IBC, the theory of Fresh Slate, and few debatable issues with respect to Claims

Recently, the government of India has suspended any fresh initiation of insolvency for up to a year under the Insolvency and Bankruptcy Code, 2016 (IBC), which means that no new Corporate Insolvency Resolution Process (CIRP) will be triggered against any Corporate Debtor (CD), however, the CIRPs against the CDs which have already been triggered are most likely to continue.

There have been various issues emerging in relation to CIRP, some of these issues are pertaining to the claims which have been made against the CD before and after the approval of the resolution plan. In this article, the author aims to discuss the aforesaid issues in light of the theory of fresh slate.

The Theory of Fresh Slate

The theory of Fresh Slate, in effect, is that once the resolution plan is approved by the Committee of Creditors (CoC), it shall be binding on all stakeholders and a successful Resolution Applicant (RA) cannot suddenly be faced with undecided claims after the approval of the resolution plan as the RA starts running the business of the CD on a fresh slate.

The theory finds its root in Section 31(1) of the IBC and this theory has been put to effect by the Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors (Essar Steel judgment) decided on 15.11.2019), wherein it was held that:

“66. 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 also worthwhile to note that an argument was made before the Supreme Court relying upon Section 60(6) (which is for computing the period of limitation specified for any suit or application by or against CD and excludes the period of moratorium) that the intention of the legislature behind having 60(6) is to allow litigations to continue even after the CIRP has ended. This argument was however negated by the Supreme Court in the following words:

“67. 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 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, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this count.”

Recently, the judgment of the Ultra Tech Nathdwara Cement Ltd v. Union of India, passed by the Rajasthan High Court on April 7, 2020 also seems to have buttressed the theory of fresh slate. Ultra Tech had taken over Binani Cements after emerging as a successful RA and had paid the dues to the department as admitted by the CIRP in terms of the resolution plan.

The High Court quashed the GST demand against Ultra Tech for dues of Binani Cements for a period prior to the date of the finalization of the resolution plan and held that once the offer of the RA is accepted and the resolution plan is approved by the appropriate authority, the same is binding on all concerned to whom the industry concern may be having statutory dues. The Court also observed that no right of audience is given in the resolution proceedings to the operational creditors’ viz. the Central Govt. or the State Govt. as the case may be.

Furthermore, a recent amendment of Section 32A of the IBC ceases the liability of the CD for an offence committed prior to the commencement of the CIRP and protects the property of the CD, and only shows the intent of the legislature to provide a fresh slate to the successful RA.

Analyzing ‘The Claim’:

Once the CIRP has been initiated against the CD, the Resolution Professional or the Interim Resolution Professional (RP /IRP) makes a public announcement allowing the operational creditors, financial creditors, secured creditors, unsecured creditors, employees and other stakeholders to submit their claims with proof. Now there can be two scenarios:

Scenario A: If the Claim is made after the approval of Resolution Plan:

If the claim is made after the approval of the resolution plan, relying on the theory of fresh slate, it can be said that the claimant might not be able to recover any dues from the CD as its claim might not have been dealt with in the approved resolution plan. Therefore, a stakeholder cannot afford to sleep over his claims and fail to submit it on time.

Scenario B: If the Claim is made before the approval of Resolution Plan:

The claimants are required to submit their claims with proof on or before the date stipulated in the public announcement by IRP. However, claimants who have not been able to submit their claim to the IRP/RP before the stipulated date announcement may do so but before the 90 (ninetieth) day of the insolvency commencement date. In some cases, the claims have been allowed after the 90^th day as well but before the stage of acceptance of the resolution plan.

As per Regulation 13 & 14 of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the IRP/RP is required to collate and verify the claims received by him. Further, if the amount claimed by a creditor is not precise due to any contingency or other reason, the IRP/RP is required to determine it by making the best estimate of the amount of the claim based on the information available with him.

It is also worth mentioning that the RP is required to mention disputed, undisputed, fixed, legal, matured, unmatured, equitable, secured or unsecured, contingent claims in the information memorandum. Reliance is placed on the definition of ‘claim as per section 3(6) of the IBC and Regulation 36 (h) of the CIRP regulation which requires the RP to mention in the information memorandum, the details of all material litigation and ongoing investigation or proceeding initiated by Government and statutory authorities.

In an ideal scenario, in light of the Essar Steel judgment, where the claims are made before the approval of the resolution plan, the RP is required to collect, collate and finally admit claims of all creditors. These claims are then required to be examined for payment, in full or in part or not at all, by the RA and can also be finally negotiated by the CoC with the RA.

