Insolvency & BankruptcyAmendment of Section 31 of IBC is Retrospective in Nature

April 13, 20210

Amendment of Section 31 of IBC is Retrospective in Nature

In the matter of Ghanashyam Mishra and Sons Private Ltd v. Edelweiss Asset Reconstruction Company & Ors., Civil Appeal No. 8129 of 2019, a bench of Supreme Court comprising of Justice R.F.Nariman, Justice B.R.Gavai & Justice Hrishikesh Roy held that an amendment in 2019 in Section 31 of IBC is declaratory and clarificatory in nature.

Decided 

13th April,2021

Issues

The issues dealt by the bench are as under:

(i) whether any creditor including the Central Government, State Government or any   local   authority   is   bound   by   the Resolution Plan once it is approved by an adjudicating   authority   under   sub­section (1)   of   Section   31   of   the   Insolvency   and Bankruptcy   Code,   2016   (hereinafter referred to as ‘I&B Code’)?

(ii) whether the amendment to Section 31   by   Section   7   of   Act   26   of   2019   is clarificatory/declaratory  or  substantive   in nature?

(iii) whether after approval of resolution plan   by   the  Adjudicating   Authority  a creditor including the Central Government, State Government or any local authority is entitled   to   initiate   any   proceedings   for recovery   of   any   of   the   dues   from   the Corporate Debtor, which are not a part of the   Resolution   Plan   approved   by   the adjudicating authority?

 

Observation on Code

“54. It could thus be seen, that one of the dominant objects of I&B Code is to see to it, that an attempt has to be made to revive the Corporate Debtor and make it a running concern….” 

“71. Perusal of the SOR would reveal, that one of the prime   objects   of   I&B   Code   was   to   provide   for  implementation of insolvency resolution process in a time bound manner for maximisation of value of assets in order to balance the interests of all stakeholders. …”

( SOR*Statement of Objects and Reasons )

 

Legislative Intent of Amendment of Section 31

It was noticed, that in some cases there was extensive litigation causing   undue   delays   resultantly   hampering   the   value maximisation.  It was also found necessary to ensure, that all creditors are treated fairly.

Therefore in view of the various difficulties faced and in order to fill the critical gaps in the corporate insolvency framework, it was necessary to amend certain provisions of the I&B Code.   

Clause (f) of para 3 of the SOR of the Insolvency and Bankruptcy Code (Amendment) Bill, 2019 would amply make it clear, that the legislative intent in amending sub­section (1) of Section 31 of I&B Code was to clarify, that the resolution plan approved by the Adjudicating Authority 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.  

 

Why Amendment was made?

The Court relied upon the matter of  Union  of   India  and others  vs.  Martin  Lottery  Agencies  Ltd.(2009) 12 SCC 209 to assess the reason of amendment and held as under:

76. It could thus be seen, that the speech made by Hon’ble Finance Minister while explaining the amendment could be referred to for ascertaining what was the reason for moving the Bill.  The speech can be used for finding out:

(1)  what   were   the   circumstances   in   which   the amendment was carried out; 

(2)  what was the mischief for which the unamended section did not provide; and 

(3)  what   was   sought   to   be   remedied   by   amended enactment.  

 

77.It is clear, that the mischief, which was noticed prior to amendment of Section 31 of I&B 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 NCLT; 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 Adjudicating Authority, 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.   

82. It could thus be seen, that what is material is, to ascertain   the   legislative   intent.     If   legislature   by   an amendment   supplies   an   obvious   omission   in   a   former statute or explains a former statute, the subsequent statute has a relation back to the time when the prior Act was passed.

 

The Court further relied upon  the   case   of  B.K.   Educational   Services Private Limited vs. Parag Gupta and Associates (2019) 11 SCC 633, as to whether the 2018 amendment which inserted Section 238A to the I&B Code was clarificatory in nature or not.

26.  In the present case also, it is clear that   the   amendment   of   Section   238­A would not serve its object unless it is construed as being retrospective, as otherwise,   applications   seeking   to   resurrect time ­barred claims would have to be allowed, not being governed by the law of limitation.

