Clean Slate Doctrine under the Insolvency and Bankruptcy Code (IBC)

Clean Slate Doctrine under the Insolvency and Bankruptcy Code (IBC) Latest News

The Delhi High Court recently confirmed the “clean slate” doctrine under the Insolvency and Bankruptcy Code (IBC) by holding that a successful resolution applicant cannot be burdened with the criminal liabilities of a corporate debtor’s past management.

About Clean Slate Doctrine under the Insolvency and Bankruptcy Code 

• The Clean Slate Doctrine is a key legal principle embedded in the Insolvency and Bankruptcy Code, 2016 (“IBC”), which plays a pivotal role in the corporate insolvency process in India.  
• The doctrine suggests that once a company successfully undergoes the insolvency resolution process and is taken over by a new buyer, the new owner should not be held accountable for any of the company’s pre-existing debts, penalties, or liabilities.  
• This principle is designed to give the company a fresh start, essentially, a “clean slate” free from the baggage of its prior financial troubles.  
• The Clean Slate Doctrine has been upheld in several landmark rulings by India’s Supreme Court (SC), reaffirming its crucial role in the IBC framework.
  • In the Essar Steel India case, the SC emphasized that one of the primary objectives of the IBC is to streamline insolvency procedures in India and bring all claims under a unified system.  
    • The SC ruled that once a resolution plan is approved by the National Company Law Tribunal (NCLT), any and all previous liabilities, including debts and penalties, are extinguished.  
    • This means no party can initiate or continue any legal proceedings related to a claim that is not included in the approved resolution plan.
  • In the Edelweiss Asset Reconstruction case, the SC held that government dues, such as taxes and duties, are extinguished if they are not part of the resolution plan. 
  • In the Surya Exim case, the Gujarat High Court, following the SC rulings, held that any tax demands issued after the NCLT’s approval of a resolution plan should be cancelled, reinforcing the idea that claims not included in the approved plan are no longer valid.

Source: TAXS

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