The enactment of the Insolvency and Bankruptcy Code, 2016 ("IBC") was aimed at promoting time-bound resolution of corporate debtors ("CDs"). This is evident from the 2015 Report of the Bankruptcy Law Reforms Committee which highlights timely resolution of insolvency as one of the cardinal principles underlying the IBC.
In furtherance of this aim, a significant amendment was introduced to Regulation 12(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations") in 2018 ("2018 Amendment"). Prior to the 2018 Amendment, Regulation 12(2) of the CIRP Regulations allowed creditors of a CD to submit their claims "till the approval of a resolution plan" by the committee of creditors ("CoC"). Consequently, the information memorandum and resolution plans in a corporate insolvency resolution process ("CIRP") were susceptible to multiple revisions to incorporate the claims of creditors as and when they were filed. This resulted in delays in the CIRPs. Pursuant to the 2018 Amendment, the time-period for the submission of claims by creditors was limited to 90 days from the insolvency commencement date ("Amended Regulation 12(2)").
The Amended Regulation 12(2) was a commendable step in the pursuit of timely resolution of CDs. The interpretation of this provision has evolved considerably over time with decisions of the National Company Law Tribunal ("NCLT") and the National Company Law Appellate Tribunal ("NCLAT"). The following section captures a brief account of such jurisprudential emergence.
Interpretation of Amended Regulation 12(2)
In the matters of Twenty First Century Wire Rods Ltd. (MANU/NC/0465/2019) and EARC Pvt. Ltd. v. Adel Landmarks Ltd. (MANU/ND/8365/2019), the Principal Bench of the NCLT observed that when the CIRP has not reached the stage of approval of the resolution plan by the CoC, a claim submitted by a creditor cannot be rejected by a resolution professional ("RP") merely on the ground of delay in filing it. This is because the time-period prescribed under Regulation 12(2) is merely directory in nature.
Further, in the case of India Opportunities III Pte Limited and Anr. v. V. Venkatachalam (2019 SCC OnLine NCLT 18406), the NCLT Hyderabad directed the RP to consider the belated claim of a creditor even at the stage when the resolution plan had already been approved by the CoC and was pending for approval before the NCLT.
Notably, acceptance of claims submitted after the statutorily prescribed period, as endorsed by the NCLT in the aforesaid decisions, rendered the purpose of the 2018 Amendment nugatory and appeared to restore the position of law that existed prior to such amendment. It provided a window for successive extension of CIRPs and potentially conflicted with Section 12 of IBC which requires CIRPs to be completed within 330 days from the insolvency commencement date. This marked a backward movement in the drive of promoting time-bound resolution of CDs.
However, it is noteworthy that some recent orders of the NCLT and NCLAT evince a departure from the above views towards a reasoned and stricter approach in observing the timeline prescribed under the Amended Regulation 12(2).
In the case of Centrum Financial Services Ltd. v. CFM Asset Reconstruction Pvt. Ltd. (MANU/NL/0150/2021), the NCLAT held that even though Regulation 12(2) is directory in nature, a delay of only a few days in filing of claims can be considered. The beneficiaries under the IBC cannot keep on adopting dilatory tactics and defeat the objects of the IBC.
Similarly, NCLT Kolkata in Reliance Commercial Finance Limited v. Vista Mining Pvt. Ltd. (2021 SCC OnLine NCLT 11537) explained that the discretion available to the NCLT to condone delays in filing of claims, in light of the directory nature of Regulation 12(2), must be exercised only for good and sufficient reasons. If this caveat is not considered, the whole purpose of the 2018 Amendment will be defeated. Further, it will open up a wide possibility of late filing of claims in CIRPs, turning "an otherwise time-bound process into a never-ending process".
Further, in the matter of Assistant Commissioner, Central GST v. Vicor Stainless Pvt. Ltd. (2021 SCC OnLine NCLT 7830) NCLT Ahmedabad noted that if belated claims of creditors are accepted at the stage when resolution plans are pending approval of the CoC, the RP will have to amend the stakeholders list and the resolution applicants will have to modify their respective resolution plans. Further, the resolution applicants taking financial assistance from other sources under the resolution plan may have to apply for further assistance. This will hamper the objective of timely completion of the CIRP. The appeal filed against this order of the NCLT was dismissed by the NCLAT, stating that the RP is not duty bound under IBC to collate such belated claims.
These decisions of the NCLT and NCLAT endorse a reasoned and fact-based application of the Amended Regulation 12(2). The authorities have allowed a narrow window for condoning delays for meeting the ends of justice, given that there exist sufficient reasons warranting such condonation and the CIRP has not reached the stage of approval of the resolution plan by the CoC. Such an interpretation of the Amended Regulation 12(2) is undoubtedly a step forward.
The Shadow of the Rainbow Papers Case
The strides made in the aforementioned orders towards achieving the goal of time-bound insolvency resolution are now eclipsed by the judgment of the Supreme Court ("SC") in the case of State Tax Officer v. Rainbow Papers Limited (2022 SCC OnLine SC 1162) ("the Rainbow Papers case").
In this case, the claim of the appellant, a statutory creditor, was rejected by the RP as it was filed after approval of the resolution plan by the CoC. This decision of the RP was upheld by the NCLT and NCLAT. However, the SC observed that delay in filing of a claim cannot be the sole ground for rejection of such claim as the timeline prescribed under the Amended Regulation 12(2) is directory and not mandatory. Accordingly, the SC set aside the resolution plan approved by the NCLT and allowed the RP to consider a fresh resolution plan which also incorporates the claim of the appellant.
This ruling of the SC renders the Amended Regulation 12(2) otiose and opens the floodgates for a plethora of applications seeking consideration of belatedly filed claims. This could result in re-starting the entire bid process as well as multiple revisions of the information memorandum and the resolution plans.
The Way Forward
The objective of a time-bound resolution of CDs can be achieved by a strict interpretation of the Amended Regulation 12(2). Condonation of delay in filing claims should only be allowed when it is vital for meeting the ends of justice and there exist sufficient reasons for the same. Further, such condonation must not be allowed once the CIRP has reached the stage of approval of the resolution plan by the CoC. The