The claim would get extinguished once the Resolution Plan was accepted by the National Company Law Tribunal

[Ref: Sirpur Paper Mills Limited vs. I.K. Merchants Pvt. Ltd. dated 07th May, 2021]

We are regularly seeing lots of changes by way of amendments, ordinances and judgments in the Insolvency and Bankruptcy Code, 2016 (hereinafter the ‘IBC’) in a very short span of over four years. The Hon’ble Supreme Court of India has played a crucial role by interpreting various provisions of the IBC to make it a workable legislation. Day by day our interest has been increasing but despite of crucial role of Hon’ble Supreme Court there are some issues which are unresolved yet. Like, the IBC does not expressly provide for the treatment of the unsatisfied part of the claim. After the recent judgement of Hon’ble Supreme Court in Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, would this mean that the creditors will have to suffered whose claims have been rejected out rightly and cannot initiate legal proceedings against the new avatar of the corporate debtor i.e. Resolution Applicant for recovery of their outstanding claims? Further, would pending demands from the statutory authorities also face the same treatment as that of a normal class of creditors and hence they cannot also continue the demands post a successful resolution?

On 07th May, 2021, in the matter of Sirpur Paper Mills Limited vs. I.K. Merchants Pvt. Ltd. (hereinafter the “Sirpur Judgments dated 7th May 2021”) the Calcutta High Court settled an important question i.e. Whether award-holder’s claim would stand extinguished upon the approval of a Resolution Plan under CIRP of Corporate Debtor, when award holder has not pressed his claim during CIRP.

It is important to note that aforesaid Sirpur Judgments dated 7th May 2021 was delivered on basis of judgment given by the Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited. Relying on aforesaid Supreme Court rulings, Justice Moushumi Bhattacharya ruled that the claim would get extinguished once the Resolution Plan was accepted by the National Company Law Tribunal.

In Sirpuz Judgments dated 7th May 2021, Justice Moushumi Bhattacharya has re-visited her judgment given on dated 10th January, 2020 wherein it was held that the corporate insolvency resolution procedure enumerated as under IBC cannot be used as a tool to curtail any claim which arose prior to the commencement of the insolvency proceedings. Justice Moushumi Bhattacharya found that “the three-member Bench decision of the Supreme Court in Essar constitutes a significant -and subsequent- development of the law in relation to the fate of existing claims during and after corporate insolvency resolution proceedings which, in turn, would constitute a sufficient reason for this court to re-visit the judgment dated 10th January, 2020.”

“The reason for having a re-look at the judgment at this stage is the pronouncement of the law by the Supreme Court in Essar and more recently in a judgment delivered on 13th April, 2021 in Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited; 2021 SCC On Line SC 313, wherein it was held that once a Resolution Plan is approved, a creditor cannot initiate proceedings for recovery of claims which are not part of the Resolution Plan.

Sirpur Paper Mills Limited vs. I.K. Merchants Pvt. Ltd. dated 10th January, 2020 (hereinafter the “Sirpur Judgments dated 10th January 2020”)

First, we have to understand what judgment was given by Justice Moushumi Bhattacharya on 10th January, 2020 in the matter of Sirpur Paper Mills Limited vs. I.K. Merchants Pvt. Ltd. An Award-debtor/Sirpur Paper Mills Ltd. had moved High Court seeking to withdraw its earlier application to the High Court under Section 34 of the Arbitration and Conciliation Act (Arbitration Act). Basically, in 2008, the Award-debtor/Sirpur Paper Mills Ltd.  had moved Court to set aside an arbitral award pronounced on July 7, 2008.

The relevant facts of this matter, in earlier, are as under-

(i) the Reference was made on 18th June, 2001 and the Arbitrator was appointed on 2nd March, 2006.

(ii) the arbitral Award was delivered on 7th July, 2008 for a sum of Rs.3,21,927.70/- at 9% per annum in favour of the respondent/claimant/K. Merchants Pvt. Ltd. (Formerly Known as I.K. Merchants).

(iii) An application for setting aside of the Award was filed on 31st October, 2008 by Award-debtor/Sirpur Paper Mills Ltd.

(iv) Operational Creditors initiated proceedings under the IBC against the Corporate Debtor/ Award-debtor/Sirpur Paper Mills Ltd. in September 2017.

