The Theory of Clean Slate under the IBC, 2016 in light of the Ghyansham Mishra Case
– By Debdatta Mukhopadhyay,
4th year Student at KIIT School of Law Bhubaneswar
With the coming into force of the Insolvency and Bankruptcy Code, 2016 (Hereinafter referred to as the IBC, 2016), the existing Insolvency Regime in India faced a major overhaul. The already existing Statutes for instance the SARFAESI Act, 2002, RDDBFI Act, 1993 etc. had several loopholes and were severely criticized for reasons including it to being debtor centric, time consuming and being rigid statutes. On the completion of over five years of the IBC, 2016, the Statute can still be said to be at a nascent stage with new Judicial Interpretations coming in. One such very engrossing question of law included whether the unsatisfied claims of the Creditors after the final acceptance of the Resolution Plan by the Committee of Creditors would still be an eligible ground to initiate legal proceedings against the new form of Corporate Debtor? The accompanying short Article aims to analyse this position of Law in light of the Judicial Rulings on the same.
The introduction of the Insolvency and Bankruptcy Code, 2016 has been a very positive change. It changed the very rigid approach of the earlier Statutes and primarily aims at balancing the interest of all stakeholders in the Insolvency framework in a very flexible manner. The Earlier Statutes primarily aimed at ‘Loan recovering’ whereas the IBC aims at ‘Loan restructuring’ hence carrying a wider approach. It seeks to give a level playing field to the Corporate Debtor and thus seeks to balance the interest of both the Creditor and the Corporate Debtor by ensuring that both the Company survives and at the same time the Creditors claims are duly satisfied. This objective of the IBC is very much evident from the Hon’ble Finance Minister’s words in the Rajya Sabha session when the Bill was introduced for the very first time:
“There is a reset and then after the reset the company is competitive once again and it goes forward and it becomes successful. That is what happens consistently in the United States. They go into bankruptcy, the liabilities are reset, they become competitive again and then thereafter they do fine…”[i].”
The IBC, 2016 provides for the Corporate Insolvency Resolution Process (CIRP), the process through which the Corporate Debtor is transformed to new form. In order to further understand the ‘theory clean slate’, a brief understanding of the CIRP is must.
The steps involved are as follows:
- Application before the National Company Law Tribunal
- Corporate Insolvency Resolution Process begins, Interim Resolution Professional takes over the Management of the Company and Moratorium sets in
- Verifying and classifying the claims of the Creditors and subsequent formation of the Committee of Creditors (COC)
- Appointment of the Resolution Professional by the COC
- Approval of the Resolution plan
The Theory of Clean Slate
As discussed in brief above the CIRP Process, the final step states that after submission of Resolution plans by Interested parties, Section 30(4) of the IBC, 2016[ii] mandates the Committee of Creditors to approve the resolution plan by not less than 75% of the Voting Share of the Financial Creditors. Subsequent and final approval is required by the Adjudicating Authority provided it is satisfied that the approval by the COC meets the requirements as in Section 30(2) IBC[iii].[iv]
After going through the above process, the Management of the Company is expected to begin with a ‘clean slate’ which essentially means that the business of the Corporate Debtor is revived again and is expected to start afresh.
Having given a brief explanation to the Clean Slate Theory, it must be stated that there are few limitations of this Theory:
- The Theory is applicable only to the Company in against which the Corporate Insolvency Resolution Process is invoked, it’s subsidiaries cannot be insulated with respect to their defaults
- This Theory applies only to Pre CIRP liabilities not the ones arising after that
Clean Slate Theory Upheld?
In light of this theory, an interesting question of law arose in the Case of Ghanshyam Mishra v EARC & Ors[v] as to whether after the final acceptance of the Resolution Plan by the NCLT a creditor can initiate legal proceedings against his unsatisfied part of the claim which does not form part of the approved resolution Plan?
“This Question of Law assumes importance due to the fact that if the Creditors are in fact allowed to initiate Legal Proceedings for their unsatisfied part of the claim which does not form part of the Final Resolution Plan, it would result in defeating the very objective of the Insolvency and Bankruptcy Code, 2016 and more specifically the theory of Clean Slate. This simply means that once a Resolution Plan is approved by the Committee of Creditors and subsequently by the Adjudicating Authority, generally the Corporate Debtor assumes its ‘new avatar’ and is expected to start afresh on a new slate. However if the above situation were to be allowed the Creditors may in respect to their unsatisfied part of Claim initiate legal proceedings against the new form of Corporate Debtor and this would result in Defeating the ‘Clean slate’ theory.”
