning of debt and thereafter meaning of claim, given respectively in clauses (11) and (6) of the section be looked at.[12]

The lingering dissonance which emerges from the application of the doctrine of fresh slate to the CIRP, can only be rectified if the position adopted in Satish Kumar Gupta (supra) is qualified on the basis of either of the following criterion:

  1. Temporality of the Claims; any debts which are not realised by the date of the initiation of the CIRP are not debts in the eyes of the code and are thus extinguished in the eyes of the law, upon the completion of the CIRP Process, or;
  2. Nature of the Claims; whereby any claims which are not realisable against the Corporate Debtor without protracted dispute, are not claims in the eyes of the law, upon the CIRP Process.

The binary being suggested hereinabove, is predicated on the understanding that if temporality is taken to be the rationale behind the Fresh Slate Doctrine, per Satish Kumar Gupta (supra), then any person who chooses to pursue an alternate and efficacious remedy against a debtor, before moving for Insolvency of the Debtor, will be at a severe disadvantage. In effect, the signalling would be that a creditor, in every instance, ought not to pursue civil remedies against every corporate debtor, and instead ought to proceed on war footing to seek insolvency of such erring parties.

On the other hand, if the nature of the claims is taken to be the criterion upon which the fresh slate doctrine is predicated, then the natural corollary to the same is that any claim which is realisable upon the conclusion of legal proceedings, would not be a valid claim for the purposes of the code. This cannot be the case, on account of the fact that S. 3(10) of the code, recognises decree holders to be in the same class as financial creditors and operational creditors, ergo recognising that claims often enough can only be realised once recourse is had to Courts of Law.

Reading these two scenarios together, we find that either all claims arising after the cutoff date are non-est for the purposes of the Code, or all claims that arise out of legal disputes are non-est for the eyes of the Code. Trying to marry the two, to the effect of saying that some claims are non-est after the cutoff date, smacks of arbitrariness, because it penalises certain classes of individuals, who proceed towards the object of judicial determination, just via a path that isn't the one preferred by the Code.

Perhaps then, the Hon'ble Supreme Court was driven towards the adoption of the Fresh Slate Doctrine, not based on either of these principles, but on the principles of equity. Reference in this regard may be had to Swiss Ribbons (supra), where the Hon'ble Supreme Court attributed the noblest intentions to the Code, painting it with the brushstrokes of a last resort for mismanaged corporate persons, in a desperate bid to keep them as going concerns, and infusing capital into the economy. The Doctrine of Fresh Slate is perfectly in consonance with the objectives attributed to the code in Swiss Ribbons (supra) and is largely equitable when applied to persons who are part of the insolvency process, and voluntarily accept haircuts to their claims.[13]

However, the same principles, when applied to individuals with valid but unrealised claims, yields that by virtue of the current structuring of the code, they are being actively denied the opportunity to realise their claims, and thus participate in the Resolution Process. This, by no yardstick, can be considered equitable for it defeats the first principle of equity, ubi jus ibi remedium. In fact, it even militates against another trite of equity Vigilantibus non dormientibus aequitas subvenit, which translates to mean, he who has been wronged must proceed swiftly to seek justice; an action which in this case is being denied by this interpretation of the Code, which penalises individuals for adopting an alternative efficacious remedy, and thereafter extinguishes their claim before such remedy could be taken to its logical conclusion.

Possibly, the Hon'ble Supreme Court introduced the Doctrine of Fresh Slate to ensure that the Code achieves the ends it was enacted for, i.e. the revival of the corporate debtor. An indispensable part of this process is healthy participation by Resolution Applicants. In a bid to attract such participation the Doctrine of Fresh Slate serves as a lucrative incentive. However, this interpretation is at odds with the Legislative structuring of the code. Section 14 of the Code provides for moratorium to help preserve the assets of the corporate debtor during the resolution process.[14] Crucially, the moratorium under Section 14 of the Code does not extinguish proceedings altogether, but simply operates as a bar against continuing proceedings. Viewing it from the lens of Legislative intent, If the drafters of the Code intended to extinguish the pending suits or proceedings of the corporate debtor, they would not have merely imposed a stay on such proceedings; but would have enacted a provision in that respect. Such a provision could have been a direction to the concerned authorities to conduct a summary or expeditious trial/proceeding for such claims and consequently include the creditors of such claims under the scope of Section 31(1) as creditors. Moreover, the moratorium ceases to have effect once the plan is approved by the Adjudicating Authority,[15] the only automatic result of the same could be the restitution of the pending suit/proceedings; or they could be included as a part of contingencies in the Resolution Plan, approved by the Adjudicating Authority.

