Introduction
The fundamental legislative intent behind the enactment of IBC has been the resolution of Corporate Debtors. Compared to previous laws, the distinguishing feature of the Code is that it does not to operate as a mere debt recovery route for creditors. The doctrine of fresh slate is of much significance in achieving the objective of debt resolution.
The doctrine of fresh slate in simple terms can be understood as a new lease of life that is extended to a corporate debtor. In legal parlance, once a Resolution Plan is ratified by the CoC and approved by the Adjudicating Authority it is binding on all the stakeholders and the successful Resolution Applicant now man aging the Corporate Debtor shall not be liable to the debts or/and acts of the erstwhile management.
However, there still exists an ambiguity in respect of treatment of Disputed claims post completion of resolution process. This article will analyze and discuss the position and treatment of disputed debts post resolution process of Corporate Debtor.
Role of RP in disputed claims
Once the Insolvency Petition is admitted and a moratorium is initiated, all claims have to be filed before the IRP. The IRP vets, verifies and collates all claims in order to include it in the Information Memorandum. The idea is to make prospective Resolution Applicants aware about the outstanding dues liable by the Corporate Debtor in order to put forth a feasible Resolution Plan that will balance the interest of all stakeholders and at the same time help the Corporate Debtor operate as a going concern post resolution process.
In the Swiss Ribbons case[1], the Supreme Court has settled the law that the RP exercises only administrative powers. He is only empowered under the Code to vet, verify and collate claims by creditors. He does not have adjudicatory powers. This is in contrast to the role of a liquidator who adjudicates the claims and has the power to accept or reject claims.
The NCLAT in NTPC Ltd. (SIPAT Project) vs. Rajiv Chakraborty, IRP of Era Infra Engineerin Ltd.[2] has reinforced the principle by directing the RP to include the disputed claims in the information Memorandum and not reject the claim on account of existence of dispute. Admission/rejection of claims will be dealt with during approval of Resolution Plan, where NCLT will look into whether interest of all stakeholders has been taken care of.
In the Essar Steel judgement[3], the Supreme Court had upheld the direction to the RP to admit disputed debts at a notional value at Rs 1. A note was also included below such disputed debts stating that they are subject to outcome of adjudication.
On account of the statutory scheme of the Code, a RP can only include disputed claims in the Information Memorandum at a national value. Since they are under dispute, the NCLT also cannot decide the claim as disputed claims cannot secure admission under the Code.
As a result, such creditors with disputed claim will be rendered sans any remedy as their claims are not dealt with nor with any mechanism to pursue the claim on account of the Supreme Court’s decision in the Essar Steel case.
Clean slate vis-à-vis disputed claims- A need for detour from Essar Steel
The Code does not envisage abatement of proceedings against the Corporate Debtor on account of completion of resolution process. This can be inferred from Section 60(6) where period of moratorium is excluded for the purposes of calculating limitation period in respect of any suit or other proceeding.
In Reliance Commercial Finance Ltd vs. Texmills Pvt Ltd.,[4] the above position was reiterated. It was heled that upon approval of Resolution Plan, there is no automatic discharge from legal proceedings and the Corporate Debtor will have to approach the concerned authorities for appropriate reliefs.
The significance of doctrine of clean slate was first discussed in detail in the Essar Steel judgment of the Supreme Court. It was emphasised by the Apex Court that a successful Resolution Applicant cannot be faced with ‘undecided claims’ post the resolution process. The Supreme Court had set aside the NCLAT ruling which allowed pursuing of claims apart from those which have been ‘decided on merits’ by the RP/NCLAT/NCLAT.
However, this will be detrimental to those disputed claims which were included in the Information Memorandum under the title ‘subject to adjudication’ by the RP during moratorium, as the RP is not vested with adjudicatory powers to admit or reject claims. The Supreme Court instead of extinguishing all undecided claims, should have interpreted the term ‘undecided claims’ in respect to those claims which have not been filed before the RP during the entire period of resolution.
A disputed claim, strictly speaking will not pose a major hindrance to a successful Resolution Applicant as such claims re already present in the Information Memorandum of the Corporate Debtor A Successful Resolution Applicant undertakes to face the various risks associated with the entity while acquiring the Corporate Debtor. Therefore, the argument that disputed claims are sudden claims to be faced by a RA post resolution process does not hold forte.
