Supreme Court: No Proceeding Can Be Initiated in respect of Claims which are Not Part of Resolution Plan

Supreme Court: No Proceeding Can Be Initiated in respect of Claims which are Not Part of Resolution Plan

The Supreme Court (SC) on 13 April 2021, in the case titled Ghanashyam Mishra and Sons Private Ltd. (Appellants) v. Edelweiss Asset Reconstruction Company (Respondents) ruled that once a resolution plan is approved by the Adjudicating Authority under Section 31(1) of the of Insolvency and Bankruptcy Code, 2016 (IBC) all 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 SC bench comprising of Justices R F Nariman, B R Gavai, and Hrishikesh Roy, heard a batch of pleas against several orders of the National Company Law Appellate Tribunal (NCLAT). The SC held that the amendment of 2019 made to the Bankruptcy Code is 'clear and declaratory in nature and therefore will be effective from the date on which IBC has come into effect in 2016'.

Issues before the SC

- Whether any creditor - Centre, States, or local authority - is bound by the resolution after approval by an adjudicating authority under Section 31(1) of the IBC?

- Whether the amendment to Section 31 by Section 7 of Act 26 of 2019 is clarificatory/declaratory or substantive in nature?

- Whether after approval of resolution plan by adjudicating authority, a creditor is entitled to initiate any proceedings for recovery of any of the dues from the corporate debtor, which are not a part of the plan?

The Court held that once a resolution plan is duly approved, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central government, any State government, or any local authority, guarantors and other stakeholders.

The SC in its judgment stated that on the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of the 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.

With regard to the issue of statutory claims of the State Government and the Central Government in respect of the period prior to the approval of resolution plan by Adjudicating Authority, the Court proceeded to examine the object of the amendment.

According to the amendment made in 2019 in Section 31 of IBC, any debt regarding the payment of dues arising under any law for the time being in force including the ones owed to the Central Government, any State Government, or any local authority, which does not form a part of the approved resolution plan, shall stand extinguished.

The SC further clarified in its judgment that the legislature has given paramount importance to the commercial wisdom of the Committee of Creditors (CoC) and the scope of judicial review by Adjudicating Authority is limited to the extent provided under Section 31 of IBC and the Appellate Authority is limited to the extent provided under Section 61(3) of IBC.

Justice Gavai said that once the adjudicating authority approves the resolution plan and it is as approved by the CoC meets the requirements as provisioned under Section 30(2) of the Code, it shall be binding on the Corporate Debtor and its employees, members, creditors, guarantors, and other stakeholders.

The Top Court held that the legislative intent behind this is, to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that (recovery of such dues) is permitted, the very calculations on the basis of which the resolution applicant submits its plans would go haywire and the plan would be unworkable.

The Court placed reliance on Rajya Sabha debates and Finance Minister's speech to conclude that the amendment was clarificatory in nature.

The SC concluded that the legislative intent in amending Section 31(1) of the Code was to clarify, that the resolution plan approved by the Adjudicating Authority shall also be binding on the Central Government, any State Government or any local authority to whom a debt is owed regarding the payment of the dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, including tax authorities.

It added, "In order to remedy the said mischief, the legislature thought it appropriate to clarify the position, that once such a resolution plan was approved by the Adjudicating Authority, all such claims/dues owed to the State/Central Government or any local authority including tax authorities, which were not part of the resolution plan shall stand extinguished."

It held that "The respondents are not entitled to recover any claims or claim any debts owed to them from the corporate debtor accruing prior to the transfer date."