Clean Slate Doctrine — Wiggle Room for “Uncrystallised Claims”?

The Insolvency and Bankruptcy Code, 2016 (IBC) under Section 31 provides for a binding nature of the approved resolution plan upon all stakeholders involved in the resolution plan. The 2019 Amendment¹ further clarified the scope and extent of this to include Central and State Government as well as local authorities to whom statutory dues are owed by the corporate debtor. This led to the development of the “clean slate doctrine” by the Supreme Court in Essar Steel India Ltd. (CoC) v. Satish Kumar Gupta² and Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.³, whereby it was established that once a resolution plan has been approved by the Adjudicating Authority all claims forming part of the resolution plan stand frozen, while claims not forming a part of the resolution plan shall be extinguished.⁴ Thus, no proceedings pertaining to a period prior to the resolution process can continue or be initiated against the corporate debtor for claims which do not form a part of the approved resolution plan.⁵ This ensures a fresh start for the successful resolution applicant and avoids them to be plagued by the hydra-headed nature of new “claims” against the erstwhile entity.⁶

Furthermore, trends suggest an even more progressive interpretation to the theory of clean slate, whereby the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) have disallowed fresh claims submitted after the approval of the resolution plan by the Committee of Creditors (CoC) pending approval before the adjudicating authority.⁷ This is because the adjudicating authority cannot interfere with the “commercial wisdom” of the CoC and once a resolution plan is approved by the CoC the same cannot be amended by the adjudicating authority.⁸ Therefore, if a claim does not form part of the resolution plan approved by the CoC, the same cannot be incorporated by the adjudicating authority at a later stage.

The theory of clean slate has been challenged on multiple counts owing to uncrystallised dues for the period prior to resolution process,⁹ assessment of escaped tax liabilities,¹⁰ reassessment for a period prior to resolution process,¹¹ arrears pertaining to electricity consumption of the corporate debtor,¹² however, the courts have consistently upheld the importance of providing a fresh slate to the resolution applicant and rejected any fresh claims against the corporate debtor once the resolution plan has been approved by the adjudicating authority.

Here it is critical to note that the operation of clean slate doctrine is solely with respect to the corporate debtor and not the former directors of the corporate debtor i.e. the operation of Clean Slate Doctrine does not absolve the Directors of their personal liability incurred while acting in their respective capacities. In fact, the criminal liability of the Directors under Section 138 of the Negotiable Instruments Act, 1881 also subsists despite the corporate debtor being absolved of the same by virtue of the resolution plan.¹³ Likewise, “wilful defaulter” proceedings can also continue after the approval of the resolution plan as such proceedings are aimed at preventing further fraud and loss of public money and not recovery of debt.

While the courts have held a fairly consistent view with respect to the scope and extent of Clean Slate Doctrine, the same has been a highly contested issue by various government authorities. The most contentious issue remains to be the admission and determination of a fresh claim relating to a period prior to the resolution process arising after the approval of the resolution plan. One such instance has recently been raised before the Supreme Court in an appeal against the judgment of the High Court of Gujarat in Surya Exim Ltd. v. Union of India¹⁴.

In the impugned judgment, the High Court of Gujarat, despite conclusion of the resolution process and fresh start, allowed a reassessment pertaining to tax liability for assessment year prior to resolution plan. The Court held that in the absence of any pending demand as on the date of approval of resolution plan by the adjudicating authority, the liability cannot be said to have been extinguished by virtue of the resolution plan. This is in line with an earlier judgment of the Madras High Court in Dishnet Wireless Ltd. v. CIT¹⁵ wherein the Court observed that the IBC cannot be used to dilute the rights of the Income Tax Department under the Income Tax Act, 1961 and thus the same does not preclude the Department from conducting reassessment for a period prior to the conclusion of resolution process.

Presently, an appeal against the judgment of the High Court of Gujarat in Surya Exim case¹⁶ is pending before the Supreme Court. Thus, a critical issue regarding origination of fresh liability on account of uncrystallised statutory dues once a resolution plan has been approved will be addressed with finality by the Supreme Court.

In our considered view the Clean Slate Doctrine operates to allow all — the resolution applicant, the corporate debtor and the creditors a finality and certainty regarding all dues and liabilities. A successful resolution applicant must not be plagued with unexpected liabilities as it will act as a deterrence against participating in the resolution process. Moreover, allowing for certain statutory dues to be claimed outside the resolution process further impacts the waterfall mechanism under the IBC as it effectively creates a category of “special creditors” eligible to claim dues against a corporate debtor by bypassing the IBC. Thus, the operation of clean slate doctrine must operate against all dues pertaining to a period prior to the resolution plan, regardless of when such dues are crystallised.