Introduction
Reaffirming the principles laid down in Essar1 and Edelweiss2, the Calcutta High Court ("High Court") in a recent judgment3 held that an operational creditor who fails to lodge a claim in a Corporate Insolvency Resolution Process ("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." The High Court held that once a resolution plan is approved, all claims which are not a part of the resolution, stand extinguished.
Facts
An application was made under Section 34 of the Arbitration and Conciliation Act, 1996 ("Act") to set aside an arbitration award passed by a sole arbitrator ("Award") in a matter between Sirpur Paper Mills Limited ("Sirpur"/ "Petitioner"/ "Award Debtor") and I.K.Merchants Pvt. Ltd. ("IK Merchants"/ "Respondent"/ "Award Holder"). The challenge before the High Court was that the proceedings under Section 34 had become infructuous due to the approval of a resolution plan and the subsequent changes to the management of the Petitioner, in the insolvency proceedings of the Petitioner under the Insolvency and Bankruptcy Code, 2016 ("IBC").
Arguments advanced:
The Petitioner relied upon Section 31 of the IBC and argued that once a resolution plan is approved, it is binding on all the corporate debtors and its stakeholders4. A resolution applicant cannot be faced with undecided claims once the resolution plan has been accepted5. Reliance was placed upon the definition of 'claim'6 which is defined as a right to payment whether reduced to judgment or not; including a disputed claim and right to such payment whether reduced to judgment or not. Reliance was also placed on definition of 'debt'7, which includes both financial and operational debt. A resolution plan must mandatorily contain the amount payable under it to both operational and financial creditors8. Further, it was argued that the amended Section 36 of the Act applies prospectively9. Thus, arguing that no purpose would be served by pursuing the application for setting aside the Award10.
The Respondent argued that the arguments advanced by the Petitioner, were raised on two earlier occasions and that they had already been rejected; and that res judicata applies to different stages of the same proceeding11. Further, upon filing of an application under Section 34 of the Act, the Award was automatically stayed given the prospective application of amendments12; and the Respondent could not have approached the NCLT for lodging its claim. Filing of an application under Section 34 of the Act would amount to a pre-existing dispute, which would put the Respondent outside the purview of IBC13. Since Section 34/challenge to the Award proceedings were pending, nothing was as such due from the Petitioner, as a default occurs only when a debt is due and payable14.
Judgment
The High Court observed that this was the second time that the Award debtor had urged that Section 34 proceedings could not continue in light of the approval of a resolution plan. The High Court observed that since the law has been continuously evolving, it would amount to 'judicial short-sightedness, even stubbornness' to hold on to past views and hence the argument on res judicata must be read down.
The Supreme Court in Essar15 held that once a resolution plan is approved, it is binding on the corporate debtor and all its stakeholders. The successful resolution applicant must start the business of the corporate debtor on a 'fresh slate'. The Supreme Court in Edelweiss 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. A successful resolution applicant cannot suddenly be faced with undecided claims, making uncertain the amounts payable under the plan. The Supreme Court noted that the revival of the corporate debtor is the dominant purpose of the IBC and no sudden surprises could be sprung on the resolution applicant. Any debt which does not form a part of the approved resolution plan shall stand extinguished and no person is thereafter entitled to initiate proceedings in respect of such extinguished claims. Section 31 of the IBC being clarificatory in nature, is effective from the date of the IBC.
The IBC contemplates various stages16 at which operational creditors are given notice of commencement of CIRP against a corporate debtor, also taking into account claims of parties who have not initiated proceedings against the corporate debtor. For example, the information memorandum includes all details pertaining to the financial position of the corporate debtor including information related to existing disputes. The result is that all creditors are made aware of the CIRP and provisions exist to invite claims to be included in the list of claims. In view of the many opportunities provided to the Award Holder under the IBC to submit its claims, the Award Holder 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 Act.
The High Court further noted that under the amended Section 36 of the Act, the award is not automatically stayed upon filing of a Section 34 application17. The Supreme Court judgment in Kochi Cricket18 clarified that those applications pending at the time of the passing of the said judgment would also be governed by the amended Section 36 of the Act and the award debtor would not have the benefit of an award being automatically stayed. Thus, the High Court held that the Award Debtor was not rendered immobile in the present matter from pursuing its claim under the Act.
The High Court noted that the provisions of the IBC should not be used in terrorem when there are pre-existing ongoing disputes between the parties and the IBC should not be used as a recovery mechanism. One of the objects of the IBC is to ensure that operational creditors do not put the debtor prematurely in insolvency for extraneous considerations.
In essence, the High Court held that an operational creditor who fails to lodge a claim in CIRP has missed the opportunity to claim its dues out of an arbitral award, despite a challenge to the arbitral award pending before a civil court.
Lastly, the High Court refused to go into the question of whether the Award should be set aside or sustained, as it would amount to waste of judicial time; the claim of the Award Holder being extinguished upon approval of the resolution plan.
Footnotes
1. Essar Steel India Limited v. Satish Kumar Gupta (2020) 8 SCC 531
2. 2021 SCC Online SC 313
3. Sirpur Paper Mills Ltd. v. IK Merchants Pvt. Ltd., A.P. 550 of 2008
4. Essar Steel India Limited v. Satish Kumar Gupta (2020) 8 SCC 531
5. 2020 SCC Online Cal 668, MANU/WB/0739/2020, 2021 SCC Online Cal 114
6. Section 3(6)(a) of the IBC
7. Section 3(11) of the IBC
8. Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations, 2016 ("CIRP Regulations")
9. (2018) 6 SCC 287
10. (2004) 11 SCC 168, (2015) 5 SCC 732
11. AIR 1960 SC 941, (1964) 5 SCR 946
12. (2018) 6 SCC 287, (2020) 10 SCC 1
13. (2018) 1 SCC 353, (2018) 17 SCC 662
14. (2019) 4 SCC 17
15. Paragraph 107
16. Regulation 7 under Chapter IV – Proof of Claims; Regulation 12 – Public Announcement
17. (2018) 6 SCC 287
18. (2018) 6 SCC 287
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