SC on Binding Nature of an approved Resolution Plan

By Nihit Nagpal and Devika Mehra

The Hon’ble Supreme Court in its recent judgement while emphasising on aim of the IBC,2016 i.e., to economically rehabilitate the Corporate Debtor, deliberated on the finality of a Resolution Plan, approved by the Adjudicating Authority i.e. NCLT and its binding nature on all its creditors and quite exponentially gave clarity on the position of the Central and State Government amongst the list of creditors.

Any creditor, including Central/State Government or any local authority, is bound by Resolution Plan as approved by Adjudicating Authority

In a recent judgment of Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Limited, (Civil Appeal No.8129/2019)[1], on April 13, 2021, the Hon’ble Supreme Court held that any creditor, including Central/State Government or any local authority, is bound by Resolution Plan as approved by Adjudicating Authority under Section 31(1) of the Insolvency and Bankruptcy Code, 2016. It also further held that the Central and State Government or any local authority to which operational debt is owed shall be an “Operational Creditor” vis-à-vis that Company.

What transpired in the above case is that the State Bank of India (“Financial Creditor”) under Section 7 of IBC filed an application before the National Company Law Tribunal, Kolkata Bench, against the Orissa Manganese & Minerals Limited (“Corporate Debtor”) which is a company, engaged in the business of mining iron ore, graphite, manganese ore and agglomerating iron fines into pellets.

The Hon’ble NCLT through its Order dated August 03, 2017 admitted the Company Petition and thereafter, subsequently a Resolution Professional (“RP”) was appointed. The RP initiated the resolution process in accordance with the provisions of the IBC, 2016. During the process three resolution plans were received, each from Edelweiss Asset Reconstruction Company Limited (EARC), Respondent No.1, Orissa Mining Private Limited, and Ghanashyam Mishra & Sons Private Limited, the Appellant, respectively. The Hon’ble NCLT  by an elaborate order dated   22.6.2018 approved the Resolution Plan of GMSPL, which was duly approved by CoC by a voting share of more than 89.23%.

The NCLAT, vide its Order dated 23.04.2019 held that the Resolution Plan of GMSPL (Ghanshyam Mishra and Sons Pvt. Ltd.) is better than the other Applicants. However, NCLAT observed that the claims of the parties, which are not included in the Resolution Plan could be agitated by them before respective forums. Consequently, GMSPL filed an Appeal before the Supreme Court against the NCLAT Order dated 23.04.2019 with respect to the observation made in the Impugned Order. Inter-alia, the following issues were framed:

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 NCLT under Section 31(1) of the IBC, 2016?
2. Whether after approval of Resolution Plan by the NCLT, 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 NCLT?

The Supreme Court while dealing with the aforementioned issues observed and held in the following manner:-

1) That the Government is covered under the definition of the ‘Creditor’ under IBC. The Court through the harmonious constructions of definitions of the Operational Creditor[2], Operational debt[3], and Creditor[4] observed 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’.

2) That the operational debt owed to Central Government, any State Government or any local authority would come within the ambit of ‘Operational Creditor’. Similarly, a person to whom a debt is owed would be covered by the definition of ‘creditor’.

3) It further observed that the claims as mentioned 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, once a resolution plan is duly approved by the NCLT under Section 31(1) of the IBC.

4) 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 proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 cannot be continued.

5) The Court further observed that the Section 31 Amendment of the IBC is “clarificatory and declaratory in nature” and therefore will come into effect from the date from which the Insolvency & Bankruptcy Code came into effect.

Conclusion:

The objective behind the Insolvency & Bankruptcy Code was to permit a restructuring process enabling the liability of corporate debtor to be reset, in order to enable new management to begin with a clean slate thus allowing for the revival of the corporate debtor’s business. This decision of the Supreme Court furthers the Objectives of IBC, which it originally was set out to achieve.

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[1] 22323_2019_33_1501_27518_Judgement_13-Apr-2021.pdf (sci.gov.in)

[2] Section 5(20) of IBC

[3] Section 5(21) of IBC

[4] Section 3(10) of IBC