Crown debts not forming part of approved resolution plan are extinguished: Karnataka High Court

A Division Bench of the Karnataka High Court comprising Justices B.V. Nagarathna and Hanchate Sanjeevkumar in the matter of Union of India and Others v. Ruchi Soya Industries Limited, REED 2021 Kant 05522, held that if the departments of Central or State Governments do not file an application or participate in the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC) then their claims get extinguished automatically.

The National Company Law Tribunal, Mumbai (NCLT) vide order dated 8 December 2017 read with 15 December 2017 initiated CIRP against M/s Ruchi Soya Industries Ltd. (Respondent). Thereafter, Interim Resolution Professional on 21 December 2017 issued public notice inviting claims from all the creditors of the Respondent. However, the Union of India and Department of Customs (Respondents) did not file claims in the said proceedings. Subsequently, a consortium of Patanjali group submitted a Resolution Plan which was approved by the Committee of Creditors (CoC). Later, the NCLT through orders dated 24 July 2019 and 4 September 2019 also approved the said Resolution Plan under section 31 of IBC.

In the present appeal filed by Appellants, seeking recovery of its dues from year 2015, the Respondent argued that pursuant to the successful implementation of Resolution Plan on 18 December 2019, no proceeding could have been initiated for recovery of the dues by the Appellants as the dues are not part of the Resolution Plan approved by the NCLT.

The Karnataka HC placed reliance on the judgment of the Hon’ble Supreme Court in the matter of Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, REED 2021 SC 04534, where it was held that any creditor including the Central Government, State Government or any local authority is bound by the Resolution Plan once it is approved by NCLT under section 31(1) of IBC. The Supreme Court had also stated that that the commercial wisdom of the CoC is to be given paramount importance and hence, all claims must be submitted to and decided by the Resolution Professional prior to the approval of the Resolution Plan.

It is also pertinent to note that on 16 September 2019 vide section 7 of Act 26 of 2019 an amendment was made to section 31 of the IBC, which states that Resolution Plan approved by NCLT shall be binding on the Central Government, any State Government or any local authority to whom statutory dues are owed. In the Ghanashyam Mishra case, the Apex Court has made it clear that the said amendment being clarificatory in nature would have retrospective operation from the date of enforcement of IBC.

Hence, the Karnataka High Court having regard to the judgment in Ghanashyam Mishra case, concluded that if the departments of Central or State Governments do not file an application or participate in the resolution process, their claims automatically get extinguished. Accordingly, the present appeal filed by Appellants was dismissed.