Once Resolution Plan Is Approved, No Creditor Can Initiate Proceedings To Recover Claims Not Part Of Resolution Plan : SC Upholds 'Clean Slate Theory'

Insolvency & Bankruptcy Code, 2016 ("IBC") is a legislation aimed at timely resolution of an entity ("corporate debtor") which has defaulted in payment to its creditors (including the statutory authorities). The corporate debtor has to undergo baptism by fire in the form of a Corporate Insolvency Resolution Process ("CIRP"). Once the corporate debtor is admitted into CIRP, it is the duty of the resolution professional to collate all the outstanding claims from all classes of creditors against the corporate debtors. It is only once all such claims have been crystallised, that the IBC allows for interested parties ("resolution applicant") to submit their respective resolution plans which include the treatment of the aforesaid claims. These plans are then put to vote before the body of financial creditors ("Committee of Creditors"/"CoC") who then vote for the most commercially viable resolution plan. The successful resolution plan then carries through the transition of the corporate debtor into the new entity. Amidst the very brief overview of the abovementioned process, there arises an interesting issue. As has been the experience so far, most of the resolution plans provide for a 'haircut' in payment to the creditors. This means that the successful resolution applicant will implement the plan by paying some value of the outstanding claim and extinguish the unsatisfied part of the claim. The IBC does not expressly provide for the treatment of the unsatisfied part of the claim. Would this mean that the creditors who have suffered a haircut or whose claims have been rejected outrightly, can still initiate legal proceedings against the new avatar of the corporate debtor for recovery of their outstanding claims? Further, would pending demands from the statutory authorities also face the same treatment as that of a normal class of creditors and hence they cannot also continue the demands post a successful resolution? The Supreme Court in a very recent decision in Ghanshyam Mishra vs EARC & Ors has laid to rest the above doubts and controversies. FACTUAL NARRATION The Supreme Court was presented with a batch of matters wherein a common issue arose - whether after approval of resolution plan by the Adjudicating Authority a creditor including the Central Government, State Government or any local authority is entitled to 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 the adjudicating authority? The creditors in these batch matters included statutory authorities like the State commercial tax department, State mining department, income tax department etc. in respect of their respective outstanding demands against the corporate debtors. In each of these matters, the concerned successful resolution plan had stipulated that the claims (including statutory liabilities and contingent liabilities) to the extent not satisfied or received under the plan will be extinguished. The corporate debtor in its new avatar shall not be liable to bear the same. The Adjudicating Authority in each of these cases had approved the resolution plans exercising jurisdiction under section 31 of the IBC. On appeal, the approval of these resolution plans was upheld. However, the Hon'ble NCLAT had given the following liberty to various class of creditors: Workmen can move appropriate applications before the labour court for recovery.Statutory dues of various government departments are dues outstanding & would qualify as operational debt.Corporate Guarantee can be invoked against the new entity The effect of these observations was that the creditors were now filing claims/suits/recovery actions against the corporate debtor in its new avatar (under a new management). The statutory authority continued to press their demands for outstanding dues. Hence, the successful resolution applicants were aggrieved with these observations of the Hon'ble NCLAT and the matters were carried to the Hon'ble Supreme Court. The above factual narration has culminated into the present decision. DECISION OF THE SUPREME COURT Once a resolution plan is duly approved by the Adjudicating Authority under Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the creditors (including statutory authorities, employees and guarantors)On the date of approval of resolution plan by the Adjudicating Authority, all such claims, 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 a claim, which is not part of the resolution plan.The amendment made to section 31 of the IBC is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect.Consequently all...

Once Resolution Plan Is Approved, No Creditor Can Initiate Proceedings To Recover Claims Not Part Of Resolution Plan : SC Upholds 'Clean Slate Theory'

Deepak Joshi

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Once Resolution Plan Is Approved, No Creditor Can Initiate Proceedings To Recover Claims Not Part Of Resolution Plan : SC Upholds 'Clean Slate Theory'

Deepak Joshi

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