Those claims are in the nature of contingent liabilities which a Resolution Applicant undertakes along with the assets and other liabilities while submitting a Resolution Plan. They cannot be regarded as ‘undecided claims’ but as ‘contingent claims’ as it was very well within the knowledge of the Resolution Applicant while a submitting resolution plan.
Disputed Claims- Revisiting prior cases
In M/s. Kotak Mahindra Prime Ltd. vs. Mr. Bijay Murmuria & Ors.,[5] the NCLAT held that creditors cannot pursue pending litigation if their claims have been dealt with in the Resolution Plan. This decision is based on Section 31 of the Code, that a resolution plan is binding on all stakeholders.
The relevant para is extracted as follows:
“However, once a Creditor/’Financial Creditor’ or ‘Operational Creditor’ files its claim before the ‘Resolution Professional’ and the same is taken into consideration by the ‘Successful Resolution Applicant’ and while submitting the plan or the revised plan providing them same treatment as has been given to the other similarly situated ‘Financial Creditors’/ ‘Operational Creditors’, the ‘Financial Creditors’/ ‘Operational Creditors’, thereafter cannot take the benefit of sub-section (6) of Section 60 of the ‘I&B Code’ nor they can pray to pursue the suit or arbitration proceeding or to file a fresh suit or arbitration proceeding for the same claim.”
This decision is of much significance, as when compared to the present context, a disputed claim is not dealt with in the Resolution Plan and a similar treatment is not accorded to in line with the same class of creditors on account of existence of dispute.
An earlier judgement which deviates from what Essar Steel Judgement is the ruling of the Bombay High Court in M/s Tata Steel Bsl Ltd. vs Varsha W/O Ajay Maheshwari.[6] In the aforesaid case, the moot point was whether the Petitioner is justified in its ground that the Respondent 1 cannot file the present suit for recovery of dues inspite of participating in the resolution process.
The Bombay High Court held that:
“…..In the present case, although the resolution process was initiated by a financial creditor under section 7 of the IBC, the resolution plan prepared under the provisions of the IBC and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, recognized the claim of respondent No.1 as an operational creditor and under Regulation 38 of the aforesaid Regulation of 2016, priority is given to the amount due to respondent No.1as an operational creditor over the dues of financial creditors. Thus, when the resolution plan provides for the dues payable to respondent No.1, subject to the pending suit, it cannot be said that any error was committed by the Trial Court in passing the impugned order.
37. The aforesaid position of law, when applied to the facts of the present case clearly demonstrates that the attempt on the part of the petitioner to escape liability of paying dues of respondent No.1 as an operational creditor, was correctly shot down by the Trial Court bypassing the impugned order. Therefore, it is held that the suit filed by respondent No.1 cannot be dismissed as claimed by the petitioner in the application at Exhibit-153.”
It can be said that the Essar Steel judgement has overruled the above ruling. However, rendering creditors remediless under the Code although they have exercised due diligence by participating in the resolution process is arbitrary and not in consonance with the objective of the Indian insolvency framework.
CONCLUSION
The position of disputed claims post resolution process remains a grey area in the Indian Insolvency framework until such time it is comprehensively settled by the Supreme Court. Although it was touched upon by the Essar Steel Judgement, there still remains a huge gap in understanding.
The Code being a beneficial legislation, should be interpreted in a manner that does not extinguish those disputed claims which have not been dealt with in Resolution Plans. Necessary amendments may be made to the Code to incorporate a provision requiring discharge of disputed claims if it crystalizes following adjudication by competent authorities. Failing which, such creditors shall be rendered remediless, which shall operate contrary to the legislative intent.
[1] Swiss Ribbons Pvt. Ltd. v. Union of India. (Writ Petition (Civil) No. 99 of 2018.)
[2] https://nclat.nic.in/Useradmin/upload/9622656375ed88ed0e29a8.pdf
[3] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. (Civil Appeal No. 8766-67 Of 2019)
[4] Reliance Commercial Finance Ltd vs. Texmills Pvt Ltd., I.A 664/2019 in C.P. (I.B.) No. 299/NCLT/AHM/20108
[5] M/s. Kotak Mahindra Prime Ltd. vs. Mr. Bijay Murmuria & Ors., Company Appeal (AT) (Insolvency) No. 47 of 2019
[6] M/s Tata Steel Bsl Ltd. vs Varsha W/O Ajay Maheshwari., WRIT PETITION NO. 8620 OF 2018, Bombay HC (Nagpur Bench),
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