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Can a Welfare Policy Preserve Claims Extinguished Under IBC? Says No
In a significant ruling reinforcing the supremacy of the , the has held that a welfare-oriented rehabilitation policy cannot preserve claims that have been extinguished under the IBC. The court emphasised that gives it over all inconsistent laws and policies, including those designed for the benefit of displaced persons.
Justice Sanjeev S. Kalgaonkar, presiding over a single-judge bench, dismissed a petition seeking rehabilitation benefits under the , after the petitioner’s land was acquired for a power project that later underwent corporate insolvency. The judgment underscores the binding nature of approved resolution plans and the finality they bring to claims against the .
Background of the Case
The petitioner, Keshav Prasad Jayaswal, owned agricultural land and a house that were acquired for the establishment of . Following the acquisition, Jayaswal sought to be declared a “displaced person” under the state’s rehabilitation policy of 2002, which entitled him to benefits including a residential plot of 5,400 square feet. However, during the pendency of his claim, entered the under the IBC.
A submitted by was approved by the on . Pursuant to the approved plan, was converted into , and the effectively got a fresh start.
The
The court held that the approval of the triggered the statutory “.” This doctrine, rooted in the IBC’s objective of maximising value and enabling a fresh start for viable corporate debtors, means that claims not forming part of the approved stand extinguished and cannot be enforced against the successful .
“The approval of , submitted by M/s Adani Power for respondent Essar Power M.P. Ltd, on 1.11.2021 by the National Company Law Tribunal triggers statutory '',” Justice Kalgaonkar observed. The court further stated that no person could initiate or continue proceedings for a claim that was not part of the approved . Consequently, the relief sought by Jayaswal—though based on a welfare policy—was “” against or its successor, .
of IBC Over Welfare Policies
The crux of the judgment lies in the interplay between the IBC and state rehabilitation policies. The petitioner argued that the rehabilitation policy was welfare-oriented and should be treated as an exception to the general rule of claim extinguishment. The court firmly rejected this contention, relying on , which provides that the Code shall have effect notwithstanding anything inconsistent therewith in any other law or instrument having force by law.
Justice Kalgaonkar observed: “Thus, Rehabilitation policy or any agreement with project affected (displaced) person cannot facilitate claim as an exception for the reason that it is welfare oriented. Section 238 of IBC gives Insolvency and Bankruptcy Code over all inconsistent laws and policies.” This reasoning aligns with the settled position that the IBC’s objective of time-bound resolution and finality cannot be undermined by state policies, regardless of their benevolent nature.
Collector’s Findings Upheld
Separately, the court examined the petitioner’s claim against the state authorities. The Collector had conducted an inquiry and inspection and concluded that Jayaswal did not qualify as a displaced person because he had not been residing within the acquired area for at least one year before the cut-off date of . Finding no apparent or jurisdictional error in the Collector’s proceedings, the court declined to interfere under and dismissed the petition.
Thus, even if the rehabilitation policy had survived the IBC override, the petitioner’s claim would have failed on factual grounds. The dual rejection—both on the merits of the claim under the policy and on the legal effect of the —leaves no avenue for the petitioner to pursue the benefits.
Legal Implications for Insolvency Practice
The judgment reinforces several key principles for insolvency practitioners and corporate lawyers. First, it confirms that the is a robust shield for resolution applicants. Once a is approved, all claims—including those arising from statutory obligations or welfare policies—are extinguished if not included in the plan. This provides certainty to bidders and facilitates the revival of distressed companies.
Second, the ruling clarifies that welfare policies, however laudable, cannot override the IBC’s statutory scheme. This is particularly relevant for infrastructure and power projects where land acquisition and rehabilitation issues often arise. The IBC’s ensures that the resolution process is not derailed by legacy claims from project-affected persons.
Third, the judgment underscores the importance of due diligence for resolution applicants. While the protects them from unknown claims, they must ensure that all potential liabilities—including those arising from rehabilitation commitments—are addressed in the to avoid future litigation.
Impact on Project-Affected Persons
For individuals displaced by projects that later become insolvent, this ruling may appear harsh. However, the court’s logic is consistent with the IBC’s design: all stakeholders, including those with welfare claims, must participate in the insolvency process and assert their rights in a timely manner. Once the is approved, the is freed from past liabilities, and claimants cannot bypass the IBC by invoking state policies.
The judgment does not leave project-affected persons entirely remediless. They can still approach the appropriate forum—such as the during the CIRP—to have their claims considered. But if they fail to do so, or if the does not provide for their claims, the extinguishment is final.
Conclusion
The ’s decision in reaffirms the primacy of the IBC over inconsistent state policies, even those that are welfare-oriented. By applying the and Section 238, the court has sent a clear message: the IBC’s resolution mechanism cannot be circumvented by post-resolution claims, regardless of their humanitarian underpinnings. The ruling provides much-needed clarity for resolution applicants and strengthens the finality of approved plans, thereby advancing the IBC’s core objective of promoting the revival of stressed assets while balancing the interests of all stakeholders.
