Extinguishment of the Additional Claim Out of Resolution Plan Post Its Approval

ABSTRACT

The insertion of the Insolvency Bankruptcy Code (IBC) has opened floodgates for petitions raising their claims after the approval of the resolution plan. The amended Ordinance of 2018 provides rehabilitation of the corporate person by transforming into a new avatar. The statute enhances a very sceptical view of the vicious claim of debts even after the Resolution Plan has been approved by the Adjudicating Officers. The legislators thoroughly aim at interpreting a concrete understanding of the code by providing a satisfactory settlement of those outstanding claims.  In spite of these developments, it questions the inclusion of statutory authorities being bound by the orders even after the amended structure. The author intends to bring in a restructured view of IBC which resolves the dispute of different claims arising between the parties into a successful restart of a corporation.

INTRODUCTION

The starting of Corporate Insolvency Resolution Process (“CIRP”) sets forth the duty of the Resolution Professional by collecting all the outstanding claims of various creditors including a batch of the (Statutory Authorities) Central Government, State Government, Municipal Authorities and the State Commercial Tax Department Authorities against the Corporate Debtors. Once the dues have been transcribed, the interested parties are allowed to participate in the Insolvency process and submit their respective resolution plan. By furtherance of the process, voting rights are followed by the Committee of Creditors (“CoC”) which initiates a start of the new management by proposing the most feasible Resolution plan. The viable resolution plan transforms the resolution applicant into a Competitive Avatar, enabling a restart of its position on a Clean Slate by the significant position holders to the control of Corporate Debtor’s Business.

In spite of the disputable claims, it pays only a nominal part arising out of the outstanding claim and completely amputates the unsatisfactory part of the creditors, leaving the gates open for the continuation of contentious outstanding claims. With the introduction of Section 31 of IBC it cancels all the additional claims after the approval of the resolution plan, holding its applicability to all the members.

 Recognition of the Role under Section 31 of IBC

Section 31 of Insolvency Bankruptcy Code [1]highlights the view of extinguishment of the additional claims (including contingent claims) arising out of the resolution plan after the approval. The code signifies that once the plan is approved by the Committee of Creditors the decision would necessarily be binding on all parties who have been a part of the resolution plan, including, the Corporate Debtor, Statutory Authorities, Members, Stakeholders, Employees of the company.

While the majority of the decision holders are the Committee of the creditors who take into account the commercial viability and feasibility of the plan in all discretional aspects, which furthers the process of approval to the Adjudicating Authority for final orders. The proposed plan naturally stands extinguished if it is rejected by the Resolution Professional during the CIRP.

In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others[2], the Supreme Court held that “Section 31 was envisaged in order to extinguish the subsequent claims arising after the order passed”. While the Code was interpreted to avoid the “Undecided Claims” which would grow apart from the Approved and Decided Resolution Plan, which otherwise barricades the amount payable by the Resolution Applicant who would rather successfully takeover the business control in the normal course of CIRP.

It is therefore necessary that all the prospective claims be submitted prior to the Resolution Professional so that the most suitable plan shall be proposed by the Committee of Creditors whereby the Resolution Applicant would know exactly what amount is required to be paid in order to take over the Corporate Debtors business without any ambiguity.

In the most recent Case of Ghanshyam Mishra v. EARC & Ors [3]the Supreme Court addressed on three main issues;

  • “Whether after the approval of the resolution plan by the Adjudicating Authority, the Statutory Authorities are bound by it under Section 31(1) of the IBC”
  • “Whether the dues can be collated from the Corporate Debtor if it is not a part of the Resolution plan approved by the Adjudicating Authority”
  • “Whether the amendment structure of Section 31 by Section 7 of 2019 will have a declaratory or substantive existence?”

In the present case, the Supreme Court revolves around the conformity of the issues arising in Section 31 of Insolvency Bankruptcy Code. Interestingly the Court opined that the amendment of 2019 to Section 31(1) of IBC 2016 had a retrospective operation from the date the Code came into effect.

