I. Delhi HC: Claims settled under a resolution plan become non-arbitrable and a reference of those claims would amount to reopening of the resolution plan.
The Delhi High Court ("Delhi HC") has, in its judgement dated October 10, 2023, in the matter of Indian Oil Corporation Limited v. Arcelor Mittal Nippon Steel India Limited [ARB.P. 102/2022], held that claims that have already been settled under a resolution plan would become non-arbitrable once the resolution plan is approved by the committee of creditors ("CoC") and affirmed by the adjudication authority under the Insolvency and Bankruptcy Code, 2016 ("IBC").
Indian Oil Corporation Limited ("Petitioner") and Essar Steel India Limited ("ESIL"), formerly known as Essar Steel Limited, had entered into a gas supply agreement dated January 15, 2009 ("GSA"). Article 14 of the GSA empowered the Petitioner to call upon ESIL to take remedial steps for payment in the event of ESIL's failure to lift the entire adjusted annual contract quantity. On May 4, 2016, the Petitioner served a notice on ESIL in pursuance of the 'take or pay' obligation enumerated under Article 14 of the GSA for ESIL's failure to comply with its obligations thereunder. Consequently, ESIL served a termination notice on the Petitioner, which was disputed by the Petitioner on the ground that the Petitioner had not committed any breach of its contractual obligations under the GSA.
Thereafter, the Petitioner issued a demand notice dated April 27, 2017, on ESIL, towards recovery of the payments that were due to it, and upon non-receipt of such payments, the Petitioner subsequently issued a notice of dispute dated May 8, 2017, on ESIL. The Petitioner, in its notice of dispute, called upon ESIL to amicably resolve the dispute as contemplated under the GSA, but, since ESIL failed to respond to such notice, the Petitioner invoked arbitration under the provisions of the GSA.
However, during the pendency of the aforementioned dispute, corporate insolvency resolution process ("CIRP") was initiated against ESIL and a resolution professional ("RP") was appointed. While responding to the Petitioner's notice invoking arbitration, ESIL, in its letter dated August 7, 2017, apprised the Petitioner of the commencement of CIRP and the moratorium as declared by the National Company Law Tribunal, Ahmedabad ("NCLT"). The RP issued public notices inviting claims against ESIL and consequently, the Petitioner filed a claim for INR 3762,58,74,503. However, the RP vide his e-mail dated December 7, 2018, addressed to the Petitioner admitted the Petitioner's claim for a notional amount of INR 1 to ensure the Petitioner's participation in the CIRP and clarified that the balance claim amount was not admitted owing to the pending dispute between the Petitioner and ESIL.
The resolution plan submitted by Arcelor Mittal Nippon Steel India Limited ("Respondent") was approved by the CoC on October 25, 2018 ("Resolution Plan"). NCLT, while according its sanction to the Resolution Plan did not agree with the view of the RP to admit claims of the Petitioner at a notional value of INR 1 and directed the RP to include the claims of operational creditors including the Petitioner in the said Resolution Plan. The RP preferred an appeal before the National Company Law Appellate Tribunal ("NCLAT") against the decision of the NCLT. However, the NCLAT affirmed NCLT's view and modified the Resolution Plan to include therein certain claims, such as that of the Petitioner.
Against the order passed by the NCLAT, an appeal was preferred before the Hon'ble Supreme Court ("SC") in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others [(2020) 8 SCC 531] ("Essar Steel India Case"), wherein the SC set aside the directions of both NCLT and NCLAT in relation to inclusion of claims after the approval of the resolution plan. The SC explained the importance of the clean slate doctrine and held that once a resolution plan has been approved and accepted, the successful resolution applicant cannot be burdened with additional claims by modifying the resolution plan. The SC's decision affirmed the action of the RP and conferred a seal of finality on the Resolution Plan. Hence, the Respondent, as a successful resolution applicant, acquired 100% shareholding of ESIL and took over its management.
Thereafter, the Petitioner issued a notice of demand, calling upon the Respondent to pay the amounts that were due to the Petitioner under the GSA, however, the Respondent denied any liability arising from the GSA. This led to the Petitioner invoking arbitration against the Respondent, and upon the failure of the Petitioner and the Respondent to mutually appoint an arbitrator, the Petitioner approached the Delhi HC for the appointment of an arbitrator under Section 11 (Appointment of arbitrators) of the Arbitration and Conciliation Act, 1996 ("Act").
- Whether the approval of the Resolution Plan resulted in an extinguishment of all the claims the Petitioner could enforce against the Respondent.
- Whether the approval of the Resolution Plan would render disputes that were sought to be referred for arbitral tribunal's consideration, as non-arbitrable.
Contentions of the Petitioner:
The Petitioner submitted that the admission of claims at a notional amount of INR 1 and the approval of the Resolution Plan could not have been viewed as a conclusive adjudication of the Petitioner's claims as flowing from the GSA, and therefore the Delhi HC ought to take appropriate steps for the constitution of an arbitral tribunal in order to resolve the dispute between the Petitioner and the Respondent. The Petitioner further contended that the 'take or pay' obligations under Article 14 of the GSA were to continue up to the year 2028 and would thus go far beyond the date on which the Resolution Plan was approved by the NCLT. Furthermore, SC's approval of the Resolution Plan with the Petitioner's claim being admitted at a notional value of INR 1 could not have been read as depriving the right of the Petitioner to raise claims which otherwise arose out of the GSA.
The Petitioner contended that the GSA was a continuing contract and the liabilities arising therefrom was a cause of action continuing to subsist irrespective of the closure of proceedings under IBC. Thus, the Petitioner was justified in approaching the Delhi HC to exercise the jurisdiction conferred upon the Delhi HC under Section 11 of the Act.
