A New Beginning – Post Era of Resolution Plan

Insolvency and Bankruptcy Code, 2016 (“Code”), since its enactment has witnessed by far one of the highest number of amendments. Not only has the Code been amended on several occasions but the interpretation of its provisions, including the incidental rules and regulations, have evidenced accelerated evolution across the hierarchy of the courts in India. One such provision that has undergone a lot of change is Section 31 of the Code.

The aspect of admissibility of disputed claims post the approval of a resolution plan under Section 31 of the Code was provided certainty by the Hon’ble Supreme Court (“SC”) in the case of Committee of Creditors of Essar Steel India Ltd. vs Satish Kumar Gupta & Ors.¹ (“Essar’s case”). One of the pertinent questions that the SC answered in the said precedent, inter alia, was whether the disputed claims raised before the Resolution Professional (“RP”) and not admitted could be adjudicated post the acceptance of the Resolution Plan. The Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in the said case had earlier held that the disputed claims that may exist could be decided and adjudicated before the appropriate forum after the expiry of the moratorium.

Whilst setting aside the NCLAT judgment, the SC in the Essar’s case held that the intent of Section 31 of the Code was that upon approval of the resolution plan, the same was binding not only on the corporate debtor but also on all its employees, creditors, guarantors and other stake holders. The SC accordingly at paragraph 88 of its judgment observed –

“ a successful resolution applicant cannot suddenly be faced with “undecided claims” after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate…”.

SC had dealt with a similar question in the case of Ghanshyam Mishra & Sons Pvt. Ltd. vs Edelweiss Asset Reconstruction Asset Ltd. through the Director & Ors² (“”GMSPL v. EARC”). and in several other linked petitions³. Further, in the case of Ultra Tech Nathdwara Cement Limited v. State of Uttar Pradesh and Ors.⁴ as also Monnet Ispat and Energy Limited and Anr. v. State of Odisha and Anr⁵(“MIEL Case”), the issue for consideration before the SC was pertaining to the status of government claims in respect to period prior to August 16, 2019 i.e. when Section 31 was amended (“2019 Amendment”).⁶

Section 31 was amended so as to include it its ambit – 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. This article discusses (i) the GMSPL v. EARC and (ii) the MIEL Case.

Factual Matrix:

1.  GMSPL v. EARC
   In the said case, on 03 August 2017, at the instance of State Bank of India, Section 7 IBC petition against Orissa Manganese and Minerals Ltd. (“OMML”) was admitted by NCLT, Kolkata. Prior thereto, OMML had given a corporate guarantee to the takeout facility provided by EARC to Adhunik Power and Natural Resources Ltd. (“APNL”) being the sister concern of OMML. Basis the Corporate Guarantee, EARC lodged its claim with the RP, which was rejected. In the interim the resolution plan submitted by GMSPL was approved by majority of Committee of Creditors (“COC”). EARC filed an application praying that GMSPL be directed to pay full amount due and payable under the said corporate guarantee and further to issue direction for protecting the rights of lenders of APNL as pledge. NCLT approved the resolution plan of GMSPL and rejection the applications filed EARC.Aggrieved by the same, EARC approached NCLAT by way of Company Appeal against the rejection of its claim and its non-inclusion in the COC. NCLAT while holding, that the RP was justified in not accepting the claim of EARC and that NCLT had rightly rejected the application filed by EARC. However, the NCLT observed that the rejection of the claim for the purpose of collating and making it part of the Resolution Plan will not affect the right of EARC to invoke the Bank Guarantee against the Corporate Debtor, in case the principal borrower failed to pay the debt amount, since the moratorium period had come to an end.There was another appeal before the NCLAT that arose from the approval of the resolution plan of GMSPL wherein the grievance was that the RP ignored their rightful wages, statutory dues and other benefits. NCLAT held that the appellant therein may move before the civil court or a court of competent jurisdiction and may file an application before the Labour Court for appropriate reliefs in favour of the concerned workmen or against the Corporate Debtor, if they have actually worked and had not been taken care of in resolution plan. Appropriate forum for appropriate relief. GMSPL, thus, aggrieved by the observations made by the NCLAT, to the effect, that the claims of the parties, which are not included in the Resolution Plan could be agitated by them before other forums, preferred to appeal before the SC.
2. MIEL Case
   Petitioner in this case was a corporate debtor who has undergone the corporate insolvency resolution proceeding, wherein NCLT approved the resolution plan submitted by a consortium of Aion Investment Private Limited and JSW Steel Limited. After the approval of resolution plan, the demand notice was issued by the tax authorities for recovery of service tax towards royalty against the iron ore purchased by the Petitioner. Petitioner challenged the said notice by way of filing a writ petition under Article 32 of the Constitution of India as the said notices being contrary to the judgement of SC in Essar case.After considering facts of the various petitions, the Apex Court, inter alia, formulated questions as to whether (a) any creditor including the Central Government, State Government or any local authority could initiate proceedings for recovery of its dues which were not a part of the resolution plan approved by the Adjudicating Authority; (b) whether the 2019 Amendment to Section 31 of the Code was clarificatory/ declaratory or substantive in nature as its applicability (prospectively or retrospectively) was considered.In the said regard, while taking note of the Statement of Objects and Reasons (“SOR”) of the 2019 Amendment, the Court observed that from clause 3(f) of the SOR it was primarily evident that the legislature intended to bring all statutory dues and claims within the realm of Section 31 of the Code. The Court in the said context also considered the Rajya Sabha debates as also the Hon’ble Finance Minister’s Speech, wherein the Hon’ble Minister mentioned that the amendment would be made binding on the government and that the government will not raise any further claim. The Court also took into consideration the definitions of creditor, operation debt and operation debtor as laid down under the Code and held that a harmonious construction, in respect of any dues payable to the government (state or central), government would fall within the definition of “creditor” and as such within the term “other stakeholders” and therefore within the scope of Section 31.The Apex Court while passing its judgment, referring to it earlier judgments in the Essar case and K. Shashidhar v Indian Overseas Bank and others⁷ observed that the scope of judicial review of an Adjudicating Authority as also the Appellate Authority qua the commercial wisdom of the COC was very limited to the extent as set out in Section 31 and Section 61(3) of the Code. Further, the Court whilst adverting to the Essar’s judgment reiterated the law that a resolution applicant should be aware as to what has been paid in order to take over the business of the corporate debtor.The Court while concluding held that claims which do not form part of the resolution plan as on the date of approval shall stand extinguished and that no person shall be entitled to initiate or continue any proceedings thereafter for such claims.