Tripura High Court Rules Against Blacklisting Companies After Resolutions

The Tripura High Court has ruled that a state cannot blacklist a company after a resolution plan is approved under the Insolvency and Bankruptcy Code. This decision underscores that new management should not be penalized for the actions of previous management. The ruling came in response to a challenge by SREI Infrastructure Finance Limited, which had been banned from participating in government contracts for three years due to alleged misconduct under its former management.

The blacklisting order issued by the State of Tripura was based on defaults attributed to the company prior to the approval of a resolution plan by the National Company Law Tribunal. SREI’s counsel argued that such punitive measures contradict the intention of the Insolvency and Bankruptcy Code, which aims to provide companies with a clean slate following a successful resolution.

According to the petitioner’s legal team, the blacklisting undermines the objectives of corporate revival. They asserted that punishing a revived company would discourage potential resolution applicants who are crucial for the revitalization of distressed businesses.

In contrast, the counsel for the State contended that the government retains the right to select its contracting partners. They argued that the past misconduct of SREI justified the decision to blacklist the company, emphasizing that the IBC does not negate the State’s authority to act in the public interest and exclude companies with a history of violations from future projects.

The Division Bench, composed of Chief Justice Apresh Kumar Singh and Justice Arindam Lodh, highlighted that the IBC promotes business continuity and the revival of companies under new management. The court clarified that once a resolution plan is approved, the previous management’s misconduct cannot be transferred to the new management.

In its ruling, the court stated that blacklisting a company after the endorsement of a resolution plan contradicts the clean slate principle recognized by law. Consequently, the court deemed the blacklisting order against SREI Infrastructure Finance Limited as legally unsustainable and quashed it.

The decision encourages companies operating under new management to function without bearing the weight of past misdeeds. The court allowed the writ petition, reaffirming the importance of providing a fair chance for companies to rehabilitate.

This ruling is set to have significant implications for corporate governance and the handling of distressed assets within India’s evolving economic landscape. The judgment was delivered on September 25, 2024, marking a pivotal moment in the interpretation of the Insolvency and Bankruptcy Code and its application to corporate entities seeking to revive their operations.