20 Nov 2023
The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted on 1 December 2016 to transform the insolvency landscape in India. It was introduced with the objective of providing a speedy mechanism to overhaul the corporate distress resolution regime, and to maximise the value of assets of persons/entities undergoing insolvency resolution
Of the concepts underpinning the IBC regime in India, the most critical is arguably the ‘clean slate’ theory – that is, an applicant taking over an entity undergoing insolvency resolution proceedings should not be saddled with any unexpected claims and should be allowed to commence the business on a ‘clean slate‘. The clean slate theory is encoded in section 31 of the IBC, in terms of which, an approved resolution plan is binding on all stakeholders, including the corporate debtor and its employees, members, and creditors. The intent of this provision is to ensure that all stakeholders (including government authorities) abide by the terms of the approved plan and refrain from making claims that are not a part of the plan. The preamble of the IBC also states that it seeks to balance the interests of all stakeholders ‘including alteration in the order of priority of payment of Government dues‘. The clean slate theory has also been propounded by the Indian courts in several decisions including the Supreme Court’s decision in the case of Ghanshyam Mishra & Sons (P.) Ltd.1 (Ghanshyam Mishra), where the court observed that “…the legislative intent behind this is to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims…”.
The ‘clean slate‘ principle is also recognised internationally. The US bankruptcy laws refer to this concept as a ‘fresh start‘. Similarly, this concept is also prevalent under the bankruptcy laws of the UK, Poland, and other European nations.
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