Guest Post: “Clean Slate Doctrine” under IBC

[Mr. Aakash Deep Anand is Law Graduate from IP University, Delhi and presently works in a Govt. Department.]

“Clean Slate Doctrine” under the Insolvency & Bankruptcy Code and its evolution

[Aakash Deep Anand]

Introduction

The process of insolvency has undergone a substantial change after the Insolvency and Bankruptcy Code, 2016 [“IBC” or “Code”] has come into force. The ball starts rolling after a Corporate Entity enters into a Corporate Insolvency Resolution Process [“CIRP”] and the Adjudicating Authority [“NCLT”] appoints an Interim Resolution Professional [“IRP”] forthwith. The IRP further constitutes the Committee of Creditors [“COC”].

In accordance with Regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 [“IBC Regulations”], the Claims should be submitted to the IRP within the time period stipulated in the Public Announcement, which should be fourteen days from the date of appointment of the IRP. Creditors who fail to submit their claims within the stipulated timeline may submit it on or before ninetieth day of the insolvency commencement date [Regulation 12 of the IBC Regulations].

After constitution of the COC, first meeting of the COC should be held within 7 days of its constitution [Section 22(1) of the Code]. In the said meeting, the concern of appointing the IRP as Resolution Applicant [“RP”], or appointing a new RP is resolved by the Financial Creditors by a majority vote of not less than sixty-six percent [Sec 22(2) of the Code].

It is the duty of the RP to preserve and to protect the value of the Corporate Debtor and manage the operations of the Corporate Debtor as a going concern [Section 22 of the Code]. Another foremost duty of the RP (under Section 18 of the IBC) is to collect all information relating to assets, finances and operations of the Corporate Debtor and to receive/collate all the claims submitted by the Creditors pursuant to the Public Announcement. Thereafter, the RP invites the potential Resolution Applicant and prepares the Information Memorandum, based on which the Resolution Applicants come up with their Resolution Plan. The Resolution Plans received are then presented before the COC.

On the approval of a suitable Resolution Plan by the COC, the same is submitted to the Adjudicating Authority for its final approval. Once the assent of the Adjudicating Authority is obtained, the successful Resolution Applicant acquires the control over the Corporate Debtor.

The “Clean Slate Doctrine”

Almost every day, we see new developments in IBC, either in the form of Judgments or in amendments to the existing Code/Regulations. One such example is the “Clean Slate Doctrine”. The theory has been put to the effect by the Hon’ble Supreme Court of India in the matter of Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors.

In the above judgment, the Hon’ble Supreme Court has held that a successful Resolution Applicant cannot suddenly be made to face the undecided claims after the resolution plan submitted by him has been accepted, as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective Resolution Applicant who successfully took over the business of the Corporate Debtor. The Court added that all claims must be submitted to and decided by the RP so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the Corporate Debtor.

Thus, according to the Doctrine of Clean Slate, once the Adjudicating Authority approves the Resolution Plan, the plan becomes binding and thereafter, the Resolution Applicant should not face any undecided claim. The doctrine touches upon the intent of the IBC statute, which is very clear to give a suitable opportunity to the interested Resolution Applicant to acquire the dying entity and begin the functions on a clean slate.

Unfortunately, the issue is not that straightforward, as it appears to be. Questions pertaining to the claims being made after the approval of the Resolution Plan by the Adjudicating Authority are always debatable. Amongst the various concerns relating to the rejection of the claims coming up after the approval of the Resolution Plan, recently two High Courts i.e. Rajasthan and Jharkhand pronounced on the issue and reached seemingly diametrically opposite conclusions.

The Debate

Section 31 of the Code lays down that the resolution plan, once approved by the adjudicating authority, is binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any other local authority such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in resolution plan.

However, the question arises as to what happen in an instance, where the debts of any creditor against the Corporate Debtor have not been decided during the CIRP or where the claims have been  made after the approval of the resolution plan. There have been two divergent views with regard to this issue which have been elaborated upon in the succeeding sections:

View 1: Clean Slate Doctrine will prevail

In this scenario, where the claim is filed after the approval of the Resolution plan, applying the Clean Slate Doctrine, the claim will be not accepted at the belated stage.

Recently, the Hon’ble High Court of Rajasthan while allowing the Writ Petition in the matter of Ultra Tech Nathawara Cement Limited vs. Union of India & Ors. [Civil Writ Petition No.9480/2019] had butteressed the scope of “Clean State”. The Hon’ble Court held that the purpose of the statute is very clear that it intends to revive the dying industry by providing an opportunity to a Resolution Applicant to take over the same and begin the operation on a clean slate and for that purpose, the evaluation of all dues and liabilities as they exist on the date of finalization of the Resolution Plan have been left in the exclusive domain of the Resolution Professional with the approval of the COC. Further, the Hon’ble Court added that the courts are given an extremely limited power of judicial review into the Resolution Plan duly approved by the COC.

