The Insolvency and Bankruptcy Code, 2016 (IBC), since its inception, has, inter alia, been a pivotal legal framework for resolving insolvencies. It provides a clean slate to companies that successfully undergo the Corporate Insolvency Resolution Process (CIRP), allowing them to start anew. However, the hon’ble Madras High Court’s (Madras HC/Court) ruling in the case of The National Sewing Thread Co. Ltd. has brought to light the nuances and limitations of this ‘clean slate’ theory.
The National Sewing Thread Co. Ltd, a company with a rich history in manufacturing, found itself in financial turmoil, leading to its account being declared a non-performing asset (NPA). The lender, seeking to recover the dues, initiated the CIRP against the company. The resolution plan, proposed by the suspended directors/promoters of the company, was approved by the Committee of Creditors (CoC) and sanctioned by the National Company Law Tribunal (NCLT). This approval allowed the erstwhile directors/promoters to regain control of the company post-resolution. Issues arose when the company, under its new management, claimed the clean slate protection to ward off claims from undisclosed creditors. The superintending engineer of TANGEDCO, a creditor, challenged this claim, leading to a legal battle that culminated in the Madras High Court’s landmark decision.
The Madars HC analysed the intent and provisions of the IBC, particularly the concept of the clean slate and observed that while the IBC aims to facilitate the resolution of corporate debtors and maximize value for stakeholders, it does not condone fraudulent conduct or the suppression of information. The Court further emphasized that the clean slate protection is contingent upon a complete and honest disclosure of all creditors during the CIRP. It is not an instrument for erstwhile directors or promoters to escape liabilities by concealing debts.
The ruling clarified that the clean slate protection applies unequivocally when there is a change in the management or control of the corporate debtor. However, in cases where the erstwhile management regains control post-resolution, the protection is conditional. The Court held that the clean slate can only be claimed if the resolution plan has been transparent and inclusive of all creditors. If any creditor has been left out intentionally, the clean slate protection does not apply, and the company remains liable for such undisclosed debts.
The Madras HC also put in some observations in the ruling and urged the Parliament to ponder over these, including evaluation of the working efficiency of the IBC by way of an impact assessment study, protecting the statutory dues and other commercial dues payable to government run companies or corporations which have the potential of adding to the financial burden of the common man, and to assess and find solutions as to how IBC could be manipulated to defeat the interests of the undisclosed creditors of the corporate debtors.
The Court’s decision has significant implications for the IBC framework. It reinforces the need for transparency and full disclosure in the resolution process. The ruling serves as a cautionary tale for resolution applicants, especially those who are part of the erstwhile management, to ensure that their resolution plans are comprehensive and do not omit any creditors. It also provides a safeguard for undisclosed creditors, ensuring that their rights are not trampled in the quest for a fresh start. The judgment has been lauded for its balanced approach, protecting the interests of all stakeholders involved in the insolvency process. It upholds the sanctity of the IBC while preventing its misuse. The decision is a step towards refining the insolvency resolution process, making it more robust and equitable.