Central/State Government/local authority bound by approved resolution plan retrospectively

The Central/State Government/local authority bound by the resolution plan once approved by Adjudicating Authority (i.e. NCLT) retrospectively.

ABCAUS Case Law Citation
ABCAUS 3484 (2021) (04) SC

Important case law relied referred:
K. P. Varghese vs. Income Tax Officer, Ernakulam and Another (1981) 4 SCC 173
B. K. Educational Services Private Limited vs. Parag Gupta and Associates
Innoventive Industries Ltd.  vs. ICICI Bank & Anr (2018) 1 SCC 407
Kalpraj Dharamshi and another vs. Kotak Investment Advisors Ltd. and another
Karad Urban Cooperative Bank Ltd. vs. Swwapnil Bhingardevay & Ors.
Committee of Creditors of Essar Steel India Limited   through Authorised Signatory
Pr. Commissioner of Income Tax vs. Monnet Ispat and Energy Ltd
Zile Singh vs. State of Haryana and others (2004) 8 SCC 1
State Bank of India vs. V. Ramakrishnan and another (2018) 17 SCC 394

Section 31(1) of the Insolvency and Bankruptcy Code, 2016 (Code) reads: “(1) 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 words in bold were inserted by the Amendment Act of 2019 effective from 16thAugust, 2019.

In a set of appeals, the Hon’ble Supreme Court considered whether the claims of the parties, which are not included in the resolution plan, could be agitated by the claimants before the other fora, in view of section 31(1) of the Code.

The important questions of law considered by the Hon’ble Supreme Court in this batch of appeals were as under:

(i) Whether 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 (I&B Code)?

(ii) Whether the amendment to Section 31 by Section 7 of Act 26 of 2019 is clarificatory/declaratory or   substantive in nature?

(iii) Whether after approval of resolution plan by the Adjudicating Authority a creditor including the Central Government, State Government or any local authority is entitled to initiate any proceedings for recovery of any of the dues from the Corporate Debtor, which are not a part of the Resolution Plan approved by the adjudicating authority?

The Hon’ble Supreme Court noted that it had been held by it that one of the dominant objects of I&B Code is to see to it, that an attempt has to be made to revive the Corporate Debtor and make it a running concern. For that, a resolution applicant has to prepare a resolution plan on  the basis of the Information Memorandum.

The Hon’ble Supreme Court pointed out that the legislature has given paramount importance to the commercial wisdom of CoC and the scope of judicial review by Adjudicating Authority is limited to the extent provided under Section 31of I&B Code and of the Appellate Authority is limited to the extent provided under sub­section (3) of Section 61 of the I&B Code.

The Hon’ble Supreme Court stated that details required to be contained in the information memorandum enables resolution applicant as to what are the liabilities, that he may have to face and provide for a plan, which apart from satisfying a part of such liabilities would also ensure, that the Corporate Debtor is revived and made a   running establishment. The legislative intent of making the resolution plan binding on all the abcaus.in stake­holders after it gets the seal of approval from the Adjudicating Authority  upon its satisfaction, that the resolution plan approved by CoC meets the requirement as referred to in sub­section (2)  of Section 30 is, that after the approval of the resolution plan, no  surprise claims should be flung on the   successful resolution applicant.  The dominant purpose   is, that he should start with fresh slate on the basis of the resolution plan approved.

Further the Hon’ble Supreme Court noted that it had held that in view of provisions of Section 238 of I&B Code, the provisions thereof will have an overriding effect, if there is any inconsistency with any of the provisions of the law for the   time being in force or any instrument having effect by virtue of any such law.

With regard to the issue of statutory claims of the State /Central Government in respect of the period prior to the approval of the resolution plan by NCLT, the Court noted that after amendment of section 7 w.e.f. 16.8.2019 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 / State Government or any local authority, which does not form a part of the approved resolution plan, shall stand extinguished.

With respect to the dues pertaining to a period wherein Section 7 petitions had been admitted prior to 16.8.2019, the Court referred to “Statement of Objects and Reasons” and the speech of the Finance Minister in Rajya Sabha where she categorically stated that once the resolution plan is accepted, the earlier promoters will be dealt with as individuals for their criminality but not the new bidder who is trying to restore the company.

The Hon’ble Supreme Court opined that the mischief, which was noticed prior to amendment of Section 31 of   I&B Code was, that though the legislative intent was to   extinguish all such debts owed to the Central/State Government or any local authority, including the   tax authorities once an approval was granted to the resolution plan by NCLT.

The Hon’ble Supreme Court had an occasion to consider the question, as to whether the amendment to sub­section (3) of Section 14 of I&B Code by Amendment Act 26 of 2018 was clarificatory in nature or not and in another judgment considered the question, as to whether the 2018 amendment which inserted Section 238A to the I&B Code was clarificatory in nature or not. It was held that the amendment was clarificatory and retrospective.

Accordingly, the Hon’ble Supreme Court held that we therefore hold, that the 2019 amendment is declaratory   and clarificatory in nature and therefore retrospective in operation.

The Hon’ble Supreme Court stated that consequently, a person to whom a debt is owed would be covered by the definition of ‘creditor’ as defined under sub­section (10) of Section 3 of the I&B Code.  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.

The Hon’ble Supreme Court also considered various judgments of the High Courts and expressed agreement therewith.

Central/State Government/local authority bound by resolution plan once approved by Adjudicating Authority (i.e. NCLT) retrospectively

The Hon’ble Supreme Court opined that the 2019 amendment is declaratory and clarificatory in nature. It was also hold, that even if 2019 amendment was not effected, still in light of the view taken by us, the Central Government, any State Government or any local authority would be bound by the resolution plan, once it is approved by the Adjudicating Authority (i.e. NCLT).

The Hon’ble Supreme Court answered the questions framed as under:

(i) That once a resolution plan is duly approved by the Adjudicating Authority under sub­section (1) of Section 31, 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. 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 I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code 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. 

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