2025 (1) TMI 487 - HC - IBC

Blacklisting order - Seeking quashing of the order issued by the respondents whereby the petitioner has been blacklisted for a period of three years and debarred from participating in the tender process for any work advertised by the Government of Tripura - Whether the order of blacklisting dated 5th October 2023 is proper in the eye of law and on facts? - HELD THAT - The impugned order of blacklisting for a period of three years and debarment of the petitioner from participating in the future tender processes for any work advertised by the Government of Tripura cannot be held to be proper in the eye of law for the reasons recorded hereinafter. The object of revival of a sick company on approval of the resolution plan by the NCLT is intended to provide a clean slate for the company to ensure that the new management makes a clean break from the past. The resolution plan of the successful resolution applicant has been approved under Section 31 of the I B Code by the learned NCLT vide its order dated 11th August 2023 which is Annexure-2 to the writ petition. It records that on the date of approval of the resolution plan by the adjudicating authority all such claims which are not a part of 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 resolution plan. Reference made to the decision of the Apex Court in Ghanashyam Mishra Sons Pvt. Ltd 2021 (4) TMI 613 - SUPREME COURT wherein it has been held that once a resolution plan is duly approved by the Adjudicating Authority under sub-section (1) of section 31 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 Govt. any State Govt. or any local authority guarantors and other stakeholders. In the case of Ghanashyam Mishra Sons Pvt. Ltd the apex court held that one of dominant objects of the I B Code is to see that an attempt has to be made for revival of the corporate debtor and make it a running concern. The scheme of the I B Code is therefore to make an attempt by divesting the erstwhile management of its powers and vesting it in a professional agency to continue the business of the corporate debtor as a going concern until a resolution plan is drawn up - The apex court held that one of the principal object of the I B Code is to provide for revival of the corporate debtor and make it a growing concern. Once action in the nature of forfeiture of performance bank guarantee to the tune of Rs. 95, 58, 000/- has been imposed upon the company for the delay in the execution of the work of the contract the order of blacklisting would not be proper in the eye of law. The penalty of blacklisting for a period of three years and debarment from future contracts with the Government of Tripura would thus be disproportionate as the petitioner would be practically unable to enter into new contracts and undertake business in order to become a growing and running concern. The respondents have taken a stand that challenge to the order of blacklisting in an independent proceeding would lead multiplicity of proceedings and conflicting views which are best avoided. However as it appears that the learned Arbitral Tribunal has not entertained the plea against the order of blacklisting as no such claim was made before it. In such a case refusal to entertain a challenge to the order of blacklisting by this Court under Article 226 of the Constitution of India would amount to denying a remedy available in law. Conclusion - Such order of blacklisting and debarment of the petitioner company after approval of the resolution plan with a new management would defeat the dominant aim and object of the Insolvency and Bankruptcy Code 2016 and in all likelihood defeat the very purpose of revival of the company. The order of blacklisting is quashed. Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the order of blacklisting dated 5th October, 2023, issued against the petitioner, is valid in the eyes of law and facts, especially after the approval of the resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016.
• Whether the blacklisting order is proportionate and justified given the circumstances, including the change in management following the resolution plan.
• Whether the principles of natural justice were adhered to in the issuance of the blacklisting order.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the Blacklisting Order Post-Resolution Plan Approval

• Relevant Legal Framework and Precedents: The legal framework involves the Insolvency and Bankruptcy Code, 2016, particularly Section 31, which deals with the approval of resolution plans, and Section 32A, which provides protection from liability for prior offences of a corporate debtor. The case of Ghanashyam Mishra & Sons Pvt. Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd. was cited to support the argument that post-resolution plan approval, all prior liabilities not included in the plan are extinguished.
• Court's Interpretation and Reasoning: The court emphasized that the purpose of the I&B Code is to provide a clean slate for the corporate debtor after the resolution plan is approved. The court noted that the new management should not be burdened with the liabilities of the previous management.
• Key Evidence and Findings: The resolution plan approved by the NCLT on 11th August, 2023, was a pivotal factor. The court found that the blacklisting order was based on the actions of the previous management, which should not affect the new management.
• Application of Law to Facts: The court applied the principles from the I&B Code and relevant case law to conclude that the blacklisting order was not justified after the resolution plan's approval, as it would undermine the objective of the Code.
• Treatment of Competing Arguments: The respondents argued that the blacklisting was justified due to the petitioner's failure to complete the contract. However, the court found that these issues pertained to the previous management and were addressed by the resolution plan.
• Conclusions: The court concluded that the blacklisting order was improper as it contravened the objectives of the I&B Code, which aims to revive the corporate debtor.

Issue 2: Proportionality and Justification of the Blacklisting Order

• Relevant Legal Framework and Precedents: The doctrine of proportionality was considered, with references to cases like Vetindia Pharmaceuticals Ltd. vs. State of Uttar Pradesh, which emphasize that blacklisting should not be imposed for mere breaches of contract unless the conduct is egregious.
• Court's Interpretation and Reasoning: The court reasoned that blacklisting is a severe penalty that should be proportionate to the misconduct. Given the circumstances, including the change in management, the penalty was deemed disproportionate.
• Key Evidence and Findings: The court noted that the petitioner had already suffered financial penalties, such as the forfeiture of the performance bank guarantee, and that further punishment was unnecessary.
• Application of Law to Facts: The court applied the proportionality principle to find that the blacklisting was excessive, especially when the new management was not responsible for past breaches.
• Treatment of Competing Arguments: The respondents contended that the blacklisting was necessary to discipline the petitioner. The court, however, found that the penalty was not aligned with the current management's conduct.
• Conclusions: The court concluded that the blacklisting was disproportionate and not justified given the circumstances.

Issue 3: Adherence to Principles of Natural Justice

• Relevant Legal Framework and Precedents: The principles of natural justice require that parties be given a fair hearing before adverse actions are taken. The court referred to the case of Gorkha Security Services vs. Government (NCT of Delhi) to emphasize the need for proper show-cause notices.
• Court's Interpretation and Reasoning: The court found that the blacklisting order was issued after a show-cause notice and consideration of the petitioner's replies, thus adhering to natural justice principles.
• Key Evidence and Findings: The court noted that the petitioner had been given opportunities to respond to the allegations, and their responses were considered.
• Application of Law to Facts: The court applied the principles of natural justice to determine that the procedural aspects of issuing the blacklisting order were followed.
• Treatment of Competing Arguments: The petitioner argued that their responses were not adequately considered. The court found that the process was procedurally sound, but the outcome was flawed due to the reasons discussed in other issues.
• Conclusions: The court concluded that while the process adhered to natural justice, the substantive decision to blacklist was improper.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "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."
• Core Principles Established: The judgment reinforces the principle that the I&B Code aims to provide a fresh start for corporate debtors post-resolution plan approval, free from past liabilities not included in the plan.
• Final Determinations on Each Issue: The court quashed the blacklisting order, emphasizing that it was disproportionate and contrary to the objectives of the I&B Code, and that the new management should not be penalized for the past management's actions.

The judgment underscores the importance of aligning penalties with the objectives of the I&B Code, ensuring that revived companies can operate without undue hindrance from past liabilities.