Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.
Supreme Court of India · 13 April 2021 · 3 judges
Once the Adjudicating Authority approves a resolution plan under Section 31 IBC, it binds all creditors including governments, and every claim not in the plan, statutory dues included, stands extinguished; the 2019 amendment is clarificatory.
Facts
In the insolvency of Orissa Manganese & Minerals Ltd., the Committee of Creditors approved the resolution plan of Ghanashyam Mishra and Sons, and the NCLT approved it on 22 June 2018, rejecting objections of Edelweiss Asset Reconstruction Co., an unsuccessful resolution applicant whose claim on an uninvoked corporate guarantee had not been admitted. The NCLAT dismissed the appeals but observed that Edelweiss and the workmen could pursue their claims in other forums and that statutory dues remained payable to the State of Jharkhand. Connected matters concerned tax authorities continuing VAT and other demands against corporate debtors for periods before approval of their resolution plans, where the Allahabad and Jharkhand High Courts had declined relief, and a writ petition under Article 32 against a service tax demand.
Questions before the Court
- Is every creditor, including the Central Government, a State Government or a local authority, bound by a resolution plan approved under Section 31(1) of the IBC?
- Is the 2019 amendment to Section 31 clarificatory or declaratory, or substantive?
- After approval of the plan, can a creditor, including a government, initiate proceedings to recover dues that are not part of the plan?
What the Court held
- Once a resolution plan is approved under Section 31(1), the claims in it stand frozen and bind the corporate debtor, its employees, members, creditors including the Central Government, State Governments and local authorities, guarantors and other stakeholders.
- On the date of approval, all claims not part of the plan stand extinguished, and no one may initiate or continue proceedings on such claims. The successful resolution applicant starts on a clean slate and cannot face surprise claims.
- The 2019 amendment to Section 31 is clarificatory and declaratory and operates from the date the Code came into force. Even without it, governments owed statutory dues are creditors under Section 3(10) read with Section 5(20) and (21), and in any case 'other stakeholders'.
- Statutory dues to governments not in the plan stand extinguished, and proceedings for periods before approval cannot continue.
- The NCLAT's observations preserving claims of Edelweiss, workmen and the State were expunged; the other appeals and the writ petition were allowed, declaring that the respondents cannot recover debts accruing before the transfer date.
Why it matters
The judgment settles that an approved resolution plan binds governments and statutory authorities as much as other creditors, and that claims left out of the plan, including tax and other statutory dues, are extinguished. By holding the 2019 amendment to Section 31 to be clarificatory, it applies this to plans approved before the amendment, and it rests the rule on the resolution applicant's need to start on a clean slate.
In the Court's words
Copied from the official judgment; each passage links to its page.
“It is at this stage, that the plan becomes binding on Corporate Debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution Plan. The legislative intent behind this is, to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans, would go haywire and the plan would be unworkable.”
“We have no hesitation to say, that the word “other stakeholders” would squarely cover the Central Government, any State Government or any local authorities. The legislature, noticing that on account of obvious omission, certain tax authorities were not abiding by the mandate of I&B Code and continuing with the proceedings, has brought out the 2019 amendment so as to cure the said mischief. We therefore hold, that the 2019 amendment is declaratory and clarificatory in nature and therefore retrospective in operation.”
“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.”
“After coming to such finding, the only option available with NCLAT was to dismiss the appeals. In our view, the observations made in the aforesaid paragraphs, if permitted to remain, would totally frustrate the object of I&B Code of revival of a Corporate Debtor and to resurrect it as a going concern. As held by this Court, the successful resolution applicant cannot be flung with surprise claims which are not part of the resolution plan.”
Provisions interpreted
Case and bench
- Parties
- Ghanashyam Mishra and Sons Private Limited through the Authorized Signatory v. Edelweiss Asset Reconstruction Company Limited through the Director
- Case
- Civil Appeal No. 8129 of 2019 (with Civil Appeal No. 1554 of 2021, Writ Petition (Civil) No. 1177 of 2020 and Civil Appeal Nos. 1550-1553 of 2021)
- Decided
- 13 April 2021
- Bench
- R.F. Nariman, B.R. Gavai, Hrishikesh Roy
- Opinions
- Unanimous. Judgment delivered by B.R. Gavai, J.