JSA Prism | Insolvency | August 2024

Clean slate theory cannot be used to extinguish known claims when the promoter of a micro, small and medium enterprise is a successful resolution applicant under the Insolvency and Bankruptcy Code, 2016

The Madras High Court ("Madras HC") in its recent judgement National Sewing Thread Co. Ltd vs. Superintending Engineer TANGEDCO and Anr.¹, has held that the clean slate theory ("CST") does not extinguish undisclosed claims under the resolution plan of the erstwhile promoters or management ("Promoter Group"). The Madras HC has further held that in relation to such claims, the Promoter Group is jointly and severally liable. This judgement of the Madras HC is significant since it: (a) carves out an exception for the CST, especially when the Promoter Group of Micro, Small and Medium Enterprises ("MSMEs") are the successful resolution applicant; (b) protects the creditors who did not submit claims during the Corporate Insolvency Resolution Process ("CIRP") for want of