Extinguishment of claims under IBC: The issue of undecided claims and the fresh slate doctrine

Introduction

The Insolvency and Bankruptcy Code, 2016, is on track to become one of India's most active laws to date. Over the course of 3 years, the IBC has undergone a slew of modifications, ordinances, and judgments. The quick resolution and regeneration of corporate debtors are one of the primary goals of the Insolvency and Bankruptcy Code. The Supreme Court of India has performed an important function in interpreting key clauses of the IBC in order to make it a viable piece of law. The theory of Fresh Slate is that once the Committee approves the Creditors' resolution plan, it is binding on all stakeholders, and a hit Resolution Applicant can't be faced with unsure claims after the decision plan is approved, because the Resolution Applicant begins running the Corporate Debtor's business on a clean slate.

Issue of Clean Slate Theory?

The notion is rooted in Section 31(1) of the IBC, and it was put into action by the Hon'ble Supreme Court in the Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors (Essar Steel verdict), which decided on November 15, 2019. In the Essar Judgment, the Supreme Court declared that unsettled claims against the corporate debtor following the acceptance of the resolution plan should be extinguished in order to provide a clean slate to the resolution applicant.

In paragraph number 66 of the judgment, it was stated that “Section 31(1) of the Code makes it clear that once a resolution plan is approved by the Committee of Creditors it shall be binding on all stakeholders, including guarantors. This is for the reason that this provision ensures that the successful resolution applicant starts running the business of the corporate debtor on a fresh slate as it were.” It is likewise really well worth noting that a controversy become made earlier than the Supreme Court primarily based totally on Section 60(6) (that's for computing the duration of challenge designated for any match or utility via way of means of or in opposition to CD and excludes the duration of moratorium) that the legislature supposed for 60(6) to permit litigation to hold even after the CIRP has ended.

The above argument was quashed by the Supreme Court in paragraph 67 of the judgment stating, ““For the same reason, the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan 112 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 takes 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 so that it may then take over and run the business of the corporate debtor. This is the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this count.””The Rajasthan High Court's decision in Ultra-Tech Nathdwara Cement Ltd v. Union of India on April 7, 2020, appears to have bolstered the premise of a clean slate. After emerging as a successful RA, Ultra Tech took over Binani Cements and paid the department's dues in accordance with the resolution plan, as accepted by the CIRP. The High Court quashed the GST demand against Ultra-Tech for Binani Cements dues for a period prior to the date of the resolution plan's finalization, holding that once the RA's offer is accepted and the resolution plan is approved by the appropriate authority, it is binding on all parties to whom the industry concern may owe statutory dues. The Court further noted that the operational creditors, either the Central Government or the State Government, have no right of audience in the settlement processes. Furthermore, a recent change to Section 32A of the IBC eliminates the CD's culpability for an offense committed prior to the start of the CIRP and protects the CD's property, demonstrating the legislature's purpose to offer a clean slate to the victorious RA.?

Situations before and after the Essar Judgment

Before the Essar decision, the National Company Law Appellate Tribunal issued decisions in Dynepro Private Limited v V. Nagarajan and G.V. Suresh Kumar and Others v Kapil Dev Taneja had explicitly stated that if the resolution plan is approved, a party shall have the opportunity to submit its claim before the relevant court, and the time period of the moratorium would be excluded for the limitation period, as provided in Section 60 (6) of the IBC. Additionally, in Prasad Gempex v Star Agro Marine Exports Pvt. Ltd, the NCLAT stated that despite any order granted under Section 31 of the IBC, i.e. the adoption of the resolution plan, a party might continue its claim before the proper venue after the moratorium period has expired. The NCLAT become coping with an order of the National Company Law Tribunal exceeded beneath Section 31 of the IBC withinside the immediate case, wherein the NCLT held that any pending or destiny complaints in opposition to the company debtor when it comes to the duration earlier than the approval date of the decision plan shall stand dismissed. The NCLAT, in its case Santosh Wasantrao Walok v Vijay Kumar V.Iyer, relied on the Essar verdict and concluded unequivocally that claims that are not presented to, acknowledged, or dealt with by the decision expert can be extinguished as soon as the decision plan changed into approved. In Ultra Tech Nathdwara Cement Ltd. v Union of India, the Rajasthan High Court, primarily based totally on the Essar case, brushed off the GST department`s claim, noting that each one due and responsibilities can be removed while the decision plan is approved. As a result, the ball has already begun to roll.

Arising Controversies

The reasoning which was advanced in the Ultra Tech decision (above), depending on the Essar Steel decision, is that the sum mentioned withinside the accepted decision plan is very last and binding on all parties, no matter whether or not they have been heard through the RP or the CoC. This sparks a dialogue at the function of the RP. “It is crucial to remember that the Supreme Court emphasized in the Essar Steel decision that the role of the RP is administrative rather than adjudicatory. The statements that are crystal clear are usually aggregated and validated by the IRPs/RPs. However, both before and after the Essar Steel decision, there have been complaints about IRPs/ RPs failing to adequately evaluate the allegation. For example, there may be instances where:

(a) The imprecise assertion has not been provided the best estimate;

(b) The claim is not addressed in the information memorandum and so is not reviewed by the RA for payment;

(c) The claim is denied upon verification;

(d) The claim is classified as contested.

Section 60(5) of the IBC has been invoked by stakeholders to challenge rejected claims before the NCLT. In general, the NCLT also disposes of claims about the CD when the resolution plan is granted; nevertheless, there have been instances when the claim application is ongoing before the NCLT or the NCLAT, as the case may be, and the resolution plan has been authorized in the meanwhile. It is stated that in such instances, the claim would be subject to the outcome of the NCLT/NCLAT decision, and the claimant's claim would be contingent on what comparable category of creditors/stakeholders would be entitled to under the authorized resolution plan, and that the NCLT/NCLAT would not be allowed to amend the resolution plan after its approval. However, the above reasoning is countered by the fact that RAs typically feature terms that pay a zero value/notional amount to dependent, contested, or uncrystallized claims and tend to write them off. And, because the settlement plan is sacred and obligatory after approval, the creditor may not be entitled to its allegedly justified claim. If the second argument is accepted as gospel truth, plaintiffs may be rejected their claim owing to a mistake on the part of the RP or clever wording of the RA. Furthermore, there may be instances where the potential RA's resolution plan fails to adequately address the interests of non-financial creditors. Non-financial creditors may not even have the right to a hearing before the CoC. It is undoubtedly possible for the CoC to discuss or even propose a change to the RA's resolution plan. However, creditors who are not members of the CoC may not have as much bargaining leverage with the prospective RA about claims that have not been adequately addressed or have been assigned an unjust value.”

Conclusion

From the angle of a hit RA who cannot be careworn with unsettled claims as soon as the decision plan is approved, the new slate hypothesis is highly hopeful and well-intentioned. However, devious phrases withinside the decision plan that gives for claims which are contingent on the final results of modern litigation to be handled as nil or given an unfair/notional value may require careful sunder section 31 of the IBC. Section 30 of the IBC may also include a provision for the discharge of all stakeholders' disputed claims, without which no settlement plan may be accepted. One can't additionally exclude the probability of mistakes made with the aid of using the RP/IRP; consequently, the feature of the RP/IRP in declaring verification/willpower warrants greater examination. Alternatively, measures similar to those in the voluntary liquidation procedure may be made under the IBBI (Insolvency for Corporate Persons) Regulations 2016, which must deal with future obligations deriving from such unsettled Claims beneath the decision plan. Such revisions would not only resolve the problem created through the Essar Judgment but will also eliminate unjustified interpretations by judicial authorities in this respect.