Insolvency law is significantly impacted by the parties involved in the insolvency proceedings. Unfortunately, certain stakeholders may misuse the insolvency framework to benefit themselves. To prevent the abuse of insolvency law there is the doctrine of Clean Hands in Insolvency Law. By applying this doctrine, courts can prevent individuals from using insolvency laws to gain unfair advantage by hiding or manipulating debts due to their unethical actions.
What Is the Doctrine of Clean Hands in Insolvency Law ?
The doctrine of Clean Hands in Insolvency Law is undefined in Indian insolvency law. However, with the help of insolvency frameworks in other countries, this doctrine can be understood in the context of the Insolvency and Bankruptcy Code, 2016 (IBC).
Origin and Principle:
The doctrine is explained through the maxim ‘he who comes into equity must come with clean hands’ and is a fundamental equitable principle requiring parties to approach the court with Clean Hands in Insolvency Law , free from deceit or misconduct, and derived from common law. It emphasises that individuals engaged in unethical practices cannot claim equitable remedies.
Read more : Principle of Equitable Treatment Under Insolvency Law
Core Objective:
The objective of this doctrine is to prevent misuse of legal processes and ensure that only parties acting in good faith receive legal protection. It aims to uphold the integrity of the insolvency system by denying relief to those who acted inequitably.
The Relevance of the Doctrine in Insolvency Law
The doctrine of Clean Hands in Insolvency Law means that a person seeking equitable relief in insolvency proceedings must come to the court with “Clean Hands in Insolvency Law”, meaning that they should have not participated in dishonest or improper actions. The relevance of this doctrine in insolvency law can be understood in detail by the below explanation:
Application in Insolvency Proceedings:
This doctrine prevents defaulting promoters and unscrupulous applicants from exploiting the insolvency resolution process by any fraudulent situation or unethical conduct related to the debt or the debtor’s financial situation. It also ensures that all stakeholders operate with transparency and fairness.
Intersection with Section 29A of IBC:
Section 29A of the IBC prevents certain people from submitting resolution plans during the corporate insolvency resolution process (CIRP), such as undischarged insolvents, willful defaulters, etc. This section reflects the essence of this doctrine by disqualifying ineligible bidders, particularly those associated with unethical practices or prior defaults.
Role in Resolution Plans:
It prevents a party seeking to submit a resolution plan for a distressed company from engaging in any fraudulent or unethical conduct related to the company’s current financial situation. The courts must also evaluate the conduct of resolution applicants and stakeholders under the lens of this doctrine, ensuring that plans are not tainted by deceitful practices.
Analyzing Judicial Insights on the Doctrine
Landmark Cases:
The decision of the Hon’ble Supreme Court in the ArcelorMittal Case highlighted the importance of ethical conduct for resolution applicants and reiterated that applicants with prior defaults or questionable ethics cannot participate. In XYZ Ltd. v. Union of India, stated that a party cannot benefit from the court if they have engaged in any fraudulent or improper behavior concerning the matter in this case. The petitioner was found to have engaged in bribery or other unethical practices during the process, the court hence used the “clean hands” doctrine to deny their request.
Evolution in Indian Insolvency Jurisprudence:
The courts have increasingly invoked the doctrine of Clean Hands in Insolvency Law to curb fraudulent practices and uphold the integrity of the resolution process. Through judicial precedents, courts have emphasised the role of this doctrine in safeguarding the interests of creditors and stakeholders.
Global Comparisons:
In US Insolvency Law, the doctrine means that the debtor seeking relief in bankruptcy court cannot benefit from their own fraudulent or inequitable conduct related to the debts they are trying to discharge. This doctrine primarily applies to situations where a debtor is seeking equitable remedies like discharge of debts. This doctrine is commonly invoked in UK Insolvency Law when a creditor is trying to bring a claim against a debtor in insolvency proceedings, and the creditor’s actions may have contributed to the debtor’s financial difficulties through fraudulent or misleading conduct.
Challenges and Criticism of the Doctrine
The main challenges and criticisms of the doctrine of “Clean Hands in Insolvency Law” rely on the actions of stakeholders, mainly including:
Ambiguity in Application:
This doctrine can be difficult to apply in insolvency law because it requires a party to demonstrate inequitable behaviour that is related to the subject matter of the case. Therefore, determining what constitutes “unclean hands” can be subjective, leading to inconsistent judicial interpretations.
Impact on Stakeholders:
To comply with the IBC provisions, courts may apply stricter adherence to this doctrine. This may result in the exclusion of genuine applicants due to minor past infractions.
Potential Delays in Resolution:
Handling numerous stakeholders, their submissions, and potential conflicts of interest, leads to legal challenges based on this doctrine. As a consequence, the insolvency proceedings may be prolonged and affect the recovery timeline.
Conclusion
The doctrine of Clean Hands in Insolvency Law serves as a cornerstone of equitable justice, ensuring ethical compliance in insolvency proceedings. However, its practical application requires clarity and consistency. The courts will consider the severity of the misconduct, whether the creditor was aware of their actions, and the connection between the misconduct and the claim being made.
FAQs
1. What is the Doctrine of Clean Hands in Insolvency Law?
The doctrine of clean hands signified a legal principle where a party seeking relief in an insolvency proceeding must not have engaged in any fraudulent or unethical conduct related to the subject matter of their claim, coming to the court with “clean hands”.
2. How does it apply in insolvency law?
Under this doctrine, the creditor attempting to initiate CIRP against a corporate debtor, must not have participated in any fraudulent or unethical conduct related to the debtor or the debtor’s financial situation to be eligible for relief.
3. Is the Doctrine of Clean Hands codified in the IBC?
No, the doctrine of clean hands is not explicitly codified in the IBC, but its principles are applied by courts when interpreting and applying the IBC.
4. What challenges arise in applying this doctrine?
The challenges that arise in applying this doctrine is the ambiguity in its application by courts, the possible exclusion of genuine creditors in the insolvency process, and delays in the resolution process.