“Clean Slate" Principle Does Not Extend To Liabilities On Date Of E-Auction Sale Of Corporate Debtor As 'Going Concern': NCLAT

Facts:

The Corporate Insolvency Resolution Process (CIRP) against Venus Rolling Mills Pvt. Ltd. (Corporate Debtor) commenced on 22.04.2019.

Upon failure of resolution, the Committee of Creditors resolved to liquidate the Corporate Debtor. On 09.06.2022 (liquidation commencement date), the Adjudicating Authority directed the liquidation of the Corporate Debtor. The Corporate Debtor was sold as a 'going concern' on the e-auction held on 30.03.2023. Shantech International Pvt. Ltd. (Appellant) was the successful bidder. On 14.09.2023, the Liquidator issued a Sale Certificate to the Appellant.

The Appellant then filed an Application (I.A. No. 610 of 2024) for the completion of the Corporate Debtor's Sale Process to be recorded. The Adjudicating Authority disposed of the Application by the order dated 18.06.2024 (impugned order). Some reliefs claimed by the Appellant were not granted. Aggrieved by the impugned order, the Appellant filed the Appeal.

Issues:

Whether the "clean slate" principle extends only to liabilities prior to the insolvency commencement date or will extend to the date of actual sale of the Corporate Debtor as a 'going concern'?

Whether the Adjudicating Authority can refuse to grant necessary reliefs and concessions without even considering them and without assigning any reasons?

Arguments:

By the Counsel for Appellant:

• The sale of the Corporate Debtor as a 'going concern' to the Appellant entitles it to a declaration that no liability should be imposed on the Corporate Debtor up to the date of issue of Sale Certificate. This is based on the 'clean slate' theory, which extinguishes all liabilities up to the date of issue of Sale Certificate.
• The 'clean slate' principle extend not only to the liability prior to insolvency commencement date, but also to the date of actual sale date as a 'going concern'. The Adjudicating Authority granted relief and concession only for the period prior to the date of CIRP, whereas relief and concession was required to be granted up to the date of issuance of Sale Certificate.

By the Counsel for Respondent:

• The reliefs and concessions to which the Appellant was entitled had already been granted by the Adjudicating Authority by the impugned order.
• The 'clean slate' theory is applicable in reference to a Resolution Plan and does not apply to e-auction in the liquidation proceedings, which is held as per the e-auction Notice and Process document.

Observations:

The Tribunal noted that the e-auction Note clearly provided that all liabilities, known or unknown, as on the liquidation commencement date were to be dealt with under Section 53 of the IBC. It observed that since the e-auction Notice did not contemplate the grant of any relief from claims and liabilities up to the date of the e-auction sale, the Appellant could not be granted reliefs and concessions which were contemplated by the e-auction Notice itself.

Further, the Tribunal noted that Regulations 12 (Public announcement by liquidator) and 16 (submission of claim) of the IBBI (Liquidation Process) Regulations, 2016 contemplate the filing of a claim as on the liquidation commencement date.

The Tribunal observed that:

“When claim itself are as on the liquidation commencement date in the liquidation process, the argument that extinguishment of claims and liabilities should be granted till the date of sale by e-auction is not in accord with the statutory scheme as delineated by IBBI (Liquidation Process) Regulations, 2016.”

Therefore, the Tribunal held that there was no question of extinguishment of claim up to the date of sale by e-auction of the Corporate Debtor.

The Appellant had also prayed for a direction for waiver of any liabilities related to water and electricity dues of the Corporate Debtor. The Tribunal held that in this regard the Corporate Debtor was required to apply to the appropriate authorities. The waiver of liabilities for dues to any State or Central Government or statutory authorities was to be dealt with as per the e-auction notice. Therefore, no exemption or waiver could be granted.

The Tribunal observed that para 14 of the impugned order, which stated that any relief or concession not mentioned in para 13 should be deemed to have not been granted, was 'clarificatory' in nature. It held that the Adjudicating Authority had properly considered and dealt with all relevant reliefs and concessions which were part of the Appellant's Application. The Adjudicating Authority had also allowed the Appellant to approach the appropriate authorities to seek any relevant reliefs and concessions.

The Tribunal held that the claims and liabilities incurred prior to the date of e-auction could not be extinguished. It stated that the Adjudicating Authority had granted all reliefs to which the Appellant was entitled. Therefore, the Tribunal dismissed the appeal.

Case Name: Shantech International Pvt. Ltd. vs. Devendra Singh

Case No: Company Appeal (AT) (Insolvency) No. 1520 of 2024

Date of Judgment: 20.09.2024