The ‘clean slate' doctrine has been one of the most well-settled principles when it comes to the intended effects of the Insolvency and Bankruptcy Code 2016 (“Code”). The doctrine of ‘clean slate' essentially implies that once the Resolution Plan is accepted by the Committee of Creditors and approved by the Adjudicating Authority, no claim (whether satisfied or dissatisfied) would survive. The doctrine is rooted in Section 31 (1) of the Code, which reads as under:
“31. (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.”
While the doctrine has been reiterated with certainty, the evolving jurisprudence has created issues of interpretation that might lead to exploitation of loopholes by the Creditors. This article shall analyse the ‘clean slate' doctrine as propounded and reiterated by the Hon'ble Supreme Court and shall also examine possible loopholes which have emerged by way of recent judgments.
The Hon'ble Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors. (2020) 8 SCC 531 had conclusively held that all claims relating to a period prior to the initiation of Corporate Insolvency Resolution Process (“CIRP”) would have to be submitted and considered by the Resolution Professional for the purpose of presenting a true picture of the Corporate Debtor's financial position to a Resolution Applicant. It was held that only the claims included in a Resolution Plan [which is approved by the Committee of Creditors (“COC”) and the Adjudicating Authority] would be entertained and all the other claims would stand extinguished, thus provided a ‘clean slate' to the Corporate Debtor. Essar Steel (supra) laid down the law all the claims of creditors prior to the initiation of CIRP would stand concluded with the approval of the Resolution Plan. It is in this context that the Hon'ble Supreme Court held that:
“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 pop ping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would success fully 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.”
Subsequently, the Hon'ble Supreme Court in Ghanashyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited and Ors. (2021) 9 SCC 657 crystallised the law on the ‘clean slate' doctrine. The question before the Hon'ble Supreme Court was whether a creditor can raise a dispute qua the unsatisfied part of the claim, after the approval of the Resolution Plan. The Hon'ble Supreme Court held that the intent behind Section 31 of the Code was to provide a fresh start to a corporate debtor so that it can resume functions and operations afresh. If in case, unsatisfied creditors were allowed to reagitate the claims which have already been dealt with in the Resolution Plan, the mischief that is sought to be cured by Section 31 of the Code would continue and render the provision otiose. The Hon'ble Supreme Court held as follows:
“86. As discussed hereinabove, one of the principal objects of I&B Code is, providing for revival of the Corporate Debtor and to make it a going concern. I&B Code is a complete Code in itself. Upon admission of petition under Section 7, there are various important duties and functions entrusted to RP and CoC. RP is required to issue a publication inviting claims from all the stakeholders. He is required to collate the said information and submit necessary details in the information memorandum. The resolution applicants submit their plans on the basis of the details provided in the information memorandum. The resolution plans undergo deep scrutiny by RP as well as CoC. In the negotiations that may be held between CoC and the resolution applicant, various modifications may be made so as to ensure, that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders, the Corporate Debtor is revived and is made an ongoing concern. After CoC approves the plan, the Adjudicating Authority is required to arrive at a subjective satisfaction, that the plan conforms to the requirements as are provided in subsection (2) of Section 30 of the I&B Code. Only thereafter, the Adjudicating Authority can grant its approval to the plan. 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.”
Recently, the Hon'ble Supreme Court in Ruchi Soya Industries & Ors. vs. Union of India & Ors. [2022] 231 CompCas 308 (SC) reiterated that claims which are not submitted to the RP and not included in the Resolution Plan cannot survive. It was observed that the Creditor therein did not submit the claim to the RP in accordance with the applicable Rules when public announcements inviting claims were made. The decision in Ghanshyam Mishra (supra) was reiterated to hold that on the date of approval of the Resolution Plan by the Adjudicating Authority, all claims stood frozen, and claims which are not part thereof are extinguished.
In view of the consistent view taken by the Hon'ble Supreme Court , it is pertinent to make note of the distinction between undecided claims at the time of verification of claims by the Interim RP/RP. In a recent decision by the Ld. National Company Law Appellate Tribunal (“NCLAT”) in Go Airlines (India) Ltd. vs. Sovika Aviation Services Pvt. Ltd. & Ors. Company Appeal (AT) (Insolvency) No. 1076 of 2021, the NCLAT allowed for the continuation of proceedings between the Creditor and the Corporate Debtor after the CIRP was withdrawn under Section 12A of the Code. In this case, the Creditor had filed a claim before the IRP whereby the CIRP was subsequently withdrawn by following the procedure under Section 12A of the Code and no resolution plan was even contemplated. Since the claim of the Creditor was not decided and the CIRP was withdrawn, the Creditor was permitted to take all remedies available under law to recover the claim. Therefore, since the procedure of verification of claims did not reach fruition (as in the case of approval of resolution plans) the proceedings between the Creditor and Corporate Debtor were allowed to continue.