While dealing with the first question, the Court affirmatively held that all creditors including the Central Government, State Government and the local authorities to whom the payment of debt owes even the tax authorities, any law for the time being in force shall be bound to be followed by all the participants in the resolution process. If there is any additional liability it would push the resolution plan forward and frustrate the scope of law by making the entire plan impractical.  Thereby the conclusive settlement of decision would be applicable to the parties.

The dues not forming a part of the Resolution plan would automatically be discharged from holding any weightage for the payment of dues, which would rather extend the battle of the “Unnecessary- Continuous claims”. The claims not being a part of the resolution plan during the approval of the plan would be extinguished in its entirety, which otherwise awakens the scope of hardship to the creditors in the light of impediment. The Court expressed, “Claims which are not a part of the resolution plan, shall stand extinguished”.

In this part of the question, the intent behind the legislative opinion gives rise to an arguable point regarding the amended nature of Section 31, whether the code is having the structure of Declaratory or Substantive effect in its nature. Technically there being no fixed legislative expression on this point, the courts have to dig in with their own perspective while pronouncing its verdicts. While considering the amended structure under the possible heads of declaratory, the statute book will be presumed to have a retrospective effect of this Section since its inception according to the interpreters of law. If stated otherwise, the statute would have a prospective or retrospective stand from the date of such effect or the notice period, leaving the rest of the provisions undisturbed. Section 31 of IBC shall be Declaratory in nature from the date the IBC has come into effect, promoting the debtor to come in clean hands before the court.

Principle of “Clean Slate theory”

The concept of “Clean Slate theory” is not a new concept to the Indian Jurisprudence, the footprints of this principle were found in “Satyam Computers Services Limited”, the company which shattered its existence with Corporate Fraud. Erstwhile the company was granted shelter under the Companies Act. An identical view of protection is granted under Section 32 A[4] of IBC, whereby the Corporate Debtor would not be prosecuted for any offence prior to the commencement of CIRP and the initiation of penal provisions. The exemption from the criminal and civil liability ensured the beginning of a new management operation without the apprehension of being prosecuted for the earlier offences. The Principle of Clean Slate theory embodies the parties to come forth to the Courts in Clean Hands, without holding a prior record of debt.

In the present case the court reflects the same theory, to freeze all the prior claims with the inception of new management theory.

Critical Analysis

Although courts specifically categorize the amended structural provisions, it fails to interpret the other half of the claims which remains unsatisfied, as it pays only the value required for completion of the successful resolution plan. The system encourages this “Haircut” methodology and provides a vague term of settlement which highlights only the “Clean Slate Theory” but discourages the rest of the claims. The system neglects the initiation of other penal proceedings which otherwise normally arises in the failure of payment.

The Hon’ble Supreme Court opined the extinguishment of claims by any of the creditor, if admitted after the approval of the resolution plan. On the other hand it suspends and side-lines the institutions of the criminal and the civil proceedings which still can be initiated by the State, Central and the Local Government for the alleged commission of the crime committed by the Corporate Debtor prior the commencement of the proceedings.

Conclusion

The insertion of amended structure under Section 31 has opened floodgates of petition under IBC. Thereby, the court has drawn a balanced line of offering between the Corporate Debtor and Creditor for settlement. The Code provides a win-win situation by anticipating protection under Section 32A to the Corporate Debtor by helping them escape the prosecution and to the Creditor, by the prima facie payment of the value. Recently in Manish Kumar v. Union of India[5] (2021), the constitutional validity of section 32A was challenged. The Supreme Court uprightly held the need for a new management system and approved the constitutional validity of the IBC provision under Section 32A.In the wake of upcoming petition with same question the courts have paved its way to follow the same theory.


[1] The Insolvency and Bankruptcy Code, 2016 (Amended Act 31 of 2018).

[2] Committee Of Creditors Of Essar  v. Satish Kumar Gupta [2019] SCC 8766-67, 24417.

[3] Ghanshyam Mishra v. EARC & Ors [2019] SCC 8129.

[4] The Insolvency and Bankruptcy Code, 2016 (Act 32 A of 2016)

[5] Manish Kumar v. Union of India [2020] W.P (C) No. 26 of 2020


Authored By: G. Vidya. Kamath, 4th Year, SDM Law College, Mangalore

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