Analyzing NCLAT’s Affirmation in Damodar Valley Corporation v. Mackeil Ispat and Forging Limited: A Win for the Clean Slate Doctrine or a Legal Dilemma?

[Suryansh and Yash are students at Hidayatullah National Law University.]

Recently, the National Company Law Appellate Tribunal (NCLAT) Delhi in Damodar Valley Corporation v. Mackeil Ispat and Forging Limited and Another (Case) has held that approved resolution plans create permanent extinction of all unfulfilled payments and claims from the time before corporate insolvency resolution process (CIRP) initiation. The resolution process does not affect the permanent extinguishment of all outstanding claims independent of their resolution admission status. The legal decision supports the core purpose of the Insolvency and Bankruptcy Code 2016 (IBC), i.e., to establish a fresh start for corporate debtors alongside a resolution framework.

NCLAT has established that successful resolution applicants (SRA) must only pay pre-CIRP dues according to the terms outlined in the accepted resolution plan. NCLAT has protected resolution process integrity by stopping new management from bearing excessive financial responsibility which paves the way for debtors to easily revive operations. It has strengthened investor confidence through its decision that all claims must respect the boundaries set in resolution plans since it reinforces both the IBC structure and the insolvency resolution process. Since, the judgment concerns the treatment of pre-CIRP dues under the India’s IBC framework, it becomes imperative to discuss the same.

Through the means of this article, the authors analyze the Case in three substantial parts. Part I delves into the factual matrix and decision in the Case. Part II critically analyses the Case, with a special focus on the clean slate doctrine. Part III proffers authors’ suggestions to create a stronger insolvency framework. 

Factual Matrix of the Case

The major question in the Case was whether the pre-CIRP dues can be sought post approval of Resolution Plan (Plan) under the IBC. The Power Purchase Agreement in respect of industrial electricity supply was with Damodar Valley Corporation since 14 December 2009 and was executed by the corporate debtor, Mackeil Ispat and Forging Limited. The National Company Law Tribunal (NCLT) admitted an application under Section 7 filed by the State Bank of India against the respondent and the CIRP was commenced effective from 3 February 2020. The appellant disconnected electricity on 19 February 2020, and on 19 October 2020, the NCLT directed the appellant to restore electricity within 7 days of payment of consumption charges for the moratorium period. 

The respondent, on 13 May 2022, sought a refund of INR 1,88,02,539 on the ground that the same had been wrongly recovered of pre-CIRP dues and delayed payment charges. The NCLT, however, declared in favour of the respondent and directed the appellant to refund the amount and to not disconnect power to them without due process. The appellant appealed before the NCLAT. However, the NCLAT upheld the NLCT’s order, reaffirming that after the approval of the Plan, all unaccounted claims within it stand extinguished.

Cleansing the Slate, Reviving Enterprises: NCLAT’s Harmonious Verdict

In the Case, the NLCAT reinforces the “clean slate doctrine” enshrined under Section 31(1) of the IBC, which states that once a resolution plan is approved, all pre-CIRP dues not accounted within such plan and stand extinguished. The Case is in consonance with the ruling of the Supreme Court of India (SC) in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, where it held that after the approval of a resolution plan, all claims are considered to be settled and no claims outside such plan can be pursued by the creditors. Moreover, in the case of Swiss Ribbons Private Limited v. Union of India, the SC emphasized the prioritization of resolution over liquidation under the IBC, thus providing predictability in CIRP. These precedents strengthen investor confidence, enhance the efficiency, sanctity, and integrity of the CIRP, and uphold the IBC’s objective of maximizing the value of distressed assets. 

Additionally, the judgment confirms the legal standing of the IBC as supreme and prevailing over other laws with respect to matters of debt resolution and insolvency. This was reaffirmed from Alchemist Asset Reconstruction Company Limited v. Hotel Gaudavan Private Limited, wherein the moratorium provisions under Section 14 checked parallel proceedings under other laws. Further, the NCLAT, in the case of Monnet Ispat and Energy Limited v. Union of India, emphasized that utility providers cannot hamper the essential services by making a demand of pre-CIRP dues, thus reinforcing that the IBC prevails over the Electricity Act 2003. Through these cases, courts and tribunals recognize how the IBC operates as one cohesive insolvency framework to eliminate breakdowns and facilitate swift resolution procedures above other laws. 

