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Clean Slate theory – Claims not forming part of an approved Resolution Plan stand extinguished

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Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited and Ors., decided by the Supreme Court of India on April 13, 2021 – The Full bench, comprising of Mr. Justice R.F. Nariman, Mr. Justice B.R. Gavai and Mr. Justice Hrishikesh Roy, decided on the following issues:

  1. Can any creditor, including the Central Government, State Government or any local authority, be bound by the resolution plan once it has been approved by the Adjudicating Authority (“NCLT”) under Section 31(1) of the Insolvency and Bankruptcy Code, 2016 (“IBC”)? Held, that once a resolution plan has been duly approved by NCLT under Section 31(1), the claims, as provided in the resolution plan, shall stand frozen and the terms of the approved resolution plan will be binding on the corporate debtor as well as its employees, members, creditors (including the Central Government, any State Government or any local authority), guarantors and other stakeholders. As on the date of approval of resolution plan by NCLT, all claims not forming a part of such resolution plan shall stand extinguished, and no person will be entitled to initiate or continue any proceedings in respect of such claims.
  • Is the 2019 amendment to Section 31(1) of IBC clarificatory/declaratory or substantive in nature? Held, that the 2019 amendment to Section 31(1) of IBC, being declaratory and clarificatory in nature, shall be retrospectively effective from the date on which IBC came into force. The bench further observed that even if the 2019 amendment had not been made, the Central Government, any State Government or any local authority would have been continued to be bound by the terms of the approved resolution plan, in view of the existing judicial precedents. The legislature had introduced the 2019 amendment to cure the mischief caused by tax authorities who, on account of an obvious omission, were not abiding by the mandate of IBC.

Can any creditor, including the Central Government, State Government or any local authority, initiate any proceedings for recovery of any dues from the Corporate Debtor (which dues did not form a part of the approved resolution plan) after approval of resolution plan by NCLT? Held, in view of the aforesaid observations, that all dues, including the statutory dues owed to the Central Government, any State Government or any local authority, not forming a part of the approved resolution plan shall stand extinguished, and no proceedings in respect of such dues, for the period prior to the date of approval of resolution plan, could be continued.

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