The Apex Court’s interpretation of Section 31 of the IBC under the clean slate doctrine has been reinforced in numerous cases, dismissing applications from creditors who missed filing their claims within the prescribed timelines.[2] In Sirpur Paper Mills Limited Vs. I.K. Merchants Pvt. Ltd AIR 2021 Cal 222, even a decreed claim under an arbitral award was extinguished due to its non-filing in the CIR Process. Thus, a claim whether sub-judice or crystalised in the form of a decree or award, does not survive post CIR Process in terms of the provisions of Section 31 of the IBC. Thus, any claim, whether sub-judice or crystallised, does not survive post CIR Process under the provisions of Section 31 of the IBC. There is growing clamour, perhaps righly so, that the claims reflecting in the books of a corporate debtor should be provided for in a resolution plan and in one such case, the appellate tribunal has even ordered successful resolution applicant to file an addendum to a resolution plan to deal with unfiled claims of homebuyers.[3]

Survival of Counter-Claim of Corporate Debtor

Under the Civil Procedure Code, 1908 (“CPC”)[4], a counter-claim filed by a defendant in a suit is in the nature of a cross-suit and by a statutory command even if the suit is dismissed, counter-claim remains alive for adjudication[5]. Thus, applying the said principle, omission of a creditor to file its claim before the resolution professional in the CIR Process seals the fate of its claim against the corporate debtor, whereas, a counter-claim filed by the corporate debtor continues against such creditor. The continuation of a counter-claim being pursued (filed by a corporate debtor) corresponding to an extinguished claim may be inequitable to a creditor, however, in the larger scheme of things, it is to be borne in mind that the success of IBC depends on finality of a resolution plan. In the interest of timely culmination of the CIR Process and implementation of a resolution plan, the creditors who have not filed their claims in the CIR Process within the prescribed timelines cannot be subsequently entertained.

Recent developments and case laws

While the clean slate doctrine provides a clear framework for resolving insolvency, its application has raised several nuanced issues. One of the primary concerns is the treatment of contingent and unliquidated claims. The courts have held that such claims must also be filed during the CIR Process, failing which they are extinguished. This places a significant burden on the parties to monitor creditworthiness of their counter-parties, and anticipate and file all possible claims within the stipulated timeframe. Even after filing of the claim, the fate of the operational creditors under the IBC has been dismal and the median recovery for operational creditors have been calculated at 6% and 11%.[6]

Whether a dispute addressed by a resolution plan arbitrable?

In the case involving Indian Oil Corporation Ltd. (“IOCL”) and Essar Steel India Ltd. (“ESIL”)[7], IOCL issued a demand notice to ESIL before its admission to CIR Process in April 2017 and after receiving no payment, invoked arbitration in July 2017 as per their Gas Supply Agreement (“GSA”). Concurrently, in August 2017, the National Company Law Tribunal (“NCLT”) admitted insolvency petitions against ESIL filed by State Bank of India and Standard Chartered Bank triggering moratorium on proceedings initiated against ESIL. IOCL submitted a substantial claim of Rs. 3762.58 Crore during the CIR Process, but the Resolution Professional (“RP”) admitted the same only for a notional amount of Rs. 1 – due to it being a disputed claim. Post completion of the CIR Process, IOCL again issued a notice in August 2021 demanding Rs. 8772.30 Crore under the GSA, eventually leading to a petition seeking initiation of arbitration. The Delhi High Court was approached by IOCL seeking appointment of arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. In this case, the Delhi High Court followed the clean slate doctrine and held that the approval of the resolution plan for ESIL extinguished all IOCL’s claims, rendering the disputes non-arbitrable and upheld the notional treatment provided to IOCL’s claim in the resolution plan. In an appeal before the Supreme Court filed by IOCL, both the parties by consent agreed to refer the dispute to an arbitrator and in light of such development, the judgment of the Delhi High Court following the clean slate doctrine was set aside by the Supreme Court.[8] All the rights and contentions of the parties, including on the question of arbitrability, were kept open by the Supreme Court. The question of whether a claim addressed by a resolution plan remains arbitrable is therefore yet to be definitively resolved.

Can set-off be claimed during CIR Process?

The Apex Court, in Bharti Airtel Ltd. v. Vijaykumar V. Iyer, 2024 SCC OnLine SC 4, in a dispute dealing with purchase of the right to use the spectrum between Airtel entities and Aircel entities (undergoing CIR Process) has held that generally the set-off between a corporate debtor and its creditor cannot be applied during the CIR Process. In this case, the Apex Court carved two exceptions to the above general rule: (1) contractual set-off is allowed if the right existed before or on the date of CIR Process commencement, as the moratorium does not alter contractual terms; (2) equitable set-off is permitted when claims and counterclaims are linked by one or more transactions, making it inequitable for the debtor to pay without adjustment. In the facts of the case, the court rejected Airtel’s plea to apply set-off as the amounts claimed by Airtel had become payable post-CIR Process initiation.

This judgment provides some relief for counter-claimants to a corporate debtor undergoing CIR Process. It ensures that where there are mutual obligations or counterclaims involving the corporate debtor, those creditors who had set-off rights before the commencement of the CIR Process are not unjustly disadvantaged by the moratorium imposed under the IBC for recovery actions. By carving out these exceptions, the Hon’ble Supreme Court has preserved fairness for creditors who might otherwise be left with minimal or no recovery under a resolution plan.