(v) By an order dated 19th July, 2018, the Adjudicating Authority declared that the moratorium order under Section 14 shall cease to have effect.

(vi) the application under Section 34 of the 1996 Act was taken up for hearing by High court on 11thDecember, 2019.

(vii) The petitioner/ Award-debtor/Sirpur Paper Mills Ltd. prayed for setting aside of an Award dated 7th July, 2008 and contends that the present application under Section 34 of The Arbitration and Conciliation Act, 1996 (the Act) cannot be proceeded since Corporate Insolvency proceedings under IBC has been initiated against the petitioner as the Corporate Debtor. It was submitted that the Management of the corporate debtor/petitioner has been taken over by JK Paper Limited, who was the Resolution Applicant before the NCLT. It was further submitted that application for setting aside of the Award cannot continue since the respondent has not taken steps to include its claim before the Resolution Professional (RP). The respondent must first file its claim before the NCLT before it can contest the proceedings for setting aside of the award.

(viii) Justice Moushumi Bhattacharya of Calcutta High Court on January 10, 2020 held that the corporate insolvency resolution procedure enumerated as under IBC cannot be used as a tool to curtail any claim which arose prior to the commencement of the insolvency proceedings.

(ix) Justice Moushumi Bhattacharya of Calcutta High Court observed, that the petitioner being the Corporate Debtor/Award Debtor cannot be permitted to take refuge under the provisions of the IBC for relegating the claim of the respondent award-holder toa limbo for an indefinite period of time on the specious plea of the respondent not having gone before the NCLT

(x) Justice Moushumi Bhattacharya of Calcutta High Court held that “This court is not inclined to agree with the contentions of the petitioner that the challenge to the Award cannot be considered by reason of the proceedings under the IBC. This is by reason of the fact that the respondent award-holder could not have filed a claim before the NCLT/IRP since the Section 34 proceedings had not been decided in favour of the said respondent in 2017 and hence there was no final or adjudicated claim as on that date. Further, once the stage under Section 14 of the IBC, namely, moratorium with regard to continuation of pending proceedings against the Corporate Debtor has been declared to be over, no further embargo remains for continuing to hear suits and other proceedings to which the Corporate Debtor (the petitioner in this case) is a party. In any event, Section14(a) contemplates suits or continuation of pending proceedings “against” the Corporate Debtor and itis only the other sections which create roadblocks for transferring or disposing of any assets of the Corporate Debtor. In this case, the petitioner being the Corporate Debtor/Award Debtor cannot be permitted to take refuge under the provisions of the IBC for relegating the claim of the respondent award-holder to a limbo for an indefinite period of time on the specious plea of the respondent not having gone before the NCLT.”and thus stall the hearing on the application under Section 34 of the Arbitration Act and directed the application to be listed on January 21, 2020.

The Calcutta High Court in Sirpur Judgments dated 10th January 2020 held that the fact that the respondent awardholder//I.K. Merchants Pvt. Ltd.  could not have filed a claim before the NCLT/IRP since the Section 34 proceedings had not been decided in favour of the said respondent in 2017 and hence there was no final or adjudicated claim as on that date.  In the aforesaid case, the respondent award-holder//I.K. Merchants Pvt. Ltd.  had not even filed its claims before the Resolution Professional and yet the court had come to a conclusion that once the stage under Section 14 of the IBC, namely, moratorium with regard to continuation of pending proceedings against the Corporate Debtor has been declared to be over, no further embargo remains for continuing to hear suits and other proceedings to which the Corporate Debtor is a party.  The court concluded by stating that the petitioner being the Corporate Debtor/Award Debtor cannot be permitted to take refuge under the provisions of the IBC for relegating the claim of the respondent award-holder to a limbo for an indefinite period of time on the specious plea of the respondent not having gone before the NCLT.

In the aforesaid case Sirpur Judgments dated 10th January 2020, the Calcutta High Court relied upon the Supreme Court Judgments of K. Kishan vs M/S Vijay Nirman Company Pvt. Ltd and Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd to come to a conclusion that arbitral awards that are pending adjudication under Section 34 would show that a pre-existing dispute exists in such cases.

Sirpur Paper Mills Limited vs. I.K. Merchants Pvt. Ltd. dated 7th May, 2021.

