2019 Amendment To Section 31 IBC Has Retrospective Operation: Supreme Court

The Supreme Court held that 2019 amendment to Section 31 of the Insolvency and Bankruptcy Code has retrospective operation.

The amendment is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect, the bench comprising Justices RF Nariman, BR Gavai and Hrishikesh Roy observed.

Section 31, which deals with approval of resolution plan, originally read as follows: If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan

The 2019 amendment added the following words in Section 31(1) of the I&B Code after the words 'creditors'. "including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed"

The court was disposing a batch of appeals which raised the following issues.

(i) Whether any creditor including the Central Government, State Government or any local authority is bound by the Resolution Plan once it is approved by an adjudicating authority under sub­section (1) of Section 31 of the Insolvency and Bankruptcy Code, 2016?

(ii) As to whether the amendment to Section 31 by Section 7 of Act 26 of 2019 is clarificatory/declaratory or substantive in nature?

(iii) As to whether after approval of resolution plan by the Adjudicating Authority 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 adjudicating authority?

The court answered the above issues as follows:

(i) That once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claims as provided 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. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in 104 respect to a claim, which is not part of the resolution plan;

(ii) 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect;

(iii) 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 no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.

Regarding the retrospectivity of Section 31, the bench observed that the word "other stakeholders" would squarely cover the Central Government, any State Government or any local authorities.

"The Central Government, any State Government or any local authority to whom an operational debt is owed would come within the ambit of 'operational creditor' as defined under sub­section (20) of Section 5 of the I&B Code. Consequently, a person to whom a debt is owed would be covered by the definition of 'creditor' as defined under sub­section (10) of Section 3 of the I&B Code. As such, even without the 2019 amendment, the Central Government, any State Government or any local authority to whom a debt is owed, including the statutory dues, would be covered by the term 'creditor' and in any case, by the term 'other stakeholders' as provided in subsection (1) of Section 31 of the I&B Code.", the bench said.

Also held in the judgment : Once Resolution Plan Is Approved, No Creditor Can Initiate Proceedings To Recover Claims Not Part Of Resolution Plan : SC Upholds 'Clean Slate Theory'

Case:  Ghanashyam Mishra And Sons Private Limited Vs.Edelweiss Asset Reconstruction Company Limited [ CA 8129 OF 2019]

Coram: Justices RF Nariman, BR Gavai and Hrishikesh Roy

Citation: LL 2021 SC 212

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