In an important judgement, the Supreme Court Tuesday held all dues, including statutory ones, payable by ailing companies to the Centre, states and their tax authorities "shall stand extinguished" if they are not part of approved resolution plan to revive firms under the Insolvency and Bankruptcy Code (IBC).
The apex court said the principal objects of IBC is to provide for "revival of the Corporate Debtor and to make it a going concern" and remedied the "mischief" by which tax and other authorities used to keep pursuing such companies to pay their dues leading to a situation which made resolution plans for their revival unworkable.
A bench comprising justices R F Nariman, B R Gavai and Hrishikesh Roy, deciding a batch of pleas against several orders of the National Company Law Appellate Tribunal (NCLAT), held that the 2019 amendment made to a provision of the IBC is "clarificatory and declaratory in nature and therefore will be effective from the date on which IBC has come into effect" in 2016.
As per the amendment made in 2019 in section 31 of IBC, 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 Government, any State Government or any local authority, which does not form a part of the approved resolution plan, shall stand extinguished. "Once a resolution plan is duly approved by the adjudicating authority ., 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," Justice Gavai, who wrote 139-page judgment, said.
It said on the date of approval of the resolution plan, all 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 revival package.
"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," the bench held.
The top court was faced with the question whether any creditor including the Central or state governments or their authorities was bound by the Resolution Plan once it is approved by an adjudicating authority under IBC.
The other issue was as to whether after approval of the resolution plan a creditor 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 judgement referred to the intent of the legislature in amending IBC provision in 2019 and said it was aimed to thwart the mischief of some creditors to seek dues from the ailing firms after approval of their resolution plans. "It is clear, 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 Government, any State Government or any local authority, including the tax authorities once an approval was granted to the resolution plan by NCLT; on account of there being some ambiguity, the State/Central Government authorities continued with the proceedings in respect of the debts owed to them. "In order to remedy the said mischief, the legislature thought it appropriate to clarify the position, that once such a resolution plan was approved by the Adjudicating Authority, all such claims/dues owed to the State/Central Government or any local authority including tax authorities, which were not part of the resolution plan shall stand extinguished," it said.
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 (recovery of such dues) 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," it held.
The verdict came on pleas including the one filed by Ghanshyam Mishra and Sons Private Ltd against Edelweiss Asset Reconstruction Company Ltd.