The NCLAT’s 3-member bench affirmed that the Section 60(5)(c) of IBC provides jurisdiction to NCLT relating to matters relating to the Corporate Debtor’s insolvency resolution or liquidation. Accordingly, in this case, the NCLT acted well within its jurisdiction, as any matter concerning the insolvency resolution of the respondent, being the corporate debtor, falls squarely within its exclusive purview under the IBC. Thus, the judgement is in consonance with the statutory provisions under the IBC. The SC in the case of Gujarat Urja Vikas Nigam Limited v. Amit Gupta upheld that IBC needs a unified window system which would stop multiple proceedings from disrupting the debtor’s recovery process. Moreover, in Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited, it was reiterated that once a resolution plan is approved, the process attains finality, preventing operational creditors, including state entities, from asserting fresh claims thereafter.

Rewriting the Rules of Insolvency: Balancing Debt Extinguishment with Fairness

Firstly, the IBC lacks a transparent mechanism to address pre-CIRP dues of essential service providers such as those of electricity, water, etc. under the clean slate doctrine. It simply provides for operational creditors and a dearth of security interests, making them susceptible to extinguishment. To resolve this issue, the Indian framework can borrow from the Insolvency Act 1986 of the United Kingdom and Title 11 of the United States Code, where preferential treatment is provided to essential services. A plausible solution could be introducing ‘super-priority utility claims’, that provides for the safeguarding of essential services and a priority should be given to such matters to ensure greater legal fairness and certainty. 

Further, the extinguishment of pre-CIRP dues has a huge implication on investors’ confidence. While resolution applicants are protected under IBC, the retrospective annulment of debts might deter essential service providers from engaging with distressed companies in the future. To ameliorate this mechanism, a more nuanced approach could be introducing a ‘tiered extinguishment mechanism’, which would include several tiers such as on the basis of structured settlement mechanism, partial extinguishment, and full extinguishments. Such a mechanism will improve the forecasting accuracy of CIRP results thus, establishing greater trust between investors and utility service providers.

Second, even in the presence of the clean slate doctrine, the creditors most often move to courts against the SRA post approval of the Plan, insisting that their pre-CIRP dues were not considered adequately. This, in turn, questions the integrity of the doctrine, underestimates the resolution process and harms investor confidence. In the case of India Resurgence ARC v. Amit Metaliks, the SC reiterated that these continuous instances of litigation question the sanctity of tribunals’ judgements. To address this, the IBC should work upon to introduce ‘Non-Retroactivity Clause’, which would legally bar fresh litigation against the SRA for pre-CIRP dues. However, the courts can entertain such cases if there are instances of fraud or misrepresentation. Such a clause would prevent creditors from circumventing IBC’s provisions, thus enhancing its effectiveness.

Third, the IBC faces a major obstacle because undisclosed contingent liabilities become apparent post-CIRP. During the resolution process, the SRA remains unaware of these liabilities which create financial instability and disrupt business operations. The case of Rainbow Papers Limited v. State Tax Officer has shown that unknown obligations from statute create challenges for the clean slate doctrine after resolution procedures. Under Section 31(1) of the IBC the resolution of all claims leads to finality but there are no clear rules about contingent liabilities.

A ‘post-CIRP contingent liability fund’ (PCLF) needs establishment to require resolution applicants to reserve specific CIRP funds for handling unexpected claims. A PCLF would be managed by Insolvency and Bankruptcy Board of India to avoid improper fund usage. The proposed mechanism will shield SRAs from unexpected financial disruptions without denying creditors their claim rights through a dedicated fund structure.

Conclusion 

The NCLAT decision reiterates the core IBC principle of clean slate doctrine which allows corporate debtors to wipe out pre-CIRP debts. It boosts investor confidence and smooths the restructuring of operational structure. However, CIRP clarity cancels pre-CIRP debts, but it harms essential service providers and leaves financial uncertainties. 

A regulatory shift is needed. ‘Super-priority utility claims’ would introduce vital services protection, and balance would be maintained through a tiered debt resolution system. A non-retroactivity clause can protect resolution applicants from post settlement litigation. Moreover, a strategically funded PCLF would guard against unforeseen claims and improve CIRP performance. By aligning stakeholders and using insolvency hurdles as an opportunity to renew the corporate, this future focused framework ensures that insolvency is prevented.