The Adjudicating Authority approves the resolution plan submitted by the Committee of Creditors, if it meets the requirements of the Insolvency and Bankruptcy Code, 2016 (IBC). Once approved, the resolution plan becomes legally binding on all parties associated with the corporate debtor. Section 31 of IBC affects not only the corporate debtor’s creditors, but also government entities, such as Central and State Governments, local authorities, and any other parties directly impacted by the insolvency proceedings.
Understanding Section 31 of IBC
Section 31 of IBC lays down the procedure for the Committee of Creditors (CoC) to approve a resolution plan submitted by a resolution applicant. To understand this is more detail, it is important to know:
Read more: The Doctrine of Clean Hands in Insolvency Law
Core Provision:
Section 31 of IBC states that once a resolution plan is approved by the Adjudicating Authority, the National Company Law Tribunal (NCLT), it becomes binding on all stakeholders, including creditors, employees, guarantors, and the corporate debtor and ensures finality and prevents delays caused by litigation.
Objectives:
This section ensures that the resolution plan meets the requirements of section 30 of the IBC. Section 31 of IBC essentially facilitates the successful resolution of insolvency cases and provides certainty to all stakeholders as it ensures that the resolution plan has provisions for effective implementation. It promotes the principle of economic revival because it aims at ‘rescuing’ financially distressed companies.
The Clean Slate Principle Under Section 31 of IBC
This section establishes the “clean slate” principle, stating that upon the approval of the resolution plan, the slate is clean for the corporate debtor. The resolution applicant must commence operations with the burden of past actions.
Explanation of the Principle:
The clean slate principle means that once a resolution plan is approved for a corporate debtor, all pre-existing liabilities and claims against the company are extinguished. This allows for the successful resolution applicant to essentially start with a “clean slate” and operate the business free from past encumbrances. Therefore, this principle aims to facilitate a smooth transition and encourage fresh investment in distressed companies.
Key Cases Supporting the Principle:
The Supreme Court in the Essar Steel Case upheld the clean slate principle and it provides that all claims against the corporate debtor are extinguished upon the approval of the resolution plan, allowing the resolution applicant to start afresh. This principle was also affirmed in the Ghanashyam Mishra Case, which reinforced that claims not included in the resolution plan are no longer enforceable.
Retrospective Amendment to Section 31 of IBC
A “retrospective amendment to section 31” refers to a change made to section 31(3) of a law that is applied to situations that occurred before the Insolvency and Bankruptcy Code (Amendment) Act, 2019 was enacted.
Context of Retrospective Effect:
The retrospective amendment means the new interpretation of the law applies to past events as well. Therefore, the 2019 Amendment ensures that it applies to resolution plans approved before the amendment.
Judicial Validation:
The Supreme Court in the Ghanashyam Mishra Case held that the 2019 Amendment to section 31 of the IBC has retrospective operation. It also held that the amendment is clarificatory and declaratory in nature. This court held that the retrospective application was constitutionally valid and the decision provided clarity and consistency to insolvency proceedings.
Impact on Stakeholders:
This amendment significantly impacts stakeholders by essentially creating a “clean slate” principle. Therefore, once a resolution plan is approved all claims against the insolvent company, even those arising before the insolvency proceedings, become binding on all stakeholders. This allows employees to retain rights based on the plan but lose pre-existing claims.
Analysis of Stakeholders’ Obligations Post-Section 31 Approval
After the resolution plan is approved under Section 31 of IBC, the plan is bound to all stakeholders and they have certain obligations to fulfill:
Obligations of Creditors:
Once the resolution plan has been approved under Section 31 of IBC, creditors are bound to undertake the actions set out in the plan, adhering to the terms of the plan. As per the clean slate principle, any claims not part of the plan are extinguished and creditors are barred from initiating recovery proceedings.
Obligations of the Corporate Debtor:
The corporate debtor is legally obligated on a clean slate meaning that all liabilities owed prior to the approval are negated. As per Section 31 of IBC, the debtor must comply with the resolution plan and its terms, while gaining immunity from pre-resolution liabilities.
Obligations of Guarantors:
The guarantors of the stakeholders are also bound by the resolution plan and do not discharge a guarantor’s liability. They will only be released from their obligations unless it has been explicitly provided in the plan.
Practical Challenges in Implementing Section 31
Ambiguity in Resolution Plans:
If the resolution plan contains unclear of vague terms, it can lead to disputes and complications during its implementation. This may hinder the successful turnaround of the distressed company due to differing interpretations by the stakeholders involved.
Overlapping Jurisdictions:
Despite section 238 of the IBC which states that IBC provisions will have effect “notwithstanding anything inconsistent therewith contained in any other law”. This gives the IBC priority in case of conflicts with other laws. However, there remain challenges in aligning insolvency proceedings with other legal frameworks.
Resistance from Operational Creditors:
Operational creditors have a lower priority than financial creditors. Such creditors often face disadvantages, further leading to legal disputes.
Policy Recommendations
Enhance Clarity in Resolution Plans:
Mandating more comprehensive disclosure of information by resolution applicants in their plans can encourage more transparency in resolution plans. There is also a requirement to introduce cear guidelines for the independent valuation of a corporate debtor’s assets to ensure fairness in the resolution plan.
Strengthen Oversight Mechanisms:
The role of insolvency professionals in forming and approving the resolution plan needs to be improved. Insolvency professionals ensure a transparent and efficient insolvency process, and their expertise is crucial for maximising the value of a distressed company’s assets, requiring a high level of skill, objectivity, and ethical conduct.
Address Stakeholder Concerns:
Although all stakeholders are bound by the resolution plan, operational creditors’ and guarantors role are not well-defined under section 31. Therefore there is a need to develop frameworks to address concerns of operational creditors and guarantors.
Conclusion
The approval of the resolution plan in section 31 of the IBC gives a company a “fresh start” by extinguishing all claims not included in the approved plan. It has significantly impacted stakeholders’ obligations, ensuring a clean slate for the corporate debtor while promoting resolution finality. The successful resolution applicant takes over the company’s operations with a clean slate. The 2019 Amendment established a retrospective effected allotted to the provision, addressing the previous issues of undue delays by filing litigation proceedings that hampered the value maximisation.
FAQs
1. What is the significance of Section 31 of IBC?
Section 31 of the IBC outlines the process for approving a resolution plan by the NCLT, making it binding on all stakeholders giving the distressed company a “fresh start”.
2. What is the clean slate principle?
The clean slate principle refers to the legal concept that within insolvency proceedings, once a resolution plan is approved, a company essentially gets a fresh start. This means that all previous liabilities and claims against it are extinguished, allowing the new entity to operate free from past debts.
3. Does Section 31 apply retrospectively?
Yes, the 2019 amendment to section 31 has retrospective operation, this means that stakeholders cannot initiate debt proceedings that were pending before the amendment date.
4. How does Section 31 impact creditors?
The approved resolution plan is binding on all creditors, depending on the company’s financial situation, a resolution plan may result in creditors receiving a lower amount than their original claim.