The more things change, the more they remain the same.
So goes the famous saying attributed to the French writer Jean Baptiste Alphonse Karr. The saying may be old and well-worn out, touching various facets of our lives. But we expected it not to affect our legal systems. The Doctrine of Clean Slate may be one of the lesser- known legal doctrines; but that does not make it any less important. Lately, the legal luminaries had a reason to dive deep into this doctrine in the context of the Insolvency and Bankruptcy Code (IBC for short) an Act that is
currently in a formative stage having been implemented in 2016. One of the cardinal principles behind IBC is that everyone has a right to make mistakes and also has a right to a fresh start if he or she makes a mistake in business.
The doctrine of “clean slate” in essence implies that once a Resolution Plan is accepted by the Committee of Creditors and subsequently obtains the stamp approval from an Adjudicating Authority in a debt resolution process the past of a debtor, gory or otherwise, gets buried then and there. The business gets a fresh lease of life without being burdened by its past. The genesis of this principle is found in Section 31(1) of IBC which stipulates thus: “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”. This doctrine of clean slate devoid of legal jargons and in simple English implies that once the Resolution Plan is accepted as per this Section no claim, satisfied or dissatisfied would Thus, this Section provides the much-needed certainty to IBC thereby also outlining the ’clean slate’ principle. That was not to be in practice, as subsequent developments showed us. In one sense, such a situation was only to be expected in IBC, which even as of writing this, is still an evolving Code facilitating resurrection of failed businesses under new ownership
and management. Such managements restart the businesses with a clean slate unburdened by the past.
Law being law, is an ass as the subsequent evolution of jurisprudence on this has revealed. The Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Others held that “A successful resolution applicant cannot suddenly be faced with “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 takes over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional 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. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove.” The stamp of approval to the doctrine of clean slate in IBC was thus given a formal confirmation by the Supreme Court in this case. Recently, the Hon’ble Supreme Court in Ruchi Soya Industries & Ors. vs. Union of India & Others. reiterated that claims which are not submitted to the Resolution Personal and not included in the Resolution Plan cannot survive. Unfortunately, the matter did not end there, as subsequent events show.
In the unending saga of searching for finality of a CIRP a fresh Chapter was written by the Supreme Court when it gave its verdict in Fourth Dimension Solutions Ltd. vs. Ricoh India Ltd. & Others. In this case the apex court in fact validated continuation of arbitration proceedings between the Corporate Debtor and the Creditor even after the approval of the Resolution Plan. This was done on the basis of a note given by the Resolution Professional in the Resolution Plan to the effect that “The claims pertaining to FDSL have been disputed and are proceedings before the Arbitrators/Appellate Authorities. The liability is subjected to outcome of these proceedings.” Thereafter the Resolution Plan got duly approved though definite amounts were not specified against the claims made by the concerned Creditors. The Supreme Court disposed of this case with an Order: “In light of this factual position, in our opinion, the appeal needs to be disposed of by restating the said facts with liberty to the parties to pursue all contentions available to them in the proceedings pending at the relevant time, if any. It is stated that some arbitration proceedings were pending between the parties. If so, all contentions available to both sides be decided in the said proceedings on its own merits in accordance with law”. This verdict added a new dimension to the evolving discussions on the subject by distinguishing the position between crystalised claims against the Corporate Debtor and others. While doing so, the Court allowed claims that attained finality subsequent to the commencement of CIRP. This Order meant that for a prospective buyer the clean slate is not that clean, after all.
The judgment in the case of Fourth Dimension above seems to be in conflict with the earlier decisions of the Supreme Court on the doctrine of ‘clean slate’. In the past the Supreme Court had consistently held that all claims which are pending a final decision stand extinguished once the Resolution Plan is approved. This decision from the apex Court gives the Corporate Debtor a ‘soiled start’. This decision appears to be against Sec.31 of the Code. This is also against the decision of the Supreme Court itself in Ghanshyam Mishra (above)
It is possible that the last word on the subject has not yet been written. As of now the principles enunciated in Ghanshyam Mishra seem to find favour with various Benches of the NCLT. The Kochi Bench in Bijoy Prabhakaran Pulipra vs Tahsildar Kanayannur expresses its frustration on the ever-evolving nature of the new legislation thus: “If time and again new claims pop up, then it would eventually become impossible to revive the Corporate Debtor in a timely manner.”
Businesses, by nature, are fraught with its own sets of challenges. Some entrepreneurships will succeed, and some others are bound to fail. Neither every failure in business is a result of fraud nor every entrepreneur is a cheat. More importantly a failed entrepreneur should get another opportunity redeem himself. To provide that opportunity is the duty of the society. But at the same time another entrepreneur should not be called upon to shoulder undue burden of these debts. And that is the duty of the legal system. Under these circumstances the doctrine of clean slate is not just a slogan but a necessity. For the resolution process to be successful, it is imperative that the legal system should provide for certainty and commercial expediency behind every action. One hopes that the principles behind the doctrine of clean slate is not sacrificed for all times to come. If that happens it will then be a classic case of operation successful, patient dead.
***
