NEW DELHI: The Insolvency and Bankruptcy Code (IBC) promises a fresh start for bankrupt companies that have resolved their debt problems. Yet, creditors including government agencies come after them for their past dues – a headache for the company’s new investors. Recent amendments to the IBC clarify that the new investors deserve an absolutely clean slate. Mint looks at the gainers and losers.
What is the clean-slate principle?
New investors take over distressed assets when they have clarity on the viability of reviving them. That requires certainty about claims that various parties have on the asset.
Once the claims have been filed and admitted, the adjudicating authority, the National Company Law Tribunal (NCLT), approves a revival plan and the new investor takes over the asset to nurture it back to financial health.
The new owners should not be bothered by fresh claims or recovery proceedings for past dues. This certainty is critical to attract investments into distressed assets.
The IBC, in its original form, embodied this spirit in its intent so that the new investor gets a fresh start and all past claims are extinguished, save what is provided in the corporate rescue plan. However, this is an oft-litigated area when creditors including state authorities come after the rescued company under the new owner.
Why is this a pain point?
Under the debt resolution process, creditors have to submit their claims on time. Often, statutory authorities such as state electricity boards and tax authorities do not represent their claim cases during this window.
Statutory authorities are often of the view that their legal mandate to recover dues under their own statutes and timelines cannot be undermined by the IBC process. Hence, claims made after a debt resolution plan is approved trigger litigation. This impacts the IBC’s effectiveness in attracting fresh investors to turn around distressed companies.
Does the amended IBC address this effectively?
The IBC Amendment Act of 2026 seeks to explicitly codify the clean-slate principle. It says that claims against a company under any other law that are not recognized and provided for in the approved resolution plan will be extinguished.
No proceedings can be instituted against a company or its assets for such claims after the corporate rescue plan is cleared.
However, during consultations and the legislative process, a question that arose was whether the clarification should be made effective from the date of amending the code or from the inception of the IBC in 2016.
The Parliamentary select committee that examined the IBC recommended that the amendment should explicitly state that the clarification on clean slate would be applicable from the “date of commencement of the Principal Act” except where judicial pronouncements have said otherwise. The government incorporated the suggestion in the bill, which has now become law.
Who are the gainers and losers?
The clean-slate principle became effective on 28 May 2016. That means all cases currently pending in the NCLT, the high courts and the Supreme Court related to claims that were not raised during the debt resolution and explicitly included in the resolution plan become void.
The judicial proceedings in such cases are expected to result in favourable verdicts for the successful bidders for those companies.
However, where the courts have already delivered a judgement, the successful resolution applicant will be bound by those verdicts. They cannot use the clarificatory provision to escape payment of past dues.
What are the other measures taken to protect new investors?
Under the amended IBC, tribunals cannot outrightly reject defective resolution plans. Creditors must be given an opportunity to rectify them first. Tribunals also have to record reasons for delays beyond 30 days in deciding on resolution plans.
Clearance from the Competition Commission of India, where required, can be obtained before filing the resolution plan with the tribunals, not before creditors approve it. These measures seek to enhance the efficiency of debt resolution.