Ghanashyam Mishra and Sons Private Ltd. Vs Edelweiss Asset Reconstruction Company Ltd. (Supreme Court of India)
Approved Resolution Plan Clears Corporate Debtor’s Past Dues, Rules Supreme Court; Claims Not Part of IBC Plan Stand Extinguished; Government Dues Included
New Delhi: In a significant ruling, the Supreme Court of India has clarified that once a resolution plan for a corporate debtor is approved by the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 (IBC), all claims not included in that plan stand extinguished. This principle applies universally to all creditors, including the Central Government, State Governments, local authorities, and other stakeholders, for dues accrued prior to the date of the plan’s approval.
The judgment, delivered in the case of Ghanashyam Mishra and Sons Private Ltd. Vs Edelweiss Asset Reconstruction Company Ltd. and other connected matters, addressed crucial questions regarding the finality of approved resolution plans and the treatment of outstanding claims, particularly statutory dues.
The court framed three key questions:
- What is the effect of an approved resolution plan on claims not included in the plan?
- Is the 2019 amendment to Section 31 of the IBC, which explicitly includes government and local authority dues within the binding effect of the plan, clarificatory and retrospective?
- Consequently, what happens to statutory dues owed to government authorities if they are not part of the approved resolution plan?
Answering these questions, the Supreme Court unequivocally held that upon the Adjudicating Authority’s approval of a resolution plan under Section 31(1) of the IBC, the claims incorporated within that plan are “frozen” and become binding on all parties involved, including the corporate debtor, its employees, members, creditors (governmental or otherwise), and guarantors. Critically, the court stated that any claims not part of the approved resolution plan shall stand extinguished on the date of approval, and no person is entitled to initiate or continue any proceedings regarding such omitted claims.
The court further clarified that the 2019 amendment to Section 31 of the IBC, which added explicit mention of Central Government, State Government, and local authority dues, is “clarificatory and declaratory in nature.” This means the amendment did not introduce a new principle but merely clarified the existing legal position under the original IBC. Therefore, this provision is effective from the date the IBC came into force.
Flowing from these findings, the Supreme Court concluded that all dues, including statutory dues owed to governmental authorities, if not included as part of the approved resolution plan, are extinguished. No proceedings concerning such dues for the period prior to the Adjudicating Authority’s approval of the plan can be continued.
The judgment then applied these principles to several appeals and a writ petition before it.
In Civil Appeal No. 8129 of 2019, the case primarily involved a challenge by Edelweiss Asset Reconstruction Company Ltd. (EARC) to the approved resolution plan of Ghanashyam Mishra and Sons Private Ltd. (GMSPL) for the corporate debtor, OMML. EARC’s claims, based on an uninvoked corporate guarantee and pledged shares, were not admitted by the Resolution Professional (RP) during the Corporate Insolvency Resolution Process (CIRP). The National Company Law Tribunal (NCLT) approved GMSPL’s plan and rejected EARC’s challenge and its application regarding the non-admission of its claims. The NCLT found that the corporate guarantee was uninvoked before the completion of the CIRP and that the invocation of the pledge during the moratorium period was impermissible. The NCLT also dismissed an application by the District Mining Officer, Jharkhand, whose claims were not supported by adequate documentation.
The National Company Law Appellate Tribunal (NCLAT) dismissed the appeals against the NCLT order but made observations suggesting that the rejection of claims in the resolution plan might not affect EARC’s right to invoke the bank guarantee post-moratorium or the rights of other excluded claimants (like workmen and the State of Jharkhand for statutory dues) to seek remedies in other forums.
The Supreme Court strongly criticized these observations by the NCLAT, deeming them “beyond the scope of the powers” under Section 61(3) of the IBC and running “totally contrary to the consistent view taken by this Court.” Citing precedents like K. Sashidhar and Kalpraj Dharamshi, the court reiterated that a successful resolution applicant cannot be burdened with unexpected claims not part of the plan. The court found EARC’s conduct of first participating as a resolution applicant after its claim was rejected and then challenging the approved plan as taking chances. It held that EARC was bound by the principle that claims not in the plan are extinguished, a principle even reflected in EARC’s own proposed resolution plan. The court also upheld the NCLT’s rejection of the District Mining Officer’s claim due to lack of documentation and the overriding effect of Section 238 of the IBC over other laws like the Mines and Minerals (Development and Regulation) Amendment Act. The Supreme Court expunged the problematic paragraphs from the NCLAT judgment and upheld the NCLT’s order.
In Civil Appeal arising out of SLP (Civil) No. 11232 of 2020, the appellant challenged a judgment of the Allahabad High Court which had dismissed their writ petition against a U.P. VAT demand on the ground of availability of an alternative remedy. The appellant argued that the VAT dues, relating to a period prior to the transfer date under the approved resolution plan, stood extinguished. The Supreme Court noted the exceptions to the rule of alternative remedy, including cases where the order is wholly without jurisdiction. Given its finding that the 2019 amendment to Section 31 is retrospective and extinguishes pre-approval claims not in the plan, the court held that the tax proceedings could not continue. It stated that relegating the appellant to an alternative remedy would be pointless as the claims were not permissible in law. The Allahabad High Court’s judgment was quashed, and the court declared that the respondents were not entitled to recover any pre-transfer date claims from the corporate debtor.
Similarly, in Writ Petition (Civil) No. 1177 of 2020, the petitioners challenged demands for service tax and other dues raised after the approval of their resolution plan. Although the court would ordinarily not entertain a direct writ petition under Article 32, it chose to do so because the central question of law was being decided in this batch of matters. Relying on its interpretation of Section 31, the court held that the respondents were not entitled to recover claims or debts owed to them from the corporate debtor that accrued prior to the transfer date. The court also referenced its earlier dismissal of an Income Tax Authority’s appeal concerning the same petitioner (Special Leave Petition (Civil) No. 6483 of 2018), where it had already indicated that the IBC overrides the Income Tax Act and that Crown debts do not take precedence over secured creditors.
Finally, in Civil Appeals arising out of SLP (Civil) Nos. 7147-7150 of 2020, the Supreme Court allowed intervention and quashed a Jharkhand High Court judgment that had rejected the appellant’s petitions challenging the recovery of Jharkhand VAT for prior years. The High Court had incorrectly held that government dues were not “operational debt” and that the 2019 amendment to Section 31 did not affect plans approved before its enactment. The Supreme Court reiterated its position that the resolution applicant steps into the shoes of the corporate debtor and has the standing to file writ petitions, and that pre-transfer date claims, including the VAT dues, cannot be recovered.
The Supreme Court’s judgment in Ghanashyam Mishra and Sons Private Ltd. Vs Edelweiss Asset Reconstruction Company Ltd. reinforces the “clean slate” principle central to the IBC. Once a resolution plan is approved, the corporate debtor can move forward without the burden of past liabilities not accounted for in the plan, ensuring the effectiveness of the resolution process and promoting the revival of distressed companies.
Judicial Precedents Referenced:
