The Hon’ble Supreme Court (“SC”), in its recent landmark judgment of Ghanashyam Mishra & Sons Pvt Ltd vs. Edelweiss Asset Reconstruction Company Limited , has settled the legal position on various issues arising under the Insolvency and Bankruptcy Code, 2016 (“Code”).
While the main issue arising out these matters is in relation to Section 31 of the Code, the Court has touched upon various other significant issues faced by litigants/parties during the Corporate Insolvency Resolution Process (“CIRP”). In this article, we will attempt to cover the key takeaways from this judgment
B. Commercial wisdom of CoC:
The Hon’ble Supreme Court in K Sashidhar v. Indian Overseas Bank & Ors. opined that the Code is an economic legislation and Courts ought not to interfere in the decision-making process of the Committee of Creditors (“CoC”). In the Pre-Sashidhar era, there was a surge in challenges to applications filed for approval of the resolution plan, inter alia, questioning the CoC’s reasons for approving/rejecting a resolution plan. The SC in subsequent decisions (including the present one) has now settled the law by restricting the scope of judicial review and upholding the commercial wisdom of the CoC. While considering a resolution plan, the Adjudicating Authority (“AA”) can only scrutinise it through a legal lens and within the four corners of the Code.
C. Amendment to Section 31(1):
Section 31 (1) of the Code says:
“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 emboldened words were added vide Insolvency & Bankruptcy Code (Amendment) Act, 2019 (“Amendment”). One of the issues in this judgment was the retrospective or prospective effect of this Amendment and the government authorities sought argued that it ought to be prospective.
While interpreting any of the provisions of the Code, the Hon’ble SC in all its landmark judgments so far has heavily relied on the object of the Code being –
“to consolidate and amend the laws
. for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues
It has recurrently been held that the object of the Code is also a time-bound resolution of the Corporate Debtor (“CD”) and all provisions are to be construed in harmony with this principle. Section 31, even pre-Amendment was very clear that the resolution plan was binding on all stakeholders including the government. Reason being that the government dues are operational debts under the Code. The SC in this case also relied upon the Statement of Objects and Reasons of the Insolvency and Bankruptcy Code (Amendment) Bill, 2019, which revealed that due to various litigations in relation to interpretation of section 31 qua government authorities it was vital to ‘clarify’ the legislative intent. In light of all the above reasons, the SC finally concluded that the Amendment was declaratory and clarificatory in nature, thus having retrospective effect.
D. Resolution Plan & its effect:
In Ghanashyam (supra) and other similar matters, various tax authorities and government departments pressed their claims against the CD even after the resolution plan was approved by the Adjudicating Authority. A major issue was raised in relation to the claims that did not form part of the resolution plan. It was argued that such claims be permitted to be enforced even after the resolution plan was approved. In the matter of one of the connected matters, i.e. Edelweiss Asset Reconstruction Company Ltd. v. Orissa Manganese & Minerals Ltd & Ors. , the Hon’ble NCLAT while dismissed the appeal, left it open for these creditors to press their claims before a civil court or appropriate forum.
The Hon’ble SC has set aside the NCLAT’s findings and reiterated the law laid down in COC of Essar Steel India Ltd. through Authorised Signatory v. Satish Kumar Gupta & Ors. , wherein the SC categorically held that once the resolution plan is approved, all claims stand extinguished, and the CD is handed over to the Resolution Applicant (“RA”) as a ‘fresh slate’. This is also because the CIRP is designed in a manner that all creditors including government entities/authorities etc.- have the opportunity to file their claims. The SC has further clarified that, upon approval by the AA, all claims that are included in resolution plan shall be dealt in accordance with the said plan and all the claims that are not a part of the resolution plan, shall stand extinguished. The rationale behind this is to ensure the viability of taking over such an entity, which otherwise would be affected adversely post resolution, if the RA was ‘flung with surprise claims’.
E. S-238 of the Code and its overriding effect:
Another reason for rejecting NCLAT’s directions is the overriding effect of section 238 of the Code. The Hon’ble SC has reaffirmed the law laid down in the case of Pr.Commissioner of Income Tax vs. Monnet Ispat and Energy Ltd. , wherein it was categorically held that the Code would hold primacy over any inconsistency between the provisions of the Code and any other law.
F. Power of High Court under Article 226:
In one of the connected matters herein, the Respondents raised an issue on the jurisdiction of the High Courts under Article 226 of the Constitution when an alternate remedy was available. The Hon’ble SC reiterated the settled legal position that existence of an alternate remedy would not operate as a bar, provided, it is filed for (i) enforcement of a fundamental right; (ii) there was a violation of principles of natural justice; (iii) the order/proceedings were devoid of jurisdiction; or (iv) the vires of the Act is challenged.
This judgment is almost a summary of the major decisions of the Hon’ble SC in relation to the CIRP of a CD under the Code. While this judgment does highlight the importance of the binding nature of a resolution plan and unencumbered acquisition of the CD, there are a few issues that remain to be settled. For instance, arbitration claims that are yet to be crystallised may not strictly be extinguished as has also been held by the SC in one matter in a slightly different context . However, the law on this issue is still evolving and it requires deliberation by the courts, especially in light of this latest judgment.
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