Debts of the Corporate Debtor arising after the approval of the Resolution Plan are rejected for the reason that the same are not incorporated in the approved Resolution Plan. Thus, according to this view, it may not be possible for the Resolution Applicant to consider the claims that never came to his knowledge during the CIRP, as the same would also defeat the purpose of the “Clean Slate”.

View 2: Clean Slate Doctrine will not prevail

The latter view is polar opposite to the prior. There may be cases where the IRP/RP had left over certain claims during the CIRP or had omitted to identify the claims during the CIRP. Therefore, the same would have resulted in unexpected claims after the approval of the Resolution Plan.

In this regard, the Hon’ble Jharkhand High Court recently, in the matter of Electrosteel Steels Limited vs. The State of Jharkhand and Ors. dismissed the prayer of Electrosteel Steels Limited. The company (Electrosteel) entered into the CIRP and a successful Resolution Applicant, M/s Vedanta Limited took over the company pursuant to approval of the Adjudicating Authority.

The dispute arose when the state tax authorities initiated garnishee proceedings against Electrosteel to recover the unpaid taxes. The Petitioner Company (Electrosteel) has challenged the garnishee order issued by the Deputy Commissioner of Commercial Taxes (Bokaro, Jharkhand). The garnishee order was issued on the account of tax/penalty due from the Petitioner Company.

In this regard, the Hon’ble Jharkhand High Court quoted the relevant portion of Regulation 6 of the IBC Regulations which is as mentioned as below: -

 

"6. Public announcement

 

(1) An Insolvency professional shall make a public announcement immediately on his appointment as an interim resolution professional.

[Explanation: 'Immediately' means not later than three days from the date of his appointment.]

 

  (2) The public announcement referred to in sub-regulation (1) shall:

 

(a) be in Form A of the Schedule;

(b) be published-

(i) in one English and one regional language newspaper with wide circulation at the location of the registered office and principal office, if any, of the corporate debtor and any other location where in the opinion of the interim resolution professional, the corporate debtor conducts material business operations; ------------------."

In Electrosteel (supra), the Hon’ble Court observed that the Public Announcement was never made in Petitioner’s principal place of business or a place, where a registered office of the Petitioner Company was situated. The registered office of the Company was situated in the State of Jharkhand. However, the Public Announcement was published in the Business Standard of Kolkata Edition.

This omission resulted in demands of the state tax authorities, which has been made after the approval of the resolution plan. As the state tax auhtorities were not even a part of the CIRP, the purpose of “involved in resolution plan” under Section 31 of the Code was defeated and the Hon’ble Jharkhand High Court dismissed the petition.

In the meantime, the judgment was challenged before the Hon’ble Supreme Court of India by way of a Special Leave Petition [SLP (C) No.7147-7150/2020]. The matter is pending before the Apex Court as on date.

Comments

The “Doctrine of Clean Slate” justifies rejection of claims made after the approval of the plan so as to provide a fresh or a clean start to a successful Resolution Applicant.

The Code stipulates that the powers of the board of directors or partners shall be exercised by the IRP/RP from date of his/her appointment. As a result, the board stands substituted by the IRP/RP. The IRP/RP is also duty bound to reasonably be aware of the assets and liabilities of the Corporate Debtor. Such a duty necessarily entails the IRP/RP to find out if there are statutory dues owed by the Corporate Debtor.

If the existence of any statutory debt can be reasonably determined by the IRP/RP, it would be unjust or illegitimate to consider such debts as wiped out merely on the ground that no claims have been filed by the concerned government department/authority. Ultimately, these statutory debts are public money owed to the people of India. However, the legislative intent of the statute is to ensure the revival of the dying industry but the same shall not result into the loss of public money.

In sum, the doctrine of clean slate has to be applied with a lot of circumspection as regards statutory debts. If the IRP/ RP can reasonably determine pending statutory dues, the same should be brought on record even if no claims have been filed by the concerned department/authority. The nature of function of the IRP/ RP requires him/ her to go to the extent of communicating with statutory authorities, in cases where the IRP/ RP could, with reasonable diligence, find out if the Corporate Debtor owes statutory dues.

Alt+Law: Technological Innovation and the Law

[The legal profession is regarded as one of the least innovative professions (see, here, for instance). Lawyers do not accept technological improvements easily. Given this, Ms. Aarvi Singh's Alt+law bot comes as a pleasant surprise. She is a student of RGNUL, Punjab and an avid researcher with several papers published in various law journals/ reviews.

