Retrospective Operation of Section 31 of the IBC after the 2019 Amendment

The Supreme Court analysed the necessity of the amendment in Sec. 31 of the Code and held the resolution for the removal of unplanned mischief in the Code.

The Amendment 2019 held by the Supreme Court brought a retrospective operation to Section 31 of the Insolvency and Bankruptcy Code (Code). The purpose of the amendment is the clarification of the provision under Sec 31 that deals with the approval of the resolution plan by the committee of creditors under Sec. 30(4) of the Code, which on satisfying the adjudicating authority be approved as an order binding the corporate debtor, and its employees, members, creditors, guarantors and other stakeholders relevant to the resolution plan.

The resolution plan by the Committee of Creditors (CoC) under Sec. 30(4) of the Code, which on satisfying the adjudicating authority be approved as an order binding the corporate debtor, and its employees, members, creditors, guarantors and other stakeholders relevant to the resolution plan.

What was the change made by Amendment 2019?

Amendment 2019 added a provision to sec 31(1) of the IBC to include the Central Government, State Government or any other local authority to whom a debt is owed, in payment of arising under any law for the time being in force.

The Court considered appeals that gave rise to these issues:

● The rights of the creditors (whether the Central Government, State Government or local authority) if binding by the Resolution Plan that is approved by an adjudicating body.

● The Amendment to Sec 31 by Sec. 7 of Act 26 of 2019, if clarifying or substantive in feature.

● The approval of the resolution plan by the adjudicating body a creditor (whether the Central Government, State Government or local authority) if entitled to initiate any proceedings for recovery of the dues, not as a part of the Resolution Plan approved by the adjudicating authority from the corporate debtor.

The Court solved the issues raised and passed the order answering that:

● If the adjudicating authority has duly approved the resolution plan under Sec. 31(1) the claims under the resolution plan shall be halted and it will be binding on the corporate debtors, and their employees, members, creditors, guarantors and other stakeholders relevant to the resolution plan. It shall include the Central Government, State Government or local authority.

● The date on which the resolution plan is approved, the claims those does not form a part of the resolution plan shall cease and no one can file a suit to continue a proceeding that does not involve a part of the resolution plan.

● Since the day Amendment 2019 has been passed to add the new provision to Sec. 31 of IBC, it will be affecting consequently all the dues including the statutory dues owed to the Central Government, State Government or local authority. However, if it is not a part of the resolution plan, it will cease to exist, and no proceeding shall be taken forward in respect to the dues out of the resolution plan for the period before the date on which the approval is granted by the adjudicating authority.

Who is an operational creditor?

The Court used the terms creditor and the stakeholders, precisely.

The definition of the creditor included any person to whom a debt is owed. Such a person can be a financial creditor, a secured creditor, an operational creditor, an unsecured creditor o0r a decree-holder.

The main concern in this Amendment, the operational debt is the claim in respect of goods or services that includes employment or a debt for the payment of which the due payment arises under any law in force at that point of time and payable to the Central Government, State Government or local authority.

In that concern, the operational creditor is the person to whom an operational debt is owed and includes a person to whom the above-explained debt is legally assigned.

Conclusion

The decision is likely to resolve litigations, requires quick and sorted resolution, but was stuck at various forums. The Supreme Court analysed the necessity of the amendment in Sec. 31 of the Code and held the resolution for the removal of unplanned mischief in the Code.