Case Analysis of Ghanashyam Mishra and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.
Shivangi Singh
Student, Jindal Global Law School, O.P. Jindal Global University
Introduction
Under the Insolvency and Bankruptcy Code 2016 (“IBC”), the Corporate Debtor (“CD”) has to undergo baptism in the form of Corporate Insolvency Resolution Process (“CIRP”), which once initiated, obligates the Resolution Professional (“RP”) to collate claims from all classes of creditors against the corporate debtor undergoing CIRP. After crystallization of all such claims, IBC allows for submission of resolution plans by from i.e., Resolution Applicants (“RA”), outlining scheme for dealing with all the claims admitted. These plans are then presented for vote before the Committee of Creditors (“CoC”) which then approves the most commercially viable plan out of all. The approved resolution plan then transforms the creditor into an entirely new, stable entity.
In the present case of Ghanashyam Mishra & Sons (P) Ltd[3], addressed the question of whether creditors are bound by the resolution plan approved by the AA, and if they can pursue claims not included in the plan.
In this case, the Apex court was dealing with a batch of matters which involved certain common issues revolving around treatment of claims which have not been considered/sufficiently provided for under the resolution plan approved by the Adjudicating Authority. The case also discusses the binding nature of approved resolution plans and throws light upon the nature of 2019 amendment to IBC 2016, clarifying that the Central Government (“CG”), any State Government (“SG”) and local authorities, creditors are to be bound by such plan.
The case reiterates the ‘clean-slate’ theory, protecting the interests of the CD as well as that of the successful resolution applicant acquiring the CD.
Objective and overview of the analysis
The objective of present analysis is to understand the legally binding nature of an approved resolution plan under IBC. Legal issues such as creditor obligations, the nature of amendment to section 31(1) of the code, and the ability of creditors to pursue claims not covered by the plan shall be discussed. While the upcoming section shall provide the readers with an elaborate study on the legal principles and specific provisions necessary to understand the issues involved and arguments raised by the parties, the analysis segment shall aim to analyse the reasoning given by the Apex court and suggest an alternate route towards settling the issues in hand, followed by the conclusion.
Background
In order to gain a deeper understanding of the issues involved in the present case, it is necessary to understand the essential legal provisions that apply. This section shall therefore examine the same and simultaneously discuss the ‘clean-slate’ theory which has been reiterated in the present case.
Legal provisions involved
Section 14(1)(a) IBC
Section 14(1)(a) of the Code prohibits legal actions against a corporate debtor once petitions are admitted under Section 7, 9, or 10, imposing a “moratorium.” Courts in India clarified the scope of proceedings affected by this, including criminal, arbitral, or writ proceedings, and those against corporate guarantors. Some involve disputes between parties, while others concern debts to the Government, known as “crown debts.” Past Supreme Court judgments, like Essar Steel Case[4], it has been settled that unresolved claims must be addressed in the plan and that, such resolution plan shall be the final authority upon all such claims.
Section 31(1) IBC
This section provides that upon satisfaction of the Adjudicating Authority (“AA”), if the resolution plan is approved in accordance with section 30 of the code, it shall be binding upon all the stakeholders like members, employees, creditors, guarantors and other concerned stakeholders involved in the plan.
In 2019, section 7 of Insolvency and Bankruptcy Code (Amendment) Act, 2019 (no. 26 of 2019) (“2019 Amendment”) clarified that the term ‘creditors’ in Section 31 includes Central Government, any State Government and local authorities, to whom the CD owes statutory debt.
Section 3(10), 5(20) & 5(21) IBC
Section 3(10) of the code defines a creditor as someone to whom a debt is owed. It may be a financial, operational, secured, unsecured creditor or even a decree holder., Section 5(20) defines operational creditor as “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.”
It is essential to understand the meaning of operational debt. As per Section 5(21) of the code, “a claim in respect of the provision of goods or services including employment or a debt in respect of the payment 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” constitutes an operational debt.
Factual Spectrum
- The Apex Court was dealing with an entire batch of matters including the present matter in hand, wherein a common issue was highlighted- that whether after approval of the resolution plan by the AA, any creditor, including the CG, SG or a local authority can raise claims for dues which are not dealt for under the approved plan.
- Here, the creditors also comprised of statutory authorities like Income Tax Department.
- Brief facts of the specific case in hand are that Orissa Manganese & Minerals Limited (“OMM”) faced insolvency and entered the CIRP. Three resolution plans were submitted by Edelweiss Asset Reconstruction Company Limited (“EARC”), Ghanashyam Mishra & Sons Private Limited (“GMSPL”) and another company respectively. Initially, EARC’s plan was approved by the CoC but later rejected on account of failed negotiations. The CoC later approved GMSPL’s plan with 89% votes. However, challenges arose from parties like EARC and the District Mining Officer of Jharkhand regarding claims and non-inclusion in the resolution plan. Both the National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”) upheld the approval of GMSPL’s plan but NCLAT clarified that EARC can pursue their claim against OMM through other forums even after acceptance of GMSPL’s plan.
- As a result of NCLAT’s clarification, statutory authorities including EARC continued pressing charges against the appellant. Therefore, the present appeal before the Apex Court was filed against NCLAT’s clarification.