27. We may also refer to a recent decision of   this   Court   in SBI v. V.   Ramakrishnan [SBI v. V.   Ramakrishnan,   (2018)   17 SCC 394] , where this Court, after referring to the selfsame Insolvency Law Committee Report, held that the amendment made to Section 14 of the Code, in which the moratorium prescribed by Section 14 was held not to apply to guarantors, was held to be clarificatory, and therefore, retrospective in nature, the object being that an overbroad interpretation of Section 14 ought to be set at rest by clarifying that this was never the intention of Section 14 from the very inception.

 

Other Stakeholder

The Court went on to analyse the expression ” other stakeholders” as below

87.We   have   no   hesitation   to   say,   that   the   word “other   stakeholders”   would   squarely   cover   the   Central Government, any State Government or any local authorities. The   legislature,   noticing   that   on   account   of   obvious omission, certain tax authorities were not abiding by the mandate of I&B Code and continuing with the proceedings, has brought out the 2019 amendment so as to cure the said mischief.  We therefore hold, that the 2019 amendment is declaratory   and   clarificatory   in   nature   and   therefore retrospective in operation.

Analysis of Creditor

The Court has also analysed the term “Creditor ” and held that

90.   “Creditor” therefore has been defined to mean ‘any person to whom a debt is owed and includes a financial creditor,   an   operational   creditor,   a   secured   creditor,   an unsecured creditor and a decree ­holder’.   “

Operational creditor” has been defined to mean a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

Operational debt” has been defined to mean a claim   in   respect   of   the   provision   of   goods   or   services including employment or a debt in respect of the payment 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.

Conclusion

The questions framed by the Court was concluded as under:

(i) That once a resolution plan is duly approved by   the   Adjudicating   Authority   under   subsection   (1)   of   Section   31,   the   claims   as provided in the resolution plan shall stand frozen and will be 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.   On the date of approval of resolution   plan   by   the   Adjudicating Authority, all such claims, which are not a part   of   resolution   plan,   shall   stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;

(ii) 2019 amendment to Section 31 of the I&B Code   is   clarificatory   and   declaratory   in nature and therefore will be effective from the date on which I&B Code has come into effect;

(iii) Consequently   all   the   dues   including   the statutory   dues   owed   to   the   Central Government, 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 Adjudicating   Authority  grants   its   approval under Section 31 could be continued.

 

Conclusion in Other Appeal

In other tagged appeal, the Court observed that

130. In the foregoing paragraphs, we have held, that 2019 amendment to Section 31 of I&B Code is clarificatory and  declaratory  in   nature   and   therefore   will   have   a retrospective operation.  As such, when the resolution plan is approved by NCLT, the claims, which are not part of the resolution   plan,   shall   stand   extinguished   and   the proceedings related thereto shall stand terminated.   Since the subject matter of the petition are the proceedings, which relate to the claims of the respondents prior to the approval of the plan, in the light of the view taken by us, the same cannot be continued.   Equally the claims, which are not part of the resolution plan, shall stand extinguished.   

 

AMLEGALS Remarks

This decision will put rest to many frivolous litigations which are going rounds in various forums including High Courts due to various post Resolution demands from authorities et al.

The Court analysed the intent and purport of amendment in Section 31 of the Code and held that it had been done to remove the unintended mischief in the code and hence it is clarificatory and declaratory in nature with retrospective applicability from the date it was introduced in the Code itself.

The Court also held that 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 IBC.

 

Leave a Reply

Your email address will not be published. Required fields are marked *

© 2020-21 AMLEGALS Law Firm in Ahmedabad, Mumbai, Kolkata, New Delhi, Bengaluru for IBC, GST, Arbitration, Contract, Due Diligence, Corporate Laws, IPR, White Collar Crime, Litigation & Startup Advisory, Legal Advisory.

 

Disclaimer & Confirmation As per the rules of the Bar Council of India, law firms are not permitted to solicit work and advertise. By clicking on the “I AGREE” button below, user acknowledges the following:
    • there has been no advertisements, personal communication, solicitation, invitation or inducement of any sort whatsoever from us or any of our members to solicit any work through this website;
    • user wishes to gain more information about AMLEGALS and its attorneys for his/her own information and use;
  • the information about us is provided to the user on his/her specific request and any information obtained or materials downloaded from this website is completely at their own volition and any transmission, receipt or use of this site does not create any lawyer-client relationship; and that
  • We are not responsible for any reliance that a user places on such information and shall not be liable for any loss or damage caused due to any inaccuracy in or exclusion of any information, or its interpretation thereof.
However, the user is advised to confirm the veracity of the same from independent and expert sources.