Supreme Court settles the binding nature of Resolution Plans on Government bodies in Insolvency Cases (13 April 2021)

Date of the Judgment: 13 April 2021
Citation: (2021) INSC 210
Judges: B.R. Gavai, J., R.F. Nariman, J., Hrishikesh Roy, J.

Can a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (I&B Code) bind government bodies, including tax authorities? The Supreme Court of India recently addressed this critical question, clarifying the extent to which such plans bind all creditors, including the Central and State Governments and local authorities. The Court’s decision provides much-needed clarity on the binding nature of resolution plans and their impact on statutory dues.

The Supreme Court, in a three-judge bench comprising Justices B.R. Gavai, R.F. Nariman, and Hrishikesh Roy, delivered the judgment. The majority opinion was authored by Justice B.R. Gavai.

Case Background

This batch of cases involved multiple appeals and a writ petition, all raising similar questions about the binding nature of resolution plans on government bodies. The cases included:

• Ghanashyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited & Ors.
• Ultratech Nathdwara Cement Limited vs. State of Uttar Pradesh and Others
• M/s Monnet Ispat & Energy Limited and Another vs. State of Odisha and Another
• Electrosteel Steels Limited, Bokaro, Jharkhand vs. State of Jharkhand and Others

The core issue in all these cases was whether government bodies, including tax authorities, are bound by a resolution plan approved by the National Company Law Tribunal (NCLT) under the I&B Code, and whether they can initiate separate proceedings for recovery of dues not included in the plan. The appellants argued that once a resolution plan is approved, it is binding on all stakeholders, including government bodies, and any claims not included in the plan should be extinguished.

Timeline

Course of Proceedings

In the case of Ghanashyam Mishra, the NCLT approved the resolution plan of GMSPL and rejected the claims of EARC and the District Mining Officer. The NCLAT upheld the NCLT’s decision but made observations that allowed EARC and other creditors to pursue their claims in other forums. Aggrieved by this, GMSPL appealed to the Supreme Court.

In the case of Ultratech Nathdwara Cement Limited, the Allahabad High Court dismissed the writ petition filed by the company, citing the availability of an alternative remedy. The High Court held that the tax authorities could continue proceedings despite the resolution plan.

In the case of M/s Monnet Ispat & Energy Limited, the petitioner directly approached the Supreme Court under Article 32 of the Constitution, challenging demand notices for recovery of Service Tax, District Mineral Foundation (DMF), and National Mineral Exploration Trust (NMET) dues.

In the case of Electrosteel Steels Limited, the Jharkhand High Court rejected the writ petition filed by the company, holding that the resolution plan was not binding on the State Government since it had not participated in the CIRP.

Legal Framework

The core legal provisions discussed in the judgment include:

• Section 31 of the I&B Code: This section deals with the approval of a resolution plan by the Adjudicating Authority (NCLT) and its binding effect on the Corporate Debtor and all stakeholders. The 2019 amendment to this section clarified that the resolution plan also binds the Central Government, State Governments, and local authorities.
• Section 3(10) of the I&B Code: Defines “creditor” to include any person to whom a debt is owed, including financial and operational creditors.
• Section 5(20) and 5(21) of the I&B Code: Define “operational creditor” and “operational debt,” respectively, including debts owed to the Central Government, State Governments, and local authorities.
• Section 238 of the I&B Code: Provides that the I&B Code has an overriding effect over any other law that is inconsistent with it.

The Court emphasized that the I&B Code aims to consolidate and amend laws relating to the reorganization and insolvency resolution of corporate persons in a time-bound manner, maximizing the value of assets and balancing the interests of all stakeholders. The Court also highlighted that the commercial wisdom of the Committee of Creditors (CoC) in accepting or rejecting a resolution plan is paramount, with limited judicial review available.

Arguments

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether any creditor, including the Central Government, State Government, or any local authority, is bound by the Resolution Plan once it is approved by an adjudicating authority under sub-section (1) of Section 31 of the I&B Code?
2. Whether the amendment to Section 31 by Section 7 of Act 26 of 2019 is clarificatory/declaratory or substantive in nature?
3. Whether, after approval of a 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?