Contentions of the Respondent:
The Respondent contended that the concept of extinguishment of claims would not only have to be considered in the light of the principles laid out by the SC in the Essar Steel India Case but also in light of the express language of the Resolution Plan itself, which provided for the extinguishment and discharge of all liabilities and claims in relation to any corporate guarantees, indemnities and all other forms of credit support provided by ESIL prior to the Resolution Plan approval date, upon the approval of the Resolution Plan.
The Respondent submitted that the SC in Essar Steel India Case had, in unequivocal terms, set aside the judgements of NCLT and NCLAT which had purported to revive the claims of the operational creditors such as the Petitioner, and negate the admission of claims at a notional value of INR 1 by the RP. Therefore, with the approval of Resolution Plan, the adjudication on the claims stood at finality and there could be no further adjudication on those claims. To support its argument, the Respondent relied on the case of Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited [(2021) 9 SCC 657] ("Ghanashyam Mishra Case"), wherein the SC held that "The legislative intent behind this is to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans would go haywire and the plan would be unworkable."
Hence, the referral of the dispute to the arbitral tribunal would amount to a reopening of the Resolution Plan which would not only be wholly impermissible but would also amount to overriding the SC's pronouncement in the Essar Steel India Case.
The Respondent, bearing in mind the legal position that emerged from the Ghanashyam Mishra Case, concluded its arguments by submitting that the petition filed by the Petitioner under Section 11 of the Act was liable to be dismissed even if one employed the 'eye of needle' test, as laid down in the case of NTPC Limited v. SPML Infra Limited [(2023) SCC OnLine 389] ("NTPC Limited Case"), extracts of which have been reproduced below:
"Eye of the Needle: ...the pre-referral jurisdiction of the courts under Section 11(6) of the Act is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant's privity to the said agreement...The secondary inquiry that may arise at the reference stage itself is with respect to the non-arbitrability of the dispute. The limited scrutiny, through the eye of the needle, is necessary and compelling. It is intertwined with the duty of the referral court to protect the parties from being forced to arbitrate when the matter is demonstrably non-arbitrable."
Hence, the claims that were part of the Resolution Plan became non-arbitrable after such plan was approved by the NCLT.
Observations of the Delhi HC
While deciding on the issue on whether the approval of the Resolution Plan resulted in an extinguishment of existing claims, the Delhi HC observed that once a resolution plan is approved by the CoC and the adjudicating authority, it results in the extinguishment of all the existing claims that any party may have against the corporate debtor and no fresh adjudication can take place for any claim that was made part of the resolution plan. Relying on the Ghanashyam Mishra Case, the Delhi HC observed that the underlying theme noticed by the SC in the said case was the recognition of the right of a successful resolution applicant to take over a corporate debtor on a 'clean' or 'fresh slate', without being burdened by any uncertainties or a specter of irresolution. The approval of a resolution plan is statutorily recognized as a closure to all claims that persons or entities may have against a corporate debtor, and therefore, no fresh claims could be laid or enforced against the successful resolution applicant after the approval of a resolution plan. The Delhi HC observed that the successful resolution applicant cannot be left open to defend or oppose claims which have not been factored in the resolution plan.
The Delhi HC further observed that IBC and the resolution process does not contemplate matters being left inchoate, in fact, it exhorts one to accept the seal of finality and quietude which stands attached to the approval of a resolution plan.
With respect to the question on whether the dispute mentioned in the petition filed by the Petitioner could be said to fall within the ambit of 'non-arbitrability', the Delhi HC relied on the NTPC Limited Case where it was observed that a refusal to refer parties to arbitration would be justified when there was 'not even a vestige of doubt' with respect to non-arbitrability or where it was evident that the matter was 'demonstrably non-arbitrable'. Hence, in Delhi HC's view, once it was accepted that the approval of the Resolution Plan results in the extinguishment of all claims that the Petitioner may have had, the dispute cannot be permitted to be urged again before the arbitral tribunal since it would amount to rewriting upon the clean slate and reopening of the Resolution Plan which would be impermissible in light of the finality accorded by the SC's decision in the Essar Steel India Case. Moreover, empowering the arbitral tribunal to adjudicate or rule upon such disputes would be contrary to the principles enunciated by the SC in the Ghanashyam Mishra Case.
Decision of the Delhi HC
In view of the entirety of the above, the Delhi HC dismissed the petition filed under Section 11 of the Act and held that once a resolution plan is approved by the CoC and the adjudicating authority, it amounts to extinguishment of all the existing claims that parties may have against the corporate debtor and no fresh claims could be laid or enforced against the successful resolution applicant after the approval of a resolution plan.
Further, the Delhi HC applied the 'eye of the needle' test enshrined in the NTPC Limited Case and opined that the disputes mentioned in the petition filed by the Petitioner were non-arbitrable and no reference to the arbitral tribunal was warranted.
VA View: Through this judgement, the Delhi HC has rightly emphasized on the clean slate doctrine laid down in the Essar Steel India Case wherein the SC held that a successful resolution applicant cannot suddenly be faced with undecided claims after the resolution plan submitted by it has been accepted, as this would amount to a hydra head popping up which would throw into uncertainty, amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor.
The legislative intent of IBC is to enable the successful resolution applicant to take over a corporate debtor on a clean slate and not be burdened by unforeseen liabilities, especially those that are neither factored in nor admitted in the resolution plan. Therefore, once a resolution plan receives assent by the CoC and the adjudicating authority, it results in the extinguishment of all the existing claims that any party may have against the corporate debtor and no fresh adjudication can take place for any claim that was made part of the resolution plan.
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