IBC Simplified – Ghanashyam Mishra v Edelweiss ARC

  June 22, 2021

Summary of the Supreme Court judgment, Ghanashyam Mishra and Sons Pvt. Ltd. Through Authorised Signatory v. Edelweiss Asset Reconstruction Company Ltd. Through the Director & Ors. ~ By Sara Jain

Ratio: Once a resolution plan is approved by the NCLT, all creditors are bound by the same, irrespective of whether they participated in the corporate insolvency resolution proceedings. Any claims not forming a part of the approved resolution plan shall stand extinguished.

Relevant Facts:

  • In the present case, the Hon’ble Supreme Court clubbed four matters together owing to the similar questions of law arising out of them. The common facts in all the appeals were that despite approval of the resolution plan by the NCLT, proceedings were sought to be initiated in alternative forums for recovery of dues not provided for in the resolution plan.

Issues:

  • Whether all creditors (including the Central Government, State Government or any local authority) are bound by the resolution plan once it is approved by the NCLT? Whether any creditor is entitled to initiate proceedings for recovery of the dues from the corporate debtor which do not part of the resolution plan after approval of the same by the NCLT?
  • Whether the amendment to Section 31 inserting the words, “including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed”, was clarificatory/declaratory or substantive in nature?

Issue 1:

  • Through various judgments of the Hon’ble Supreme Court, such as K. Sashidhar v. Indian Overseas Bank, it has been established that the commercial wisdom of the Committee of Creditors is given paramount importance. While approving a resolution plan, the scope of judicial review of the NCLT and NCLAT is limited to the extent provided under Section 31 and Section 61(3) respectively.
  • The apex Court held that Section 31 clearly states that once a resolution plan is approved by the NCLT, it is binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders.
  • The information memorandum prepared by a resolution professional (in compliance with Section 29 of the IBC read with Regulation 36 of the IBBI (CIRP) Regulations, 2016), contains detailed information regarding the corporate debtor so that a resolution applicant submitting a resolution plan is aware of all assets and liabilities of the corporate debtor.
  • The rationale behind providing a detailed information memorandum is to help ensure that a resolution applicant takes the same into consideration while proposing a resolution plan which ensures (a) satisfaction of maximum liabilities and (b) revival of corporate debtor as a running establishment.
  • Thus, if after the approval of the resolution plan, any surprise/undecided claims are allowed, it would result in great uncertainty and discourage prospective resolution applicants. All claims must be submitted to and decided by the resolution professional before the approval of the resolution plan so that a prospective resolution applicant knows exactly what has to be paid for taking over the business of the corporate debtor.
  • The legislative intent is that the resolution applicant should start with a fresh slate.

Issue 2:

  • On September 16, 2019, through an amendment to the IBC, the following words in bracket and underlined were inserted to Section 31:

“If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, [including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,] guarantors and other stakeholders involved in the resolution plan.”

  • The inserted words expressly state that the resolution plan shall be binding on the government authorities as well. Therefore, considering Section 238 of the IBC has an overriding effect on anything inconsistent contained in any other statute, any government authority to whom statutory dues are owed shall be bound by the approved resolution plan.
  • The law is clear regarding any CIRPs initiated after September 16, 2019, i.e. after the aforementioned amendment to Section 31. However, to determine whether it would have retrospective application, the nature of the amendment has to be ascertained.
  • It is a well-established rule that if an amendment is merely declaratory or clarificatory in nature, it would be deemed to have retrospective application and if the same is substantive in nature, no such presumption can be made.
  • Through the speech made by the Hon’ble Finance Minister while explaining the amendment, it is clear that the mischief sought to be remedied by introducing the said amendment was that some government authorities were continuing to proceed against corporate debtors despite the approval of the resolution plan. In an effort to clarify the ambiguity in the legislation, the amendment was introduced.
  • Apart from this, the Hon’ble Supreme Court cited two reasons for highlighting the declaratory and clarificatory nature of the amendment. Firstly, it held that the words “other stakeholders” already present in Section 31 definitely covered the Central Government, any State Government or any local authority. Secondly, the definition of “operational debt” is broad enough to cover claims in respect of dues arising under any law and payable to the Central Government, any State Government or any local authority. Thus, there was no substantive amendment, as the amendment introduced could already be deduced from the then existent language of the provision.

Conclusion:

  • Once a resolution plan is duly approved by the NCLT under Section 31(1), the claims provided in the resolution plan shall stand frozen and will be binding on all stakeholders involved, including the corporate debtor and its employees, members, creditors, the Central Government, any State Government or any local authority.
  • On the date of approval of the resolution plan by the NCLT, all claims which are not part of the resolution plan shall stand extinguished, and no person shall be entitled to initiate or continue any proceedings in respect of such claims.

The 2019 amendment to Section 31 of the IBC was declaratory and clarificatory in nature, and thus would have retrospective application.

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