2021 (4) TMI 613 - SC - Insolvency and Bankruptcy

Applicability of Resolution Plan - creditor including the Central Government, State Government or any local authority - applicability of plan once it is approved by an adjudicating authority under subsection (1) of Section 31 of the Insolvency and Bankruptcy Code, 2016 - amendment to Section 31 by Section 7 of Act 26 of 2019 - clarificatory/declaratory or substantive in nature? - whether after approval of resolution plan by the Adjudicating Authority a creditor including the Central Government, State Government or any local authority 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? HELD THAT - 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. 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. It is a cardinal principle of law, that a statute has to be read as a whole. Harmonious construction of subsection (10) of Section 3 of the I B Code read with subsections (20) and (21) of Section 5 thereof would reveal, that even a claim in respect of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority would come within the ambit of operational debt . The Central Government, any State Government or any local authority to whom an operational debt is owed would come within the ambit of operational creditor as defined under subsection (20) of Section 5 of the I B Code. Consequently, a person to whom a debt is owed would be covered by the definition of creditor as defined under subsection (10) of Section 3 of the I B Code. Thus, the 2019 amendment is declaratory and clarificatory in nature. We also hold, that even if 2019 amendment was not effected, still in light of the view taken by us, the Central Government, any State Government or any local authority would be bound by the resolution plan, once it is approved by the Adjudicating Authority (i.e. NCLT). The questions framed are as under (i) That once a resolution plan is duly approved by the Adjudicating Authority under subsection (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 Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of 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; (ii) 2019 amendment to Section 31 of the I B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I B Code has come into effect; (iii) 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.

Summary

Issues Involved:
1. Binding nature of the Resolution Plan on creditors including the Central Government, State Government, or any local authority once approved by the adjudicating authority under Section 31(1) of the Insolvency and Bankruptcy Code, 2016 (I&B Code).
2. Nature of the amendment to Section 31 by Section 7 of Act 26 of 2019 - whether it is clarificatory/declaratory or substantive.
3. Entitlement of creditors, including the Central Government, State Government, or any local authority, to initiate proceedings for recovery of dues not part of the approved Resolution Plan post-approval by the adjudicating authority.

Detailed Analysis:

Issue 1: Binding Nature of the Resolution Plan
The Court held that once a resolution plan is duly approved by the Adjudicating Authority under Section 31(1) of the I&B Code, 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. On the date of approval of the resolution plan by the Adjudicating Authority, all such 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 resolution plan.

The Court emphasized that the legislative intent behind making the resolution plan binding on all stakeholders is to ensure that the resolution applicant starts with a clean slate, free from any surprise claims, ensuring the revival and continuation of the Corporate Debtor as a going concern.

Issue 2: Nature of the Amendment to Section 31
The Court held that the 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and, therefore, will be effective from the date on which the I&B Code has come into effect. The amendment clarifies that the resolution plan approved by the Adjudicating Authority shall also be binding on the Central Government, any State Government, or any local authority to whom a debt is owed in respect of payment of dues arising under any law for the time being in force, including tax authorities.

The Court referred to the Statement of Objects and Reasons of the Insolvency and Bankruptcy Code (Amendment) Bill, 2019, and the speech made by the Hon’ble Finance Minister in Rajya Sabha, which indicated that the amendment was intended to clarify the existing position and remove any ambiguity regarding the binding nature of the resolution plan on government authorities.

Issue 3: Entitlement to Initiate Proceedings Post-Approval
The Court held that all dues, including 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 Court emphasized that the provisions of the I&B Code will have an overriding effect in case of any inconsistency with any other law, as provided under Section 238 of the I&B Code. Therefore, once the resolution plan is approved, the government authorities cannot continue with any proceedings related to claims that are not part of the approved resolution plan.

Conclusion:
The Supreme Court allowed the appeals and writ petitions, holding that the respondents are not entitled to recover any claims or claim any debts owed to them from the Corporate Debtor accruing prior to the transfer date. The Court quashed and set aside the impugned judgments and orders of the lower courts and held that the claims not included in the resolution plan are extinguished and cannot be pursued further.