The amendment seeks to give buyers of distressed assets a clean slate by extinguishing all claims by creditors against a bankrupt company once an insolvency resolution plan is approved, said two persons aware of discussions in the government. This covers claims not specifically provided for in the resolution plan.

A specific provision to this effect has been included in the proposed Insolvency and Bankruptcy Code (Amendment) Bill that’s currently before Parliament, they said, speaking on condition of anonymity.

This, however, will not affect recovery of dues from promoters, managerial personnel, or guarantors in certain questionable or voidable transactions executed prior to debt resolution.

The new provision will prevent the kind of credit recovery efforts seen in distressed asset acquisitions such as that of ArcelorMittal Nippon Steel India Ltd’s ₹42,000 crore purchase of Essar Steel India Ltd in 2019, the two persons said.

In that and other similar cases, tribunals and courts shot down recovery efforts by creditors after the resolution plan was approved. But specifically disallowing such recovery bids as part of the Insolvency and Bankruptcy Code will speed up and smoothen the turnaround of bankruptcy companies, they explained.

The Bill seeks to modify IBC provision 31 by specifying that if the National Company Law Tribunal has approved a resolution plan, all claims against a corporate debtor and its assets under any other law in force, prior to the date of approval, will be extinguished.

Also, no proceedings can continue or be instituted against the company to recover such claims.

“Once the debt resolution plan is cleared by the adjudicating authority, no claim from anyone, whether the government or the local authority, will be entertained,” one of the two persons said.

The ‘clean slate’ principle

Codifying the ‘clean slate’ principle through legislative amendment provides much-needed certainty and prevents forum shopping by creditors, experts said. (Forum-shopping refers to deliberately filing a lawsuit in a court or jurisdiction that is expected to provide a more favourable outcome.)

“This amendment is a crucial step toward ensuring the IBC remains a time-bound, effective mechanism for corporate revival,” said Yogendra Aldak, partner at law firm Lakshmikumaran and Sridharan. “By codifying that all claims not provided for in the resolution plan stand extinguished and cannot be enforced or initiated after approval the amendment strengthens the finality of the process.”

The legislative certainty addresses a crucial recurring concern in the turnaround process for bankrupt companies, other experts said.

“TheSupreme Court in Essar Steel v. Satish Kumar Gupta (2019), Ghanshyam Mishra and Sons vs. Edelweiss ARC and Ors. (2021), and Manish Kumar v. Union of India (2021) had already laid the groundwork for this principle,” said Aldak.

“However, inconsistent enforcement and conflicting rulings created loopholes that allowed post-resolution claims to surface and increased collateral litigation. By legally insulating resolution applicants from legacy liabilities, the proposed amendment removes a major deterrent for bidders and investors,” he explained.

Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm, said creditors and statutory authorities have on several occasions attempted to pursue recovery outside the resolution plan, creating uncertainty and delaying its implementation.

The proposed codification of the ‘clean slate’ principle “addresses a recurring concern, seen in large insolvency matters such as Essar Steel and Bhushan Power and Steel, where parallel recovery efforts continued despite NCLT approval”, Maheshwari said.

The proposed amendment, however, maintains accountability by preserving recourse against promoters, guarantors, and joint obligors, he added.

The ministry of corporate affairs and the Insolvency and Bankruptcy Board of India did not reply to emailed queries.