Issue of Adjudicating Undecided Claims Under CIRP

It would be fair to call the Corporate Insolvency Resolution Process (“CIRP”) the bedrock of the Insolvency and Bankruptcy Code, 2016 (“Code”). The CIRP has been sketched in a manner to fulfil the twin objectives of the Code; first, that the corporate debtor must be revamped and given a life, and second, that the successful Resolution Applicant must also be able to start afresh with the corporate debtor. This forms the basis of the doctrine of fresh slate. The doctrine entails that after taking over the management of the Corporate Debtor, the Resolution Applicant should not be bothered by or troubled with undecided claims.  

Nevertheless, the incorporation of the doctrine in the spirit of the Code, the recent rulings of Rajasthan and Jharkhand High Courts presented a difference of opinions on the position of law.

The Rajasthan High Court affirmed the doctrine of clean slate in its ruling, dated April 7, 2020, in the case of Ultra Tech Nathdwara Cement Ltd v. Union of India, by rejecting the claims of the Goods and Services Tax (“GST”) authorities which were brought after the acceptance of the Resolution Plan. Reliance was placed on Section 31 of the Code, which binds the Resolution Plan on all the stakeholders of the Corporate Debtor. The Code specified that the term stakeholders has very wide connotation and envelopes the employees, members, creditors, guarantors of the Corporate Debtor along with the government authorities within itself.

In addition to this, the Supreme Court in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors (Essar Judgment) had also held that a successful Resolution Applicant could not out of the blue be faced with undecided claims after the acceptance of its Resolution Plan. All the prospective claims including disputed claims must be brought to the notice only after which any Resolution Plan is to be prepared. Once the Resolution Plan has already been approved by the Committee of Creditors (CoC), no creditor can claim or demand any sum pertaining to a period prior to the acceptance of the Resolution Plan.

This position, however, leaves many stakeholders in a disconcerting situation as Code has limited jurisdiction which makes undecided claims fall out of the scope of adjudicating authority, and because of this position Resolution Professional will too not be able to adjudicate them. The Essar Judgement, thus, takes away the opportunity of these claims to be considered properly. Similarly, in the case of Swiss Ribbons v. UOI also, the Supreme Court held that the Resolution Professional only has administrative powers, thus, cannot adjudicate the claims, averting all the claims requiring a complete trial. This legal stance hence will also fail to take into consideration all those claims which have remained undecided due to other reasons like technical failures, submission date issue, etc. which do not eventuate because of any mindful fault on anyone’s part.

However, on May 1, 2020, in the case of Electrosteel Steels Ltd. v. The State of Jharkhand the Jharkhand High Court gave a contrary ruling on the issue. The case pertained to the application of the doctrine in cases of tax dues. The reasoning given for the same was that neither there was any public announcement nor the Insolvency and Bankruptcy Code (Amendment) Act, 2019 which amended Section 31 to clarify that once a Resolution Plan is approved, it would be obligatory on all stakeholders including the government authorities has retrospective application. Thus, this judgment created an exception, and the plan was not made binding on the GST authorities since it didn’t participate in the resolution process. Even though it is a settled principle that the amendment only clarifies the position of law as it was always existing and doesn’t carve anything new, the court falls back upon this type of flawed reasoning. This conflicting opinion has created an anomaly with respect to the scope of the doctrine in India, which requires immediate attention from the Supreme Court in order to protect the rights of the acquirer.

COMPARING WITH THE UNITED STATES

The origin of the doctrine lies in the American law on bankruptcy, titled as, the United States Bankruptcy Code (“US Code”), set forth as Title 11 of the United States Code 1926. The Bankruptcy Reform Act of 1978 signalled the shift from the traditional approach of maximizing return for creditors to the modern approach of enabling debtors to maintain independent existence after bankruptcy in the United States (US).

The US Supreme Court in Williams v. United States Fid and Guar Co. laid down the purpose behind the doctrine which is to give an honest but unfortunate debtor a new opportunity to surrender his property for distribution at the time of bankruptcy.  This is done to ensure that he has a fresh field for future efforts that are not wasted away because of the preexisting debt. The spirit of the US society which concentrates more on individual choice and freedom can be seen as the intent in their laws also. Hence, minimal attention is placed on the debtor’s pre-petition conduct, instead, the focus is on assuring that pre-petition debts should not encumber the debtor’s choice and liberty.

The Bankruptcy Court in the US sets a deadline at the Debtor’s request, known as ‘bar date’ which is same as India’s 90 days period. After the public announcement of the bar date if the creditor disagrees with the amount of claim put forth in debtor’s schedules he has to respond by filing a “proof of claim”. All creditors must be informed  of this date. If a creditor is notified but he fails to reply via proof of claims by the bar date, he is restricted from contending a claim for any amount other than which is mentioned in the debtor’s filing. Thus, in the US also, undecided claims are not considered by the court relying on the simple principle of fresh slate.

CONCLUSION

The US has a relatively broader fresh slate policy for a long period of time and its journey to the identification of the doctrine commenced much earlier than India. Still, it can be seen that in the current scenario both the countries have a similar approach to the application of doctrine of fresh slate, even the process of resolution is identically tantamount in the countries. Nonetheless, there is a major difference in objective fulfilment sought from the doctrine, in India, the doctrine’s application favours the Resolution Applicant and seeks to protect his rights by making him aware about all the outstanding dues. While in the US, it focusses more on the corporate debtor’s right and giving his business a fresh operational start by preserving him from the clutches of earlier debts.