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

The Supreme Court analyzed the submissions of all parties and concluded that the 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature, having retrospective effect. The Court emphasized that the legislative intent was to ensure that all claims, including statutory dues owed to the government, are extinguished if not part of the approved resolution plan.

The Court also held that the commercial wisdom of the CoC is paramount, and the Adjudicating Authority’s role is limited to ensuring that the resolution plan meets the requirements of the I&B Code. The Court further clarified that once a resolution plan is approved, all claims are frozen, and no further proceedings can be initiated for dues not included in the plan.

The Court further observed that the Resolution Plan is binding on all the stakeholders including the Central Government, any State Government or any local authority. It further 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 Court also emphasized that the legislature has given paramount importance to the commercial wisdom of CoC and the scope of judicial review by Adjudicating Authority is limited.

How each authority was viewed by the Court?

The Court used the authorities mentioned to support its reasoning for resolving the issue. Some of the key authorities are:

• Innoventive Industries Ltd. vs. ICICI Bank & Anr.: Used to explain the scheme and objectives of the I&B Code.
• K. Shashidhar vs. Indian Overseas Bank and Others: Used to emphasize the paramountcy of CoC’s commercial wisdom.
• Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta & Ors.: Used to reiterate the binding nature of resolution plans and the limited scope of judicial review.
• State Bank of India vs. V. Ramakrishnan and Another: Used to support the view that a clarificatory amendment can have retrospective effect.
• B.K. Educational Services Private Limited v. Parag Gupta and Associates: Used to support the view that a clarificatory amendment can have retrospective effect.

The Court relied heavily on these precedents to establish that the I&B Code intends to provide a complete and binding resolution mechanism, which includes the extinguishment of claims not part of the approved plan.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following considerations:

• The legislative intent behind the I&B Code to provide a time-bound and effective resolution mechanism.
• The need to ensure that successful resolution applicants are not burdened with surprise claims after the approval of the resolution plan.
• The importance of giving effect to the commercial wisdom of the CoC.
• The need to clarify the binding nature of resolution plans on all stakeholders, including government bodies.
• The need to promote the revival of Corporate Debtors.

The Court also emphasized that the I&B Code has an overriding effect over other laws, and any interpretation that undermines the objectives of the Code should be avoided.

The Court’s reasoning was primarily based on legal interpretations and statutory analysis, with a lesser emphasis on factual aspects of the individual cases.

Logical Reasoning

Issue 1: Whether Resolution Plans bind all creditors including government bodies?

Issue 2: Whether the 2019 amendment is clarificatory or substantive?

Issue 3: Whether creditors can initiate separate proceedings for dues not included in the Resolution Plan?

The Court considered alternative interpretations but rejected them in favor of a purposive interpretation that aligns with the objectives of the I&B Code. The Court emphasized the need to provide a clean slate to the successful resolution applicant and ensure the revival of the corporate debtor.

The Court’s decision was unanimous, with all three judges concurring in the final judgment.

The Court quoted the following from the judgment:

• “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.”
• “The commercial wisdom of CoC has been given paramount status without any judicial intervention, for ensuring completion of the CIRP within the timelines prescribed by the I&B Code.”

Conclusion

The Supreme Court’s judgment in this case provides critical clarity on the binding nature of resolution plans under the I&B Code. The Court has unequivocally held that once a resolution plan is approved by the NCLT, it binds all stakeholders, including government bodies, and any claims not part of the plan stand extinguished. This decision reinforces the objectives of the I&B Code, ensuring a time-bound and effective resolution process.

The judgment has significant implications for both corporate debtors and creditors. It provides certainty to resolution applicants, ensuring that they are not burdened with unexpected claims after the resolution plan is approved. It also underscores the importance of government bodies participating in the Corporate Insolvency Resolution Process (CIRP) to ensure that their claims are considered and included in the resolution plan.

The clarification that the 2019 amendment to Section 31 is clarificatory and retrospective further strengthens the binding nature of resolution plans, removing any ambiguity on this issue. This decision will have a wide-ranging impact on insolvency proceedings, promoting a more streamlined and efficient resolution process.

In summary, the Supreme Court’s judgment has affirmed the supremacy of the I&B Code in insolvency matters, emphasizing the binding nature of resolution plans and the paramount importance of the commercial wisdom of the CoC. This decision will likely have a positive impact on the overall efficiency of the insolvency resolution process in India.