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Legal Oasis: Bombay High Court affirms Clean Slate Principle in Resolution Plan Approval

Introduction

The Hon’ble Bombay High Court (‘BHC’), in its recent judgment in Shirdi Industries Ltd. v. Art Studio[i], addressed an interim application that sought to set aside a warrant of attachment in respect of the current account held in the name of the Applicant. The BHC recognized the finality of the resolution plan (‘Plan’) approved by the National Company Law Tribunal (‘NCLT’), Mumbai Bench, under which the Applicant was to pay 15% of the Respondent’s claim, an amount approved during the corporate insolvency resolution process (‘CIRP’). This judgement reinforces the principles of res judicata with respect to the approved Plan and serves as a potent reminder to companies undergoing CIRP of their absolute obligations to fulfil their financial commitments towards creditors.

Brief Facts

  • A dispute arose from a previous petition filed by the Respondent seeking recovery of Rs. 2,87,500. Subsequently, the Applicant underwent the CIRP under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) during which the NCLT approved the Plan that entitled the Respondent to receive 15% of the claimed amount.

  • Despite the approval of the Plan, the Respondent sought payment directly from the Applicant, leading to the filing of an execution application before the BHC to recover Rs. 8,73,159/-. The Applicant contested the execution application, arguing that the amount had already been settled in accordance with the approved Plan.

Held

  • The BHC ruled in favour of the Applicant by setting aside the warrant of attachment on the current account. It was held that the NCLT had rightly dismissed the Respondent’s application which sought to declare the Plan as non-binding, thereby reinforcing the binding nature of approved Plans.

  • The BHC also observed that the Respondent had not filed an appeal against the NCLT’s decision and that the period for doing so had expired. This indicated that the order approving the plan had reached finality.

  • In analysing its judgment in the case of Ghanshyam Mishra and Sons Private Limited through the Authorised Signatory v. Edelweiss Asset Reconstruction Company Limited[ii], the BHC asserted that resolution applicants cannot be held liable for pre-resolution liabilities once the Plan is approved under s. 31 of the IBC.

  • The BHC further upheld that all liabilities payable to creditors stand discharged upon approval of the Plan, provided appropriate provisions have been made for such liabilities. It was held that the Applicant had fulfilled its obligations under the approved Plan by making payments totalling Rs. 62,539 in accordance with the prescribed schedule.

Analysis

The BHC’s decision in this case underscores the paramount importance of adhering to approved Plans in insolvency proceedings. By setting aside the warrant of attachment and affirming the binding nature of Plans approved by the NCLT, the BHC protected the resolution applicants from being saddled with pre-resolution liabilities, thus promoting the effectiveness of the CIRP under the IBC. This decision not only safeguards the interests of stakeholders but also enhances investor confidence by providing clarity and certainty to the resolution process, thereby facilitating the expeditious resolution of distressed assets, and fostering economic revitalization.

Further, this judgment clarifies the legal obligations incumbent upon all stakeholders and the discharge of liabilities upon the approval of a Plan, in accordance with the ‘clean slate’ principle inherent in the insolvency regime. By emphasizing the conclusive effect of NCLT’s approval and reinforcing the sanctity of approved Plans, the BHC’s ruling promotes the stability and integrity of the corporate insolvency framework. This not only streamlines the resolution process but also mitigates uncertainties, facilitating a conducive environment for the preservation of the corporate ecosystem and the broader objectives of economic rehabilitation and investor confidence.


End Notes

[i] 2024 SCC OnLine Bom 888

[ii] (2021) 9 SCC 657



Authored by Siddharth Jha, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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