In 2016, the Insolvency and Bankruptcy Code (“IBC”) was enacted with the objective to bring the insolvency law in India under a single unified umbrella and to ensure speedy resolution of an entity (“Corporate Debtor”) which has defaulted in payment to its creditors (including the statutory authorities). Under the IBC, the Corporate Debtor is required to undergo a Corporate Insolvency Resolution Process (“CIRP”). Once the Corporate Debtor is admitted into CIRP, the resolution professional collates all the outstanding claims from all classes of creditors against the Corporate Debtor. Once all such claims are crystallised, the IBC allows for resolution applicants to submit their respective resolution plans which include the treatment of the aforementioned claims. All such resolution plans are then put to vote before the committee of creditors 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.
It is a general practice for resolution plans to provide for a haircut in payment to the creditors. This essentially means that the successful resolution applicant will implement the resolution plan by paying a part of the total outstanding claim and extinguish the balance part of the claim. The question regarding the status of such foregone claims came up before the Supreme Court of India in the case of Ghanashyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited1 which has laid rest to the ambiguity around the same. In this case, the Apex Court was posed with a slew of matters and the common question was, whether after approval of resolution plan by the adjudicating authority under the IBC, creditors (including government authorities) are entitled to initiate any proceedings for recovery of dues from the Corporate Debtor, which were left out of the ambit of the approved resolution plan.
In the abovementioned case, the successful resolution plan had mentioned that the unsatisfied claims (including statutory liabilities and contingent liabilities) will be extinguished and that the new entity will not be liable to bear the same. While the resolution plan was upheld by the adjudicating authority as well as on appeal, however, the NCLAT allowed the following liberties to various class of creditors: (i) workmen can move appropriate applications before the labour court for recovery; (ii) statutory dues would qualify as operational debt and will be considered outstanding; and (iii) corporate guarantee can be invoked against the new entity. In view of the above, the new entity was saddled with claims and recovery suits. Aggrieved by the same, the matter was taken to the Supreme Court.
The Supreme Court held that once a resolution plan is duly approved by the adjudicating authority, the claims as provided in the resolution plan shall stand frozen and will be binding on all creditors including statutory authorities, employees and guarantors. Therefore, 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 was not a part of the resolution plan.
The Supreme Court had clarified the same in Essar Steel vs. Satish Gupta and Ors.2, wherein it was held that “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”.
The ratio makes it clear that on the date of approval of resolution plan by the adjudicating authority, all such claims, which do not form part of the resolution plan, will stand extinguished. This decision cleared the air as a lot of resolution applicants were apprehensive that even after crystalised part payment of debts of the Corporate Debtor, the new entity will be freighted with claims. This decision has once again reinforced the purpose of the IBC, which is that the Corporate Debtor should start with a fresh slate basis the resolution plan.
1 Civil Appeal No. 8129 of 2019
2 Civil Appeal No. 8766-67 of 2019