Once the terms of the resolution plan offered by successful RA are approved, they are binding on all the stakeholders of the CD, and thus, stakeholders will be entitled to their claims to the extent of the amount specified in the resolution plan.

Few Debatable Issues

One argument was made in Ultra Tech judgment (supra) relying upon the Essar Steel judgment that the amount specified in the approved resolution plan is final and binding on all parties; whether or not they had been heard by the RP or the CoC. Now this leads to a debate on the role of the RP. It is important to note that the Supreme Court in Essar Steel judgment has reaffirmed that the role of the RP is not adjudicatory but administrative. In most occasions, the claims which are crystal clear are duly collated and verified by the IRPs/RPs. However, before the pronouncement of Essar Steel judgment and till date, there have been issues with respect to the IRPs/ RPs of having not considered the claim aptly. For instance, there can be situations wherein:

(a) the claim which is not precise has not been given a best estimate;

(b) the claim is not mentioned in the information memorandum and hence not examined for payment by the RA;

(c) the claim is rejected after verification;

(d) the claim is categorised as a disputed claim

So, if the claim falls into the above categories, and in the meantime, the resolution plan is approved by Adjudicatory Authority, does after the approval of the resolution plan, the concerned claimant is left with no remedy and the claim against the CD is extinguished despite making the claim on time?

Stakeholders have taken recourse to section 60(5) of the IBC challenging rejected claims before the NCLT. As a matter of practice, the NCLT also disposes of the applications with respect to claims relating to the CD at the time of approval of the resolution plan, however, there have also been situations wherein the claim application is pending before the NCLT or the NCLAT as the case may be, and in the meantime, the resolution plan has been approved.

It is argued that in such cases the claim would be subject to the outcome of the decision of the NCLT/NCLAT, and the claimant’s claim would be dependent upon what similar category of creditors/stakeholders would be entitled to as per the approved resolution plan, the NCLT/NCLAT might not be able to modify the resolution plan subsequent to its approval. For instance, if X is a financial creditor and as per the resolution plan, financial creditors would be getting 60 % of their admitted claim, X too will be entitled to 60% of its claim, if it is admitted by the NCLT/NCLAT.

However, the counter to the above argument is that RAs usually have clauses of nil amount/notional amount being paid to contingent, disputed, or uncrystallised claim and tend to write them off. And since post-approval, the resolution plan is sacrosanct and binding, the creditor might not be entitled to its arguably legitimate claim. If the second argument is believed to be the gospel truth, then there is a possibility of claimants being denied their claim due to the error of the RP or due to the crafty drafting of the RA.

It is also worth mentioning that IBC does not provide for extinguishment of proceedings. The proviso under section 14 of the IBC (which states that the moratorium shall cease to have effect from the date of approval of the resolution plan) seems to connote that adjudication of claims that are in dispute before the appropriate forums may continue after the expiry of the moratorium. However, the theory of fresh slate seems to have unsettled this issue in a way. This issue, however, can be conclusively determined only after perusing the contents of the approved resolution plan in a particular case.

Further, there can be situations wherein the claims of non-financial creditors have not been properly dealt with by the prospective RA in the resolution plan. Such non-financial creditors might not even be entitled to a hearing before the CoC. It is certainly open to the CoC to negotiate or even suggest a modification in the resolution plan to the RA. However, the creditors apart from those part of the CoC might not have that great bargaining power with the prospective RA with respect to their claims which have not been aptly dealt with or have been given an unfair value.

Key Observations and Suggestions

The author is of the view that the theory of fresh slate is extremely promising and well-intentioned from the viewpoint of a successful RA who cannot be encumbered with undecided claims after the approval of the resolution plan.

However, the crafty clauses in the resolution plan, providing for the claims which are subject to the outcome of pending litigation as nil or given an unfair /notional value may warrant a strict review under section 31 of the IBC. A provision for the discharge of disputed claims of all stakeholders may also be made a part of section 30 of the IBC without which a resolution plan cannot be approved.

One can also not deny the possibility of errors that can be made by the RP/ IRP, thus, the role of the RP/IRP with respect to verification/determination of claims requires further scrutiny.

The author is Vardaan Bajaj, an advocate based in New Delhi. He specialises in Commercial/Regulatory litigation, Insolvency and Arbitration. He can be reached at Vardaanbajaj23@gmail.com.