Insolvency and Bankruptcy Board of India
th
7 Floor, Mayur Bhawan, Connaught Place, New Delhi -110001
14th April, 2021
Subject: Judgment1 dated 13th April, 2021 of the Hon’ble Supreme Court of India in the matter of Ghanashyam Mishra and Sons Private
Limited through the Authorized Signatory Vs. Edelweiss Asset Reconstruction Company Limited through the Director & Ors. [Civil
Appeal No. 8129 of 2019 with WP (Civil) No. 1177 of 2020 and Civil Appeals No. 1550-1554 of 2021]
Section 31(1) of the Insolvency and Bankruptcy Code, 2016 (Code) reads: “(1) 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, [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,] guarantors and other stakeholders involved in the resolution plan.” The words in bold were inserted by the Amendment Act of
2019 effective from 16th August, 2019. In this set of appeals, the Hon’ble Supreme Court considered whether the claims of the parties,
which are not included in the resolution plan, could be agitated by the claimants before the other fora, in view of section 31(1) of the
Code, and made some important findings and observations as under:
Sl. Issue Ruling Para /
No. Page No.
1 Scheme of the Code (a) One of the dominant objects of Code is to see to it, that an attempt is made 54/43
to revive the corporate debtor (CD) and make it a running concern.
(b) The scheme of the Code is to attempt, by divesting the erstwhile 54/44
management of its powers and vesting it in a professional agency, to continue
the business of the CD as a going concern until a resolution plan is drawn up.
Once the resolution plan is approved, the management is handed over under the
plan to the successful applicant so that the CD can pay back its debts and get
back on its feet.
(c) The legislature has given paramount importance to the commercial wisdom 57/60
of committee of creditors (CoC) and the scope of judicial review by the
1
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commercial or otherwise. One must do its own research or read the original text of the judgment or seek professional advice, if it intends to take any action or
decision using the material covered here.
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Adjudicating Authority (AA) is limited to the extent provided under section 31
of Code and of the Appellate Authority is limited to the extent provided under
sub-section (3) of section 61 of the Code, is no more res integra.
(d) In view of provisions of section 238, the provisions of the Code will have 64/65-66
an overriding effect, if there is any inconsistency with any of the provisions of
the law for the time being in force or any instrument having
effect by virtue of any such law.
(e) The Code is a complete Code in itself. 86/97
2 Whether any creditor, including (a) A bare reading of section 31 makes it abundantly clear that once a resolution 58/60-61
the Central Government, State plan is approved by the AA, after it is satisfied that the resolution plan as
Government or any local authority approved by CoC meets the requirements as referred to in sub-section (2) of
is bound by the resolution plan section 30, it shall be binding on the CD and its employees, members, creditors,
once it is approved by an AA under guarantors and other stakeholders. Such a provision is necessitated since one
sub-section (1) of section 31 of the of the dominant purposes of the Code is revival of the CD and to make it a
Code? running concern.
(b) Several details are required to be contained in the information memorandum 61/63-64
so that the resolution applicant is aware, as to what are the liabilities, that it
may have to face and provide for a plan, which apart from satisfying a part of
such liabilities would also ensure, that the CD is revived and made a running
establishment. The legislative intent of making the resolution plan binding on
all the stakeholders is that after the approval of the resolution plan, no surprise
claims should be flung on the successful resolution applicant. The dominant
purpose is that it should start with fresh slate on the basis of the resolution plan
approved.
(c) The legislative intent behind this is to freeze all the claims so that the 86/98
resolution applicant starts on a clean slate and is not flung with any surprise
claims. If that is permitted, the very calculations on the basis of which the
resolution applicant submits its plans, would go haywire and the plan would be
unworkable.
(d) That once a resolution plan is duly approved by the AA under sub-section 95/103
(1) of section 31, the claims as provided in the resolution plan shall stand frozen
and will be binding on the CD and its employees, members, creditors, including
the Central Government, any State Government or any local authority,
guarantors and other stakeholders.
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3 Whether after approval of (a) After the amendment to section 31(1) of the Code, any debt in respect of the 67/66-67
resolution plan by the AA, a payment of dues arising under any law for the time being in force including the
creditor including the Central ones owed to the Central Government, any State Government or any local
Government, State Government or authority, which does not form a part of the approved resolution plan, stand
any local authority is entitled to
extinguished.
initiate any proceedings for (b) On the date of approval of resolution plan by the AA, all such claims, which 95/103
recovery of any of the dues from are not a part of resolution plan, shall stand extinguished and no person will be
the CD, which are not a part of the
entitled to initiate or continue any proceedings in respect to a claim, which is
resolution plan approved by the not part of the resolution plan.
AA? (c) All the dues including the statutory dues owed to the Central Government, 95/104
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 AA grants its approval under section 31
could be continued.
4 Whether the amendment to section (a) The Statement of Objects and Reasons of the Amendment Bill makes it 71/70
31 is clarificatory/declaratory amply clear that the legislative intent in amending sub-section (1) of section 3
or substantive in nature? was to clarify, that the resolution plan approved by the AA shall also be binding
on the Central Government, any State Government or any local authority to
whom a debt is owed in respect of payment of dues arising under any law for
the time being in force, such as authorities to whom statutory dues are owed,
including tax authorities.
(b) The mischief, which was noticed prior to amendment of section 31 of the 77/75-76
Code was, that though the legislative intent was to extinguish all such debts
owed to the Central Government, any State Government or any local authority,
including the tax authorities once an approval was granted to the resolution plan
by AA; on account of there being some ambiguity, the State/Central
Government authorities continued with the proceedings in respect of the debts
owed to them. In order to remedy the said mischief, the legislature thought it
appropriate to clarify the position, that once such a resolution plan was
approved by the AA, all such claims/dues owed to the State/Central
Government or any local authority including tax authorities, which were not
part of the resolution plan shall stand extinguished.
(c) The word ‘other stakeholders’ squarely covers the Central Government, any 87/98-99
State Government or any local authorities. The legislature, noticing that on
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account of obvious omission, certain tax authorities were not abiding by the
mandate of Code and continuing with the proceedings, brought out the 2019
amendment so as to cure the said mischief. The 2019 amendment is declaratory
and clarificatory in nature and therefore retrospective in operation.
(d) A cardinal principle of law is that a statute has to be read as a whole. 91/100-
Harmonious construction of subsection (10) of section 3 of the Code read with 101
subsections (20) and (21) of section 5 thereof would reveal that even a claim in
respect of dues arising under any law for the time being in force and payable to
the Central Government, any State Government or any local authority would
come within the ambit of ‘operational debt’. 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
sub-section (20) of section 5 of the Code. Consequently, a person to whom a
debt is owed would be covered by the definition of ‘creditor’ as defined under
sub-section (10) of section 3 of the 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 Code.
(e) The 2019 amendment is declaratory and clarificatory in nature. Even if 2019 94/102-
amendment was not effected, still the Central Government, any State 103
Government or any local authority would be bound by the resolution plan, once
it is approved by the AA.
(f) The amendment to section 31, being clarificatory and declaratory in nature, 95/104
is effective from the date on which Code came into effect.
5 Conclusion (a) The claims of the parties, which are not included in the resolution plan could 63/65
be agitated by them before the other fora, as observed by the Appellate
Authority, is not permissible.
(b) The respondents are not entitled to recover any claims or claim any debts 149/139
owed to them from the CD accruing prior to the transfer to resolution applicant.
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