As mentioned above in Sirpur Judgments dated 7th May 2021, the Calcutta High Court settled an important question of in respect of arbitration law i.e. Whether award-holder’s claim would stand extinguished upon the approval of a Resolution Plan under CIRP of Corporate Debtor, when award holder has not pressed his claim during CIRP¸ on the basis of judgment given by the Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited Relying on aforesaid Supreme Court rulings, Justice Moushumi Bhattacharya in ruled that the claim would get extinguished once the Resolution Plan was accepted by the National Company Law Tribunal.

Ruling to this effect, the Calcutta High Court remarked, “This can be seen as a necessary and an inevitable fallout of the IBC in order to prevent, in the words of the Supreme Court, a “hydra head popping up” and rendering uncertain the running of the business of a corporate debtor by a successful resolution applicant. In essence, an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus for chasing the fruits of an Award even where a challenge to the Award is pending in a Civil Court.”

In the aforesaid matter Sirpur Judgments dated 7th May 2021, the petitioner/Sirpur Papter Mills presented that the present proceeding under Section 34 of The Arbitration and Conciliation Act, 1996, has become infructuous by reason of the management of the petitioner company (the Award-debtor) being taken over by a new entity following the approval of a Resolution Plan of the petitioner company by the National Company Law Tribunal (NCLT) under IBC. The petitioner’s case is that by reason of the subsequent developments after the impugned Award, the application for setting aside of the Award is not maintainable any more. Award-debtor/Petitioner relied on Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta to contend that all existing claims against judgment debtor get extinguished upon the approval of Resolution Plan.

Award-holder/Respondent stated that the same arguments were made by the award-debtor on two earlier occasions as well in 2020, when they sought to withdraw their application for setting-aside the arbitral award. He argued that res judicata would apply since the facts were the same. Award-holder/Respondent also contended that as per the law prevailing prior to the 2016 Amendment of the Arbitration Act, once an application under Section 34 was presented, the arbitral award was automatically stayed. Hence, there was no ‘claim’ in terms of the IBC for the award-holder to press before the Insolvency Resolution Professional. Therefore, Award-holder/Respondent could not submit their claim before Insolvency Resolution Professional.

High Court observation for Re judicata

The Court first examined whether the principle of res judicata would apply since the petitioner had moved court with the same prayer at an earlier instance. Justice Moushumi Bhattacharya, in her judgment, limits the operation of res judicata stating that the principle was to be “read down in fit cases where orders are capable of being altered or varied on the emergence of new facts or situations.”

The principle essentially is to guard the court from abuse of process where the same matter in issue, which had been heard and finally decided by a court, is urged again between the same parties. This is unlike the present case as the question of maintainability of the application under Section 34 of the 1996 Act can be considered at any point of time on the legal aspect and particularly on the pronouncement of a decision relevant to the matter. Since this court is of the view that the earlier orders would not stand in the way in considering the maintainability of the present application, the decision of the Supreme Court in Essar needs to be dealt with in some detail.

How the Court applied Essar Judgment and Ghanshyam Mishra.

In Essar Judgment, the Supreme Court declared that a Resolution Plan, once approved under Section 31 of the IBC, is binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders, therefore, the Justice Moushumi Bhattacharya, highlighted and emphasised in paragraph 107 of Essar Judgment.

Justice Moushumi Bhattacharya also highlighted that in this decision, the Supreme Court considered questions relating to the role of resolution applicants, Resolution Professionals and the Committee of Creditors constituted under the IBC as well as the jurisdiction of NCLT and the NCLAT with regard to Resolution Plans that have been approved by the Committee of Creditors. In the facts of that case, NCLAT had allowed admission of certain additional and belated claims of operational creditors and had held that claims which have been decided by the Adjudicating Authority or the Appellate Tribunal on merits may be decided by an appropriate forum under Section 60(6) of the IBC. In answer to the issue of undecided claims, the Supreme Court expressed its view in paragraph 107 of the Report which has been set out above. The view of the Court was that the successful resolution applicant who takes over the business of the corporate debtor must start running the business of the corporate debtor on a “fresh slate”.