Can tax demands be revived post successful conclusion of CIR Process?

It has been authoritatively held by the Apex Court in Ghanshyam Mishra that approved resolution plan is binding on the Central Government, State Government and local authorities, including the tax authorities. Despite such clear judgments, a pertinent example highlighting the complexities of the clean slate doctrine around tax laws is the case of Tata Steel Limited vs. State of UP[9]. In this case, Tata Steel Limited (“Tata Steel“) using its Special Purpose Vehicle Bamnipal Steel Limited, acquired Bhushan Steel Limited (“BSL“) which was later renamed as Tata Steel BSL Limited (“TSBL“). Post conclusion of CIR Process, TSBL was served with tax demands under VAT, Sales Tax, Entry Tax statutes of the state of Uttar Pradesh for the tax demands pertaining to BSL for assessment period prior to the acquisition of BSL under IBC. In 2021, TSBL was merged with Tata Steel. These tax demands for whichclaim was filed in the CIR Process of BSL were challenged by Tata Steel before the Allahabad High Court.

Before the High Court, among other things, the State argued that Tata Steel is getting enriched unjustly by avoiding tax liabilities of BSL. In response, Tata Steel argued that since the contention of unjust enrichment was not part of demand notices, it cannot be argued in the writ petition challenging the said demand notices. Relying on the precedents of Ghanshyam Mishraand Essar Steel,the High Court dismissed the tax demands, however, kept the question of unjust enrichment open as it was neither the issue in the assessment orders nor the impugned notices. The High Court held that such disputed question of facts cannot be adjudicated in writ petitions filed under Article 226 of the Constitution of India.[10]

The judgment of the High Court was appealed by way of a Special Leave Petition (“SLP”) by Tata Steel. The Hon’ble Supreme Court refused to interfere with the High Court’s decision and left the issue open to be decided under applicable law on its own merits.

Unjust enrichment may occur when a corporate debtor collected taxes from its customers but fails to pay them to the government, instead transfers these funds to the SRA or lenders (as the case may be) under the resolution plan. This situation can be unfair to both the government and the customers. The Supreme Court’s decision to leave the question of unjust enrichment open indicates that this issue requires a further detailed judicial examination and accordingly, the tax disputes of a resolved entity may be examined from this perspective.

Conclusion

The clean slate doctrine has been instrumental in achieving the primary objective of the IBC – the revival of corporate debtors. By ensuring that a resolution applicant takes over a debtor free from past liabilities, the doctrine promotes investor confidence and facilitates effective insolvency resolutions. However, its rigid application has also highlighted the need for a balanced approach that considers the interests of all stakeholders.

Future legal and policy developments should focus on refining the application of the clean slate doctrine, addressing its limitations, and ensuring a fair and transparent insolvency process. This includes clarifying the interplay between the IBC and other laws, enhancing creditor communication, and possibly revising the procedural aspects of claim filing to mandate that all liabilities reflecting in the records of a corporate debtor will need to be verified as claims. Through collaborative efforts and a commitment to procedural fairness, the clean slate doctrine can continue to play a pivotal role in revitalising distressed assets and promoting economic growth in India.

Footnote

[1] Section 3(6) of the Insolvency and Bankruptcy Code (IBC), 2016, defines “claim” as follows:

“claim” means— (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.

[2]  Refer Shree Sidhivinayak Cotspin Private Limited & Anr. Vs. RP of Maruti Cotex, NCLAT in Company Appeal (AT) (Insolvency) No. 694 of 2020, Order dated 20 August 2020; Dewan Housing Finance Corporation Ltd Vs. Mr. Neehal Mahamulal Pathan (RP of Udaipur Entertainment World Pvt. Ltd & Anr.), NCLT Mumbai in I.A No. 2544 of 2021 in CP (IB) No. 1396 of 2020, Order dated 24 February 2022.

[3] Puneet Kaur Vs. K V Developers Pvt. Ltd and Ors. Company Appeal (AT) (Insolvency) Nos. 390, 391, 392, 393 & 394 of 2022, Order dated 01 June 2022.

[4] Refer Order VIII Rule 6A to Rule 6D of Civil Procedure Code, 1908.

[5] Rajni Rani v. Khairati Lal, (2015) 2 SCC 682.

[6] Mohan, M.P. Ram, and Balagopal Gopalakrishnan. Effectiveness of the Resolution Process: Firm Outcomes in the Post-IBC Period. Indian Institute of Management Ahmedabad, August 2023; and https://insolvencytracker.in/2024/07/14/median-recovery-for-operational-creditors-only-6-under-ibc-report/

[7] Indian Oil Corporation Ltd. Vs. Arcelor Mittal Nippon Steel India Ltd. Neutral Citation No. 2023:DHC:7365.

[8] Civil Appeal No 1661 of 2024, Order dated 12 February 2024.

[9] Tata Steel Limited vs State of UP and Ors. SLP (C) No(s). 20661-20667/2022 order dated 05 December 2022

[10] Order dated 04 July 2022 in Writ Tax No. 728 of 2020.

This article was originally published in Mondaq on 5 February 2025 Co-written by: Misha, Partner; Abhilash Chaudhary, Principal Associate; Mahima Sareen, Principal Associate. Click here for original article

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