Legal issues involved
The case primarily discussed the following three legal issues:
i. Whether any creditors (including CG, SG and local authorities) are bound by the resolution plan once it is approved under section 31(1) of IBC?
ii. Whether the 2019 amendment to section 31(1) is clarificatory, declaratory or substantive in nature?
iii. Whether after approval of the resolution plan, any creditor (including CG, SG or local authorities) can initiate legal proceedings to recover such dues which are not a part of the approved plan?
Arguments raised by the parties
The primary contention of Respondent no.1, EARC in this case was that, a substantial part of its claim was being rendered futile because, firstly, NCLT had reserved its right to invoke the corporate guarantee in its favour and secondly, the RP never recognised EARC as a financial creditor which caused its non-participation in finalisation of proceedings.
While EARC argued that the resolution plan submitted by it was better than that of GMSPL, it was submitted by the appellant, GMSPL that both the plans contained similar provisions and even if EARC had been considered a FC, only 9% voting rights could have been granted and still the plan submitted by GMSPL would have been approved by 80% votes in its favour.
It was also argued by the appellant that commercial wisdom of the CoC is paramount and if an additional liability of 648.89 Cr. is thrown at the approved plan of 321.19 Cr., the entire resolution plan would be rendered unworkable.
Appellant also threw light upon the fact that EARC had been held liable for its non-bona fide conduct by NCLT for frivolously filing a case upon not being chosen as the SRA.
Court’s Reasoning
The court recognized the significance of the Committee of Creditors’ business expertise and highlighted the limited jurisdiction of the AA and the NCLAT. It stated that under Section 31,once the AA approves the resolution plan, the CD, its employees, members, creditors, guarantors, and other stakeholders are bound by it. Additionally, as per the Code and its regulations, the RP must prepare an Information Memorandum containing detailed information about the Corporate Debtor’s assets, liabilities, creditor claims, legal disputes, employee claims, etc. This is to ensure that the resolution applicant is fully aware of any potential liabilities. The legislative intent behind making the resolution plan binding on all parties post-approval is to prevent unforeseen claims against the successful resolution applicant and allow them to start afresh with a clean slate based on the approved plan.
Analysis
In this case, the Apex Court rendered that once resolution plans are approved, they freeze and become binding upon the CD, its members, employees, creditors (including government bodies), guarantors, and other involved parties. Any debts not included in the plan after a successful acquisition of the CD by SRA will be erased. The court also made it clear that statutory dues before the 2019 amendment in Section 31(1) of IBC are also covered, and any such debts not mentioned in the plan will be extinguished.
Reviving the financially troubled company and promptly returning the amount owed to the creditor is IBC’s primary goal. It would soon become impossible to promptly resurrect the CD if fresh claims keep coming up. It should be emphasized, though, that the government authority will not submit a claim if the liability has not yet crystallized. As a result, there should be a way to transmit a contingent claim in order to avoid forfeiting the money.
Alternative reasoning behind the settled position of law
- Efficient allocation of resources: One of the primary objectives of BLRC has been to protect the interest of CD as well as the creditors which necessitates effective distribution of resources. Chapter 3 of the BLRC report elaborates on various aspects related to maximizing the value of assets during insolvency proceedings, which is crucial for ensuring the efficient allocation of resources.[5] Such effective allocation demands disallowance of new claims following approval of the resolution plan. By finalizing claims and facilitating a fresh start for the revived company, resources (time, money, management focus) can be directed towards productive activities instead of prolonged litigation and added liabilities.
- Constitution of India Article 19(1)(g): The Fundamental Right to Engage in Trade and Business also supports the present judgment. The ultimate goal of the CIRP procedure and the resolution plan is to help the corporate debtor resurrect and carry on with its commercial operations. This goal is furthered by prohibiting new claims, which creates a stable and transparent financial picture that allows the resurrected company to operate and support the economy.
- Balance of Interests and Public Policy: The rule settled in the present judgment represents a balance between the interests of various stakeholders. It protects the settled expectations of creditors who participated in the CIRP process, while also promoting economic revival, employment generation, unbothered functioning and job creation through the continued operation of the corporate debtor.[6] This approach aligns with the public policy objective of fostering a healthy business environment.
Conclusion
This ruling has indeed been of great importance as it strives to effectively serve the main objectives of IBC, which are to revive the CD and keep it operational. It truly enables the SRA to truly begin anew. However, creditors must ensure that their claims are part of an approved resolution plan by conducting thorough due diligence to check if any proceedings have been already initiated against the CD under the Code. Additionally, creditors must submit their claims in a timely manner to the insolvency resolution professional appointed for the corporate debtor, regardless of whether proceedings have been initiated under any other law by the creditor against the corporate debtor for such claims.
References:
[2] Author is a student at Jindal Global Law School, O.P. Jindal Global University, pursuing Masters in Corporate and Financial Laws and Policy.
[3] Ibid .
[4] Essar Steel (India) Ltd. v. Satish Kumar Gupta (2019) ibclaw.in 07 SC
[5] Bankruptcy Law Reforms Committee, Volume I: Rationale and Design (2015) [3.31-3.41].
[6] Megha Mittal, ‘Accumulated welfare benefits of employees and treatment under Resolution Plans’ (Vinod Kothari Consultants, 04 February 2020). https://vinodkothari.com/2020/02/accumulated-welfare-benefits-under-resolution-plans/
Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.
Follow for daily updates: