2021 (4) TMI 613 - SC - IBC

Approved resolution plan under Section 31 binds debtor, employees, creditors and extinguishes non-included claims and pre-approval statutory dues

The SC held that once a resolution plan is approved by the adjudicating authority (NCLT) under Section 31, it binds the corporate debtor, its employees, ... Binding effect of an adjudicating authority's approval of a resolution plan - extinguishment of claims not part of approved resolution plan - operational debt including statutory dues payable to Central/State/local authorities - clarificatory/declaratory amendment and retrospective effect - paramountcy of Committee of Creditors' commercial wisdom and limited judicial review under Sections 30 and 31 - overriding effect of the Insolvency and Bankruptcy CodeBinding effect of an adjudicating authority's approval of a resolution plan - extinguishment of claims not part of approved resolution plan - operational debt including statutory dues payable to Central/State/local authorities - overriding effect of the Insolvency and Bankruptcy Code - The legal effect of approval of a resolution plan by the Adjudicating Authority and whether such approval binds creditors including the Central Government, State Governments and local authorities - HELD THAT: - The Court held that once a resolution plan is approved by the Adjudicating Authority after being satisfied that the plan meets the requirements of subsection (2) of Section 30, the plan becomes binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders. The scheme of the Code, read with the information memorandum and requirements of Section 30(2), aims to enable the successful resolution applicant to start on a clean slate; allowing post approval surprise claims would defeat that purpose. Section 238 gives the I&B Code overriding effect over inconsistent enactments. The Court further explained that statutory dues fall within the definition of 'operational debt' and operational creditors (including tax or other statutory authorities) are encompassed by the Code's definitions; therefore such authorities are bound by an approved plan and cannot continue or initiate proceedings in respect of claims not included in the plan. [Paras 61, 62, 87, 91, 95]An approved resolution plan is binding on all creditors and stakeholders, including the Central Government, State Governments and local authorities; claims not included in the approved plan stand extinguished and no proceedings in respect thereof may be initiated or continued.Clarificatory/declaratory amendment and retrospective effect - Statement of Objects and Reasons and parliamentary speech as aids to interpretation - Whether the 2019 amendment to Section 31 is clarificatory/declaratory (and thus retrospective) or substantive (prospective) - HELD THAT: - Having examined the Statement of Objects and Reasons of the 2019 Amendment and the Rajya Sabha speech of the Finance Minister, and applying principles of statutory interpretation (including precedents recognising clarificatory/declaratory amendments), the Court concluded that the amendment was intended to cure an obvious omission and to clarify legislative intent that an approved resolution plan binds Government and statutory authorities. The amendment therefore is declaratory/clarificatory in nature and operates retrospectively to the inception of the Code. The Court also reasoned that even absent the amendment, the Code's definitions already covered statutory dues as 'operational debt', supporting the retrospective, clarificatory character of the amendment. [Paras 77, 82, 87, 90, 95]The 2019 amendment to Section 31 is clarificatory and declaratory in nature and is retrospective; it confirms that statutory dues owed to Governmental authorities, if not part of an approved plan, are extinguished.Paramountcy of Committee of Creditors' commercial wisdom and limited judicial review under Sections 30 and 31 - extinguishment of claims not part of approved resolution plan - Whether a creditor, including Governmental authorities, may initiate or continue recovery proceedings for dues not included in an approved resolution plan - HELD THAT: - The Court reiterated that the Code grants primacy to the commercial wisdom of the Committee of Creditors and limits the scope of judicial review to the compliance checkpoints in Section 30(2) and Section 31. Allowing creditors to pursue proceedings for claims not included in an approved plan would undermine the statutory scheme and the objective of enabling the successful resolution applicant to take over the corporate debtor free from undisclosed liabilities. Consequently, after approval of a resolution plan by the Adjudicating Authority, no person - including Governmental authorities - may initiate or continue proceedings in respect of claims not forming part of the approved plan for the period prior to approval. [Paras 53, 54, 62, 63, 95]After Adjudicating Authority's approval, creditors including Governmental authorities are not entitled to initiate or continue proceedings to recover dues that are not part of the approved resolution plan; such claims stand extinguished.Final Conclusion: The Court declares that an adjudicating authority's approval of a resolution plan binds the corporate debtor and all creditors and stakeholders, including Central/State Governments and local authorities; the 2019 amendment to Section 31 is clarificatory and retrospective; and any statutory or other dues accruing prior to the approval date that are not included in the approved resolution plan stand extinguished and cannot be pursued by those creditors or authorities. Issues Involved:1. Binding nature of the Resolution Plan on creditors including the Central Government, State Government, or any local authority once approved by the adjudicating authority under Section 31(1) of the Insolvency and Bankruptcy Code, 2016 (I&B Code).2. Nature of the amendment to Section 31 by Section 7 of Act 26 of 2019 - whether it is clarificatory/declaratory or substantive.3. Entitlement of creditors, including the Central Government, State Government, or any local authority, to initiate proceedings for recovery of dues not part of the approved Resolution Plan post-approval by the adjudicating authority.Detailed Analysis:Issue 1: Binding Nature of the Resolution PlanThe Court held that once a resolution plan is duly approved by the Adjudicating Authority under Section 31(1) of the I&B Code, 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 the resolution plan by the Adjudicating Authority, all such claims, which are not a part of the 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.The Court emphasized that the legislative intent behind making the resolution plan binding on all stakeholders is to ensure that the resolution applicant starts with a clean slate, free from any surprise claims, ensuring the revival and continuation of the Corporate Debtor as a going concern.Issue 2: Nature of the Amendment to Section 31The Court held that the 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 the I&B Code has come into effect. The amendment clarifies that the resolution plan approved by the Adjudicating Authority shall also be binding on the Central Government, any State Government, or any local authority to whom a debt is owed in respect of payment of dues arising under any law for the time being in force, including tax authorities.The Court referred to the Statement of Objects and Reasons of the Insolvency and Bankruptcy Code (Amendment) Bill, 2019, and the speech made by the Hon’ble Finance Minister in Rajya Sabha, which indicated that the amendment was intended to clarify the existing position and remove any ambiguity regarding the binding nature of the resolution plan on government authorities.Issue 3: Entitlement to Initiate Proceedings Post-ApprovalThe Court held that all dues, including 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.The Court emphasized that the provisions of the I&B Code will have an overriding effect in case of any inconsistency with any other law, as provided under Section 238 of the I&B Code. Therefore, once the resolution plan is approved, the government authorities cannot continue with any proceedings related to claims that are not part of the approved resolution plan.Conclusion:The Supreme Court allowed the appeals and writ petitions, holding that the respondents are not entitled to recover any claims or claim any debts owed to them from the Corporate Debtor accruing prior to the transfer date. The Court quashed and set aside the impugned judgments and orders of the lower courts and held that the claims not included in the resolution plan are extinguished and cannot be pursued further.