Ms. Singh's bot in Telegram has the potential to help stressed out law students. The bot purports to summarise pdf files and provide summaries of these files. Apparently, the bot runs even on pdfs containing more than 500 pages. In this post, Ms Singh explains to the world her bot, "Alt+Law". Do test the bot and give your feedback to Ms. Aarvi Singh at aarvi03singh@gmail.com ]

Introducing my project Alt+Law 

by Aarvi Singh

Introduction

During my first internship, I was assigned the task to give a summary of a number of judgments and one such judgment was LIC v Escort, (1986) 1 SCC 264. It was way too long a judgment to summarize in half an hour. At that very moment of fear, the anxiety of being judged as poor reading capacity loomed over me. I completed the task, but always wished for some tools to assist students in researching especially when time is all that matters.

Finally, I took this task to create some tools that would assist students in creating a summary of bulky papers. I created a bot on Telegram which will summarize any judgment, paper, or any pdf with content.

Process

Technical Aspect of the bot

@altpluslaw_bot, currently is a Telegram bot, which receives and sends pdf file to an apache tika grobid document parser (open-source software). The software extracts citations and references (if any) with fair accuracy (currently 60%). Once the citations and the overall text is received then it is sent to a summarizer. Currently, I have deployed different types of summarizers which gives the summary of the text by reducing the number of word counts to approximately 10% of the original words.

Image as available on Telegram

Scope of Improvements

I am working to improve the model and soon the model will be able to extract and summarize text from websites. The next version will come with options of summarization ratios. A new bot will be publishing three distinct newsletters on various topics but as of now topics are alternative investment, technology law and energy law updates. 

No Injunction/ Interim Measure Against Infrastructure Projects: Calcutta HC Decides

Golden Edge Engineering Private Limited vs. Bharat Heavy Electricals Limited (18.06.2020 - CALHC) : MANU/WB/0558/2020 is an important decision under the Specific Relief (Amendment) Act, 2018. Petitioner was the contractor of the Owner, BHEL in respect of an Infrastructure Project as defined in Explanation to Section 21A r/w Schedule to the Specific Relief Act, 1963 (as amended) (SRA).

The Petitioner (Contractor), in an agreement entered into in 2017, contended that BHEL had delayed in providing the frontage for the work and in making payments. The Contractor also relied on the lockdown due to Covid19 to argue that delay in performance was beyond the control of the Contractor. The Contractor argued that despite assurances of completion, BHEL had gone ahead with floating a tender for performance of the remaining works that the Contractor was yet to complete. Consequently, the Contractor prayed for an injunction restraining BHEL from withdrawing the work from the Contractor and awarding it through a new tender to some other person.

The court rejected the said contentions on several grounds, some of which are provided below:

• BHEL allowed time to the Contractor to complete the work after the lockdown period but the after the lifting of restrictions, it cannot be said that there has been uncertainty as the availability of manpower. In reality, there has been no migration of workers from the State of Jharkhand, which is the state where the project is located.
• The Contractor could not adhere to the schedule even before the Covid19 pandemic. 
• The prayer granted in the petition was barred by the SRA, as amended. in terms of Sections 41(ha) and 20A. 
• There is no provision in the Tender/ Contract specifically restricting BHEL from proceeding on risk and cost.
• Even if there is a legal injury to the Contractor, the same can be adequately compensated in terms of money. 
• Balance of convenience is in favour of BHEL. As a PSU, if it is prevented from engaging a new contractor in case the existing Contractor is unable to perform, it will lead to a situation where BHEL will be stuck with the non-performing Contractor and substantial time will be wasted and project will come to a standstill in the event BHEL is unable to go ahead with the new tender. 

Comments

Para 42 of the judgment is interesting and important, for it seeks to examine the issues at stake if an injunction is passed. It deserves noting, as it is, in the judgment:

"42. So, the balance of convenience is entirely in favour of the Respondent as a Public Sector Undertaking engaged in power generation ought not to be prevented from engaging a new contractor if the existing contractor is unable to provide the requisite standard of work as the documents on record clearly show that ample opportunities have been provided and are being provided by the respondent to the petitioner to complete their outstanding work as per requisite standards but instead of utilising the same the petitioner intends to secure a monopoly and ensure the Respondent is stuck with the Petitioner in whatever performance and/or quality of work they offer. It is stated and submitted that the entire project has been severely lagging behind the requisite standards and the Respondent's employer i.e. the National Thermal Power Corporation has been constantly reprimanding the Respondent because of the cascading effect the Petitioner's under performance has been having on the entire project. A lot of time will be wasted and the project will come to a standstill in the event the Respondent is unable to go ahead with the New Tender and have a candidate ready to replace the Petitioner in the event of the failure to complete the work as such new tender would have to be conducted post the Petitioners failure."