The distinction between undecided claims prior to the initiation of CIRP and at the time of approval of resolution plans can be discussed in the context of arbitral awards. It is well settled law that an arbitral award, if undisputed, would amount to a valid operational debt. It has been settled by the Hon'ble Supreme Court in K. Kishan vs. Vijay Nirman Company Pvt. Ltd. 2018 (10) SCALE 256, that if an arbitral award has not been challenged by way of a petition under Section 34, Arbitration and Conciliation Act 1996, then the same constitutes a valid claim against which a CIRP can be commenced. Therefore, in consonance with the procedure, if a creditor with an undisputed award in their favour submits their claim to the RP, the same would be verified and included in the Information Memorandum and would have to be dealt with in the Resolution Plan.
However, the Hon'ble Supreme Court in Fourth Dimension Solutions Ltd. vs. Ricoh India Ltd. & Ors. Civil Appeal 5908/2021 has validated the continuation of arbitration proceedings between the Corporate Debtor and the Creditor despite the approval of the resolution plan. In this case, the RP had published a list of creditors whereby the Creditors' claims were included as ‘Nil' along with a note that - “The claims pertaining to FDSL have been disputed and are proceedings before the Arbitrators/Appellate Authorities. The liability is subjected to outcome of these proceedings.” Thereafter, the Resolution Plan for the Corporate Debtor was approved, without having included a definite amount against the claim of the Creditor herein. Interestingly, the Hon'ble Supreme Court finally held as follows:
“In light of this factual position, in our opinion, the appeal needs to be disposed of by restating the said fact with liberty to the parties to pursue all contentions available to them in the proceedings pending at the relevant time, if any. It is stated that some arbitration proceedings were pending between the parties. If so, all contentions available to both sides be decided in the said proceedings on its own merits in accordance with law. The civil appeal is disposed of accordingly.”
Thus, Fourth Dimension (supra) holds that if at the time of preparation of resolution plan, there are proceedings pending for the adjudication of the amount of claim, the same can be allowed to proceed despite the approval of the resolution plan. It is pertinent to note that the conclusion reached by the Hon'ble Supreme Court in Fourth Dimension (supra) seems to be in conflict with the earlier decisions of the Hon'ble Supreme Court on the doctrine of ‘clean slate'. While the Hon'ble Supreme Court has consistently held that all claims which are undecided stand extinguished upon the approval of the resolution plan, the decision in Fourth Dimension (supra) allows for the introduction of another claim after the approval of a resolution plan. On the basis of this decision, a creditor can continue to contest proceedings and raise a claim and/or commence execution proceedings against a Corporate Debtor even after the Resolution Plan has been approved and the Resolution Applicant has taken over the Corporate Debtor. In principle, this seems to be against the intent of Section 31 of the Code as interpreted by the Hon'ble Supreme Court in Ghanshyam Mishra(supra) wherein it was held that after the approval of a Resolution Plan the Corporate Debtor is given a ‘fresh start'.
Notably, various benches of NCLT even after the pronouncement of in Fourth Dimension (supra) have continued to rely solely upon the judgment in Ghanshyam Mishra(supra) possibly due to the distinction between the facts of the Applications. For instance, the NCLT Kochi Bench in Bijoy Prabhakaran Pulipra vs. Tahsildar, Kanyannu & Ors. TIBA/11/KOB/2019 after placing reliance on Essar Steel (supra) and Ghanshyam Mishra(supra) held that – “In the light of the above findings, we are on the opinion that the IBC is to revive the financially distressed company and return the debt owed to the creditor in a timely manner. If time and again new claims pop up, then it would eventually become impossible to revive the Corporate Debtor in a timely manner.” Subsequently, the NCLT Chandigarh Bench in Phoenix Arc Pvt. Ltd. & Ors. vs. GPI Textiles Ltd. & Ors CP (IB) 35/Chd/HP/2018 also placed reliance on Ghanshyam Mishra(supra) to deny the inclusion of claims subsequent to the approval of the Resolution Plan.
Even though the Hon'ble Supreme Court has consistently upheld and reiterated the ‘clean slate' doctrine, the decision in Fourth Dimension (supra) can possibly prove to be a loophole in cases where the amounts of claim, as submitted to the IRP are under adjudication at the time of CIRP. However, it remains to be seen whether the decision in Fourth Dimension (supra) would be interpreted to govern such situations or whether the continuation of proceedings would have to be seen on the facts and circumstances of each case.
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