This position is buttressed by a reading of the roles and duties of the Resolution professional under the Code. Section 25(2)(b) of the Code casts a duty upon the IRP to represent the Corporate Debtor's interests in judicial, quasi-judicial and arbitral proceedings. From a bare reading of the same it becomes manifest that despite there being provisions for a moratorium under Section 14, the Code envisages a scenario where there might be contested claims against the Corporate Debtor. It cannot then suffice to say that at the end of a successful CIRP, all contested claims against the Corporate Debtor which did not stand crystalised as of the cutoff date, stand extinguished. Thus, the Doctrine of Fresh Slate when applied to corporate persons goes against the provisions of the Code itself.

The Hon'ble National Company Law Tribunal in Indian Renewable Energy Development Agency Ltd. v. T.S.N. Raja[16], in the light of the decision in Satish Kumar Gupta (supra), observed that the Creditor with a contingent claim has an existing right, and such a claim should be brought to the notice of the Successful Resolution Applicant. Thereby, confirming that once the plan is approved and the moratorium is lifted, the only logical outcome will be the Successful Resolution Applicant facing the contingent or pending claims of the Corporate Debtor; or inclusion of the contingent [or pending] claims in the Resolution Plan, as done in this case. The uncertainty in the wake of the decision is not only limited to the Company Law Tribunals, but has also found its way to the doors of High Courts in their supervisory jurisdiction. Recently, the Hon'ble Jharkhand High Court in Electrosteels Steels Ltd. v. State of Jharkhand[17], mindful of the decision in Satish Kumar Gupta (supra) attempted to reconcile the same with the interests of the State Government by dismissing the Writ Petitions against the State Government on the following terms:

"Section 31 of the IB Code clearly lays down that the approved resolution plan shall be binding only on those stakeholders who were involved in the resolution plan."

(emphasis supplied)

During the course of arguments in Satish Kumar Gupta (supra), Mr. K.V. Viswananthan, the Amicus Curiae therein took the Hon'ble Court through the objective behind the enactment of the Code. He stated that the Code was enacted to inter alia remedy the earlier position of law heavily favouring corporate debtors. From the above discussion, it is evident that the Doctrine of Fresh Slate is inadvertently serving the same purpose which the makers of the Code intended to remedy. By extinguishing the claims of legitimate creditors with disputed and pending claims, who pursued statutory remedies for recovery of their claims, the Insolvency Law wrongly favours corporate debtors; giving them a clean chit for multiple debts owed by them.

Thus, in view of the above discussion, the authors of this article would respectfully differ with the view of the Hon'ble Supreme Court in Satish Kumar Gupta v. Committee of Creditors Essar Steel India Limited insofar as it postulates the Fresh Slate Doctrine for Successful Resolution Applicants. Statutory rights of creditors cannot precociously be stymied for the ease and convenience of Resolution Applicants, and even less so in a case where the Code itself bars the fructification of such rights until the end of the Corporate Insolvency Resolution Process.

Views are personal only.
(Arkaj Kumar, Associate at Office of the Ld. Additional Solicitor General of India, Mr. Sanjay Jain. Ramya Aggarwal, Student, Amity Law School Delhi, Affiliated to GGSIPU)

[1] 'ArcelorMittal initiates ₹42,000-cr payment for Essar Steel acquisition', Live Mint, Dec. 14 2019, at

https://www.livemint.com/companies/news/arcelormittal-initiates-rs-42-000-cr-payment-for-essar-steel-acquisition-11576320442851.html.

[2] 'Essar Steel resolution saga: The man who led the insolvency process describes its impact, challenges', Cnbc Tv, Dec. 17 2019, at

https://www.cnbctv18.com/views/essar-steel-resolution-saga-the-man-who-led-the-insolvency-process-describes-its-impact-challenges-4885121.html.

[3] 2019 SCC OnLine SC 1478.

[4] Swiss Ribbons v. Union of India, (2019) 4 SCC 17 ¶ 21.

[5] See The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, Nov. 2015.

[6] Swiss Ribbons v. Union of India, (2019) 4 SCC 17 ¶ 21.

[7] (2019) 4 SCC 17 ¶ 21.

[8] The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, Nov. 2015.

[9] The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, Nov. 2015, Ch. 2.

[10] Local Loan Co. v. Hunt, 292 U.S. 234, 244-45 (1934).

[11] Williams v. United States Fid. & Guar. Co., 236 U.S. 549.

[12] Numzae Dorab Mehta v. The Assam Company India Ltd., GA No. 1711 of 2019 & CS No. 16 of 2007 (decided on 05.02.2020).

[13] Swiss Ribbons v. Union of India, (2019) 4 SCC 17 ¶ 20, 21.

[14] Swiss Ribbons v. Union of India, (2019) 4 SCC 17 ¶ 21.

[15] The Insolvency & Bankruptcy Code, s. 31(3)(a) (2016).

[16] CA (AT) (Ins.) 899 of 2019 (decided on 03.02.2020).

[17] W.P. (T). Nos. 6324, 6325, 6326 & 6327 of 2019 (decided on 01.05.2020).

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