Supreme Court: The 3-judge bench of RF Nariman, BR Gavai* and Hrishikesh Roy, JJ has held that any creditor including the Central Government, State Government or any local authority is bound by the Resolution Plan once it is approved by an adjudicating authority under sub-section (1) of Section 31 of the Insolvency and Bankruptcy Code, 2016.
Resolution Plan – When becomes binding?
After taking note of Section 31 of IBC, the Court observed that once the resolution plan is approved by the Adjudicating Authority, after it is satisfied, that the resolution plan as approved by CoC meets the requirements as referred to in sub-section (2) of Section 30, it shall be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders.
“Such a provision is necessitated since one of the dominant purposes of the I&B Code is, revival of the Corporate Debtor and to make it a running concern.”
The Court explained one of the principal objects of IBC is, providing for revival of the Corporate Debtor and to make it a going concern. Here’s the scheme of the Code:
- Upon admission of petition under Section 7, there are various important duties and functions entrusted to RP and CoC. RP is required to issue a publication inviting claims from all the stakeholders. He is required to collate the said information and submit necessary details in the information memorandum.
- The resolution applicants submit their plans on the basis of the details provided in the information memorandum.
- The resolution plans undergo deep scrutiny by RP as well as CoC. In the negotiations that may be held between CoC and the resolution applicant, various modifications may be made so as to ensure, that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders, the Corporate Debtor is revived and is made an on-going concern.
- After CoC approves the plan, the Adjudicating Authority is required to arrive at a subjective satisfaction, that the plan conforms to the requirements as are provided in sub-section (2) of Section 30 of the IBC. Only thereafter, the Adjudicating Authority can grant its approval to the plan.
- It is at this stage, that the plan becomes binding on Corporate Debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution Plan.
“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 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.”
2019 Amendment – Nature and effect of
After the 2019 amendment, any debt in respect of 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 mischief, which was noticed prior to amendment of Section 31 of IBC was, that though the legislative intent was to extinguish all such debts owed to the Central Government, any State Government or any local authority, including the tax authorities once an approval was granted to the resolution plan by NCLT; on account of there being some ambiguity the State/Central Government authorities continued with the proceedings in respect of the debts owed to them.
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.
Further, the word “other stakeholders” would squarely cover the Central Government, any State Government or any local authorities. The legislature, noticing that on account of obvious omission, certain tax authorities were not abiding by the mandate of IBC and continuing with the proceedings, has brought out the 2019 amendment so as to cure the said mischief.
Therefore, the 2019 amendment is declaratory and clarificatory in nature and therefore retrospective in operation.
“Creditor” and “Other Stakeholders” – If includes Central Government, State Governments or local authorities
“Creditor” – If covers Government
“Creditor” has been defined to mean ‘any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder’.
“Operational creditor” has been defined to mean a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
“Operational debt” has been defined to mean a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority
Harmonious construction of subsection (10) of Section 3 of the IBC read with subsections (20) and (21) of Section 5 thereof would reveal, that even a claim in respect of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority would come within the ambit of ‘operational debt’.
The Central Government, any State Government or any local authority to whom an operational debt is owed would come within the ambit of ‘operational creditor’ as defined under sub¬section (20) of Section 5 of the IBC. Consequently, a person to whom a debt is owed would be covered by the definition of ‘creditor’ as defined under sub-section (10) of Section 3 of the IBC.
“As such, even without the 2019 amendment, the Central Government, any State Government or any local authority to whom a debt is owed, including the statutory dues, would be covered by the term ‘creditor’ and in any case, by the term ‘other stakeholders’ as provided in subsection (1) of Section 31 of the IBC.”
Key findings
(i) Once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31 of Insolvency and Bankruptcy Code, 2016, 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.
Further, on the date of approval of resolution plan by the Adjudicating Authority, all such 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;
(ii) 2019 amendment to Section 31 of the IBC is clarificatory and declaratory in nature and therefore will be effective from the date on which IBC has come into effect;
(iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.
[Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Limited, 2021 SCC OnLine SC 313, decided on 13.04.2021]
*Judgment by Justice BR Gavai
For Appellants: Senior Advocates Dr. A.M. Singhvi, Neeraj Kishan Kaul
For respondents: Senior Advocate Gurukrishna Kumar, Advocate Prashant Bhushan
For State Authorities: Advocate V. Shekhar