There are three interesting points in the decision:

• In respect of infrastructure projects, courts will not grant stay in view of the statutory mandate pursuant to the amendments to the SRA.
• Covid19 cannot be used as an excuse in respect of infrastructure projects especially where the Contractor is unable to perform the contract expeditiously;
• Tendering processes in respect of risk and cost contracting can be commenced even before termination, and would not be a ground for granting injunction.  

All the three points made above are significant in the current context. The court, rightly, analysed the importance of not passing stay orders on infrastructure projects. The judgment seems to be in line with the recent legislative mandate and seeks to balance competing interests and further the general principle of specific relief: injunctions will not be passed when damages would be adequate remedy.

However, the ultimate conclusion that: "I am of the opinion that the petitioner would be left with a claim for equitable compensation as there would be no significant prejudice to the petitioner in the event of refusal to grant interim injunction at this stage." is not entirely clear. Was the court indicating that the Petitioner/ Contractor could pursue the remedy of seeking compensation but that no prejudice would be caused to the Contractor if its prayer was refused.

[full disclosure: Till early last year, this blawgger was an employee of BHEL. However, this blawgger was in no way connected to the case or the subject-contract.]

International Arbitration: In the Age of the Technological Revolution - Volume 1 (2020)

The book titled "International Arbitration: In the Age of the Technological Revolution - Volume 1 (2020)" is interesting for two reasons. 

One, the book deals with a unique subject-matter. It deals with the interface between international dispute resolution and technology, and covers topics such as cryptocurrencies, blockchain, and artificial intelligence.  According to the Book Description:

"The first volume of the International Arbitration Collection in the Age of the Technological Revolution addresses the future (and the present) of arbitration, relating it to topics such as compliance, cryptocurrencies, startups, blockchain, and artificial intelligence. Most interestingly, this vision of technological revolution and arbitration is presented by authors from almost every continent, as there are opinions from professionals from Australia, Brazil, Spain, France, India, Portugal, Singapore and Switzerland. Several questions are formulated and answered by the authors in order to allow the reader a better understanding of how technology and arbitration already connected and they will increase their connection.

This is an extremely interesting book for anyone who wants to know more about arbitration, technology, or their interaction."

Two, the book contains a paper titled "Start-Ups & International Dispute Resolution: Challenges & Possible Solutions" penned by this blawgger, which deals with the challenges faced by Start-Ups in engaging with international arbitration. The paper also provides explores various solutions  to the common problems that start-ups face while fighting an international arbitration. Summary of the paper is as below:

"Globalisation as a phenomenon has encaptivated the world in the last part of the 20th century leading to the rise of a global service sector, where services could be offered across national borders. These factors have acted as catalysts in bringing forth a start-up revolution world over. Several start-ups have become great success stories.

The legal services industry world over has changed its approach to cater to start-ups and has adapted itself to the demands of a start-up. Even so, dispute resolution especially in the international sphere, has not been so forthcoming to provide legal services appropriate for start-ups. Start-ups face unique challenges in the context of international commercial dispute resolution. Already strained of funds, a cross-border dispute is a nightmare and might even result in shutting shop for the start-up.

This short paper identifies challenges faced by start-ups in resolving their international commercial disputes and offers possible solutions to these issues. To this end, the paper is structured in the following manner: Part II discusses the concept of a start-up. Different jurisdictions define start-ups differently. Since the scope of the paper is not constricted to a definite jurisdiction or region, start-up is defined in a general manner. Part II addresses the issues faced by start-ups in international dispute resolution, which is the primary focus of this paper. Part III offers possible solutions to these problems. Part IV concludes."

The paper concludes by putting forth the following points:

"Arbitral institutions are the centrepiece of international arbitration and significant reforms in the area have emanated from them. Hence, they should take the lead and formulate rules tailor-made for start-ups. Such rules could define start-ups and provide that in case disputes involved start-ups, certain special provisions such as appointment of sole arbitrator instead of a three member tribunal, documents-only arbitration, etc. would apply, with opt-out mechanisms. 

Internally, start-ups should put in place robust governance mechanisms and internal policies. This will aid them in not only putting forth their case well in a dispute but also ensure better governance. Start-ups should also negotiate with their clients for favourable dispute resolution and confidentiality clauses. Disputes between warring founder partners of a start-up also derail its case in legal proceedings, especially international arbitrations. Suitable systems / agreements should be put in place in consultation with lawyers to address possible future disputes between co-founders. 

All said and done, it is critical for start-ups to realize the importance of getting legal advice. There are umpteen legal issues that could crop up unexpectedly and have disastrous consequences. Therefore, it is crucial to have legal advice, preferably in-house legal counsel, who could also play multiple roles in the organization."