This post is authored by Kshitiz Jain, Digital Editor at RGNUL Financial and Mercantile Law Review (RFMLR).
Section 31(1) of the Insolvency and Bankruptcy Code, 2016 ("IBC") provides that the resolution plan, once approved by the Adjudicating Authority ("AA"), shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. Moreover, by the virtue of Insolvency and Bankruptcy Code (Amendment Act), 2019, the approved resolution is also binding upon the central government, any state government and any local authority to whom a debt is due. However, there have been numerous instances where the governmental bodies have claimed their dues from the corporate debtors even after the approval of resolution plan by the AA. Recently, the Apex Court, in the case of Ghanshyam Mishra v. Edelweiss Asset Reconstruction Company Limited (EARC) & Ors, has ruled upon the long-standing ambiguity of the admissibility of statutory claims after the approval of the resolution plan by the AA.[i]
2. GHANSHYAM MISHRA v. EARC & ORS.
As provided under section 31(1) of IBC, the National Company Law Tribunal ("NCLT"), exercising its power, approved the resolution plan proposed by the Committee of Creditors and Resolution Professional in the instant bunch of cases. However, several creditors initiated proceedings against the corporate debtor even after the successful resolution process. When the IBC applicant instituted an appeal against such proceedings, the Appellate Tribunal ("NCLAT") carved out 3 classes of creditors as exception and allowed them to claim their dues through initiating new proceedings against the corporate debtor even after the approval of resolution plan by the NCLT. These classes of creditors included the employees (workmen), statutory bodies, and the guarantors.
Subsequently, on appeal, the cases reached the Supreme Court regarding the primary issue of whether any creditor, including governmental bodies, such as Income Tax Dept., Service Tax Dept., etc., are entitled to initiate any proceedings for recovery of debts that were not a part of the resolution plan approved by the AA under section 31 of the IBC.
The Apex Court, highlighting the objectives of the IBC, decided that all pre-CIRP claims that are not a part of approved resolution plan by the NCLT shall stand extinguished. The 3 judge-bench based their judgement on three basic reasons that, firstly, a successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan,[ii] secondly, the 2019 amendment is declaratory and clarificatory in nature and by virtue of which the government departments are equally obliged to the approved resolution plans, and thirdly, any pre-CIRP claims, if permitted to remain, would totally frustrate the object of I&B Code of revival of a Corporate Debtor and to resurrect it as a going concern.
Henceforth, to prevent belated and recurring proceedings after a successful resolution process as well as to provide a fresh start to the corporate debtor, the Court held that no creditors including the statutory bodies can initiate any proceedings regarding the pre-CIRP dues against the corporate debtor. Consequently, no statutory dues can be claimed after the approval of resolution plan.
However, given the significant rise in the number of statutory dues that have not been accommodated in the resolution plan before the approval from the AA, there exists an urgent need to review the legal framework for inviting, determining and collating statutory dues during the CIRP process.
3. ANALYSIS AND SUGGESTIONS
Currently, IBC mandates the Interim Resolution Professional ("IRP") to publish a public announcement for inviting all the claims for verification and, subsequently to receive and collate the verified claims for the resolution plan. The Code stipulates all the creditors to bring forward and get their claims verified once the public announcement is made. The statutory departments are also expected to file their claims in the same way. However, the status quo is that these departments have failed repeatedly in presenting their claims before the IRP in the due CIRP Process.
In such a situation, the policymakers should consider changing the method of inviting statutory claims. It has been a consistent view of the courts that if the amount borrowed is shown in the Balance Sheet, it may amount to Acknowledgement.[iii] Since the statutory dues would usually be reflected in the books of accounts of the corporate debtor, the IRP should be required to take cognizance of the dues as per the books of accounts.[iv]
Additionally, there have been instances when the statutory bodies had not been afforded an opportunity to file a claim before the Interim Resolution Professional (“IRP”) due to an improper public announcement. It was decided in such a case that the claim would not be extinguished after the approval of the resolution plan.[v]
This exception carved out by the Jharkhand High Court once again raises ambiguities regarding the admissibility of any statutory claim after the approval of resolution plan by the AA. Hence, to eliminate such unnecessary exceptions, it is suggested that once the IRP has confirmed all the statutory dues from the books of accounts of the corporate debtor, the statutory departments should be notified about the same through a separate notice by the IRP for an absolute communication.
The judgement by the Supreme Court on admissibility of any claims after the approval of resolution plan has been a welcome one. The Court has clarified all the ambiguities raised around the initiation of any proceedings after the successful resolution process. However, the CIRP framework needs to be fine-tuned in a manner which ensures that the statutory dues are not left unaddressed. If there is a constant rise in the cases where statutory dues are not included in the resolution plan during the CIRP process, then the Insolvency and Bankruptcy Board of India ("IBBI") shall need to review the framework for determining and collating the statutory dues before the approval of the resolution plan. In such a condition, acknowledging the statutory dues from the account-books and sending a separate notice to the government departments can resolve the issue.
[i] Ghanshyam Mishra v. Edelweiss Asset Reconstruction Company Limited & Ors., LL 2021 SC 212. [ii] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors., Civil Appeal No. 8766-67 of 2019. [iii] V. Padmakumar v. Stressed Assets Stabilisation Fund and Ors., (2020) 221 CompCas 153. [iv] State Bank of India v. ARGL Ltd., CA No. 1215 of 2019, Principal Bench NCLT (decided on Mar. 12, 2019). [v] Electrosteel Steels Limited v. State of Jharkhand, W.P.(T). No. 6324 of 2019 (decided on May 1, 2020).