Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. (2021)

A resolution plan is worth nothing to a successful applicant if old claims can surface afterwards. This is the decision that gives the plan its finality — the proposition usually called the clean slate. It is the answer to the most commercially important question in Unit 2: what happens to a creditor, including a government, who did not lodge a claim or whose claim was not provided for. It is also the natural companion to K. Sashidhar: the committee's commercial judgment would be worthless if the price the applicant paid could be undone by unquantified liabilities.

The dispute arose after a resolution plan had been approved under s. 31(1). Claims were then pressed against the corporate debtor which had not formed part of the approved plan, including claims of governmental and statutory authorities. The question was whether such claims survived approval.

Once a resolution plan is approved by the Adjudicating Authority under s. 31(1):

• the claims as provided in the resolution plan stand frozen, and are 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; and
• on the date of approval of the resolution plan by the Adjudicating Authority, all such claims which are not a part of the resolution plan shall stand extinguished, and no person will be entitled to initiate or continue any proceedings in respect of a claim which is not part of the resolution plan.

The reasoning runs through the words of s. 31(1) and the purpose they serve. The sub-section declares an approved plan binding on the debtor and on the listed stakeholders. Binding means what it says: the plan is the exhaustive statement of what each stakeholder gets. If claims outside the plan survived, the plan would bind nobody in any meaningful sense, because the liability it left out would attach to the very company the plan was designed to rescue.

The commercial consequence supplies the rest. A resolution applicant bids on the strength of the liabilities disclosed. If undisclosed or unadmitted claims could be revived after approval, no applicant could price a plan, the value realised would fall, and the object of value maximisation would be defeated. The corporate debtor would emerge from the process carrying the very burden the process existed to resolve.

Extending the binding effect expressly to the Central Government, State Governments and local authorities removes the argument that sovereign and statutory claims stand outside an ordinary insolvency compromise. That extension is what makes the clean slate clean.

1. On finality of a plan, state the two consequences in order — claims in the plan freeze; claims outside it are extinguished on the date of approval — and then list the persons bound, naming the governments expressly.
2. Pair it with the collation of claims. The rule is severe on a creditor who sleeps on his claim, which is why the professional's duty to collate and to give public notice matters so much.
3. Distinguish the guarantor. A guarantor is bound by the plan as a stakeholder, but that is not the same as saying the guarantor is released. The sanction of a plan and the finality given to it by s. 31 do not per se operate as a discharge of the guarantor's liability. That is the subject of the personal-guarantor cases in Unit 3.
4. What it does not decide. It does not decide whether a claim secured by a charge created by statute must be treated as a secured claim in the first place; for that, see the next case.

Section 31 has since been amended. A new proviso permits the Adjudicating Authority, on an application by the resolution professional with the approval of not less than sixty-six per cent. of the voting share of the committee of creditors, to first approve the implementation of the plan and thereafter approve the manner of distribution provided in it within thirty days of the approval of implementation. A further proviso allows the Authority, before rejecting a plan, to give notice to the committee of creditors to rectify defects, and a new sub-section sets a thirty-day limit for passing an order under s. 31(1) or (2). Where a question raises the timing of approval or of distribution, note that the two may now be separated.