This Question of Law was finally put to rest by the Hon’ble Supreme Court in Ghanshyam Mishra v EARC & Ors[vi] wherein the Resolution Plan was approved by the NCLT (Adjudicating Authority) under Section 31 of the IBC, 2016 (Wherein the Resolution Plan extinguished certain amount of Claims of the Creditors). However on Appeal before the NCLAT, although the Appellate body upheld the Resolution Plan. However gave liberty to certain class of Creditors. Those were:
- Workmen can move the Labour Court for their unpaid dues
- Outstanding Statutory dues of Government Authorities qualify as Operational Debt
- Corporate Guarantee can be invoked against the new form of Corporate Debtor.
What this Judgement essentially led to was defeating the very objective of the IBC, 2016 i.e, the new form of Corporate Debtor was faced with legal proceedings even after the Resolution plan was successfully approved.
On Appeal before the Supreme Court, the following relevant issue arose for consideration.
- Whether after approval of the Resolution Plan by the Adjudicating Authority under Section 31 of the IBC the Creditors can still Initiate Legal proceedings against the Corporate Debtor with respect to their claim which does not form part of the Resolution Plan?
The Hon’ble Supreme Court gave it’s view on the binding nature of the Resolution Plan. It referred to the Case of Essar Steel v Satish Gupta & Ors[vii] whereby it was held that a Resolution Applicant cannot be afterwards traumatised by surprising him with undecided claims and “hydra head popping up subsequently” after the Resolution plan has been accepted. This Case crystallised the Clean State Theory. It was also held that Section 31(1) of the IBC is binding on all stakeholders.
Mention must also be made of the Case of Ultratech Nathdwara Cement Ltd v Union of India[viii] wherein the Resolution Plan submitted by Resolution Applicant i.e. Ultratech which was approved by the Adjudicating Authority was challenged by Statutory Departments like the Indirect Tax and also by the Government of Rajasthan contending that their Statutory dues were substantially reduced in the Resolution Plan. On a Writ Petition having been filed before the High Court of Rajasthan it was contended by the Petitioners that the Statutory Departments should encourage the revival of the Corporate Debtor and let it begin on a Fresh Slate which would subsequently contribute to the Public exchequer in form of taxes.
To sum up, once a Resolution Plan is approved by the Adjudicating Authority exercising it’s power under Section 31 of the IBC, 2016, it is binding on all Stakeholders and no Creditor (Including Government Authority with respect to Statutory Dues) can initiate Legal Proceedings in respect of their claims not provided for in the Resolution Plan.
Conclusion and Analysis
The Preamble of the IBC talks about the Re organisation and Insolvency Resolution of a Corporate Person. It also stipulates promotion of Business Entrepreneurship. So the focus is to revive the Company and at the same time encourages Entrepreneurs to come forward for the process of the Revival of the Company, so it can be well said that without the Theory of Clean Slate being applicable to the IBC, no entrepreneur would ever come forward for the revival process.
Further Regulation 37 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 allows the Resolution Plan to reduce some extent of existing liabilities and provide for the rest. The relevant portion of the Provision is as below:
“A resolution plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to the following:-
- curing or waiving of any breach of the terms of any debt due from the corporate debtor;
- reduction in the amount payable to the creditors;.”
Read with Section 31, IBC which makes the Resolution Plan binding on all Stakeholders.
Further, it is an imperative to mention that Insolvency and Bankruptcy Code (Second Amendment), Bill 2019 added Section 32A which provides that the Corporate Debtor shall not be Prosecuted for an Offence committed prior to the CIRP after the Resolution Plan has been approved by the Adjudicating Authority. This Amendment explicitly furthers the scheme of the IBC to help begin the Corporate Debtor on a Fresh Slate.
Bomi Daruwala rightly observes “I fail to understand that why this Clean Slate Theory had to evolve through the Judicial Process.” This theory is imbibed in the preamble of the Insolvency and Bankruptcy Code, 2016 itself. However the Decision of the Supreme Court in Ghyansham Mishra has finally settled the Law on this point and is a very positive Interpretation in consonance with the objective of the Act.
[i] “Deepak Joshi, Once Resolution Plan Is Approved, No Creditor Can Initiate Proceedings To Recover Claims Not Part Of Resolution Plan : SC Upholds ‘Clean Slate Theory’, Livelaw, (June 20, 2021), https://www.livelaw.in/top-stories/approved-resolution-plan-no-recovery-claims-supreme-court-clean-slate-theory-172561”
[ii] “Section 30 (4), Insolvency and Bankruptcy Code, 2016
[iii] Section 30 (2), Insolvency and Bankruptcy Code, 2016
[iv] Section 31(1), Insolvency and Bankruptcy Code, 2016”