Clean Slate Theory under the Insolvency & Bankruptcy Code
Table of Contents
The corporate insolvency resolution process (CIRP) has been initiated under the Insolvency and Bankruptcy Code, 2016 (“the IBC”), and numerous resolution plans are invited and deliberated upon before a final plan is selected. The clean slate theory means that once a resolution plan is approved, all pre-existing the corporate debtor are extinguished, thus allowing the company to start afresh, free from past liabilities.
Legal Foundations of the Clean Slate Theory
There are specific provisions under the IBC that cover the clean slate theory, which are:
Section 31(1) of the IBC:
Section 31(1) stipulates that once the adjudicating authority approves a resolution plan, it becomes binding on the corporate debtor and all stakeholders, including creditors, government authorities, and employees. Hence, this provision ensures that the terms of the resolution plan are final and enforceable.
Section 32A of the IBC:
The Insolvency and Bankruptcy Code (Amendment) Act, 2020 introduced section 32A. This section provides that the corporate debtor shall not be prosecuted for any offense committed before the commencement of the CIRP, once the resolution plan is approved, provided there is a change in management or control. This indirectly reinforces the Clean Slate Theory by preventing the revival of past liabilities post-resolution.
Read more : What is rebidding in the resolution process?
Judicial Interpretations Upholding the Clean Slate Theory
The landmark decision of the Supreme Court in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. emphasized that upon approval of a resolution plan, all claims not included are extinguished, and no creditor can initiate proceedings for such claims. The Court underscored that allowing additional claims post-approval would undermine the resolution process and deter prospective resolution applicants. The Securities Appellate Tribunal in M/s. Tata Steel Limited v. The Securities and Exchange Board of India upheld the Clean Slate Theory, ruling that penalties imposed prior to the approval of the resolution plan could not be enforced against the corporate debtor post-resolution.
Implications for Insolvency Professionals
Insolvency professionals (IPs) may find implementing the clean slate, including:
Due Diligence in Resolution Planning:
IPs must ensure that all known claims and liabilities are accounted for in the resolution plan. This necessitates meticulous verification and reconciliation of claims to prevent future disputes, which may be difficult as IPs handle multiple cases simultaneously.
Communication with Stakeholders:
Maintaining effective communication with creditors and stakeholders about the implications of the Clean Slate Theory is crucial for IPs to ensure a fair and transparent resolution process. Hence, stakeholders should be aware that claims not submitted during the CIRP will be extinguished upon plan approval.
Challenges and Considerations
Treatment of Contingent and Undisclosed Claims:
The Clean Slate Theory raises concerns about contingent or undisclosed claims surfacing post-resolution. Therefore, professionals must implement strategies to identify and address such potential liabilities during the CIRP.
Exceptions to the Clean Slate Doctrine:
The judicial interpretations of the clean slate theory have indicated certain exceptions, particularly when there is no change in management or control post-resolution. In certain circumstances, IPs should be cognizant of these nuances and structure resolution plans accordingly.
Recommendations for Practice
To improve the application of the clean slate theory in insolvency cases, it is recommended:
That IPs implement stringent due diligence processes to identify all existing and potential claims against the corporate debtor is essential. This includes reviewing financial records, legal proceedings, and contingent liabilities.
That the Insolvency and Bankruptcy Board of India (IBBI) should introduce training programmes and campaigns that educate creditors about the necessity of timely claim submission and the consequences of non-submission under the Clean Slate Theory. This can mitigate future disputes and enhance the efficacy of the resolution process.
Conclusion
The clean slate has been instrumental in achieving the primary objective of the IBC – reviving the corporate debtor. By ensuring that a resolution applicant takes over a debtor free from past liabilities, the doctrine promotes investor confidence and facilitates effective insolvency resolutions. The theory is particularly integral to the IBC’s objective of providing a fresh start to corporate debtors post-resolution. Courts play a major role in interpreting the clean slate theory in practice. Judicial interpretations have largely upheld this doctrine, emphasizing the finality and binding nature of approved resolution plans
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