Justice Moushumi Bhattacharya also highlighted that this view has been reiterated in the recent three-member decision of the Supreme Court in Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited. This decision considered Section 31 of the IBC and held that once the Resolution Plan is approved by the Adjudicating Authority, it shall be binding on the corporate debtor and its employees, members etc. since revival of the corporate debtor is one of the dominant purposes of the IBC. The Court was of the view that any debt which does not form a part of the approved Resolution Plan shall stand extinguished. The conclusions of the Supreme Court in paragraph 95 of the Report reiterates that once the Resolution Plan is duly approved by the Adjudicating Authority, claims which form part of the Resolution Plan shall stand frozen and would be binding on the corporate debtor. More significantly, the Court opined that claims which are not part of the Resolution Plan shall stand extinguished and no person will be entitled to initiate or continue any proceeding in respect to a claim which is not a part of the Resolution Plan.

Therefore, the opinion of the Court culminates in:-

“As held by this Court, the successful resolution applicant cannot be flung with surprise claims which are not part of the Resolution Plan.”

Whether the respondent could have lodged and pursued its claim before the NCLT when the impugned Award was challenged by the Award-debtor/petitioner in this Court on 31st October, 2008.

The next issue which would naturally fall for consideration is whether the respondent could have lodged and pursued its claim before the NCLT when the impugned Award was challenged by the Award-debtor/petitioner in this Court on 31st October, 2008.

The Respondent/ Award-holder contends that there was no scope for the respondent to approach any other forum since the impugned Award was automatically stayed upon filing of the Section 34 application. The respondent has relied on Section 34 of the 1996 Act as it stood prior to amendment of 2016 which came into effect from 23rd October, 2015. The merit of the stand taken must be seen in the light of Section 36 which has been modified and added by the 2016 amendment. The new Section 36 and sub-section (2) thereunder requires the Court to grant an order of stay of the operation of the Arbitral Award in accordance with Section 36(3) on a separate application for stay taken out by the Award-debtor. Section 36(2) marks a significant departure from the erstwhile provision in clarifying that filing of an application for setting aside of an Award under Section 34 shall not by itself make the Award unenforceable unless the Award is stayed by an order of Court in an application made in the manner provided under Section 36(3) of the Act.

On the question of whether an automatic stay on the enforcement of an arbitral award precluded the respondent award-holder from enforcing his claim, the Court relied on Board of Control for Cricketin India v. Kochi Cricket Private Limited & Ors. to hold that it would not. In BCCI, the Supreme Court ruled that pending applications under Section 34 would be governed by the amended Section36, which did away with the ‘automatic stay’ existing prior to the amendment.

Since the award-debtor’s Section 34 application was pending during this time, and the CIRP was ongoing, the award-holder could have pressed its claim during the CIRP in terms of the CIRP Regulations, the Court concluded.

“These facts would show that from the date of the admission of the application of initiation of the CIRP against the petitioner namely 18th September, 2017 until approval of the resolution plan on16th May, 2018, the respondent, as an Award-holder had sufficient opportunity to approach the NCLT for appropriate relief… The Award-holder hence was under an obligation to take active steps under the IBC instead of waiting for the adjudication of the application under Section 34 of the 1996 Act.”

These are other observations the Court makes in the tail-end of the judgment, on the question of whether or not to consider the Section 34 application –“Every litigant has a right to argue that an action commenced in a court of law or a statutory forum is not maintainable by reason of the law existing as on that date. A challenge to maintainability of an action must be considered by the court before the substance of the dispute is adjudicated on merits. A court must also decide whether the argument pertaining to maintainability is such that the entire proceeding is rendered infructuous. The present proceeding is precisely such a case where deciding on the merits of the application, i.e. whether the Award should be set aside or sustained, would be a complete waste not only of judicial time as well as of the parties since the claim of the Award-holder has been extinguished upon approval of the Resolution Plan under Section 31 of the IBC. Further adjudication on the legality of the impugned Award cannot lead to its logical conclusion and would hence be irrelevant. The parties would only be compelled to travel the road to further proceedings (appeal, enforcement etc.) without an end-point in the resolution to the dispute or any consequent relief to either of the parties. This surely cannot be the objective of any proceedings before any court of law.”

On these terms, the Section 34 application was disposed as infructuous on 7th May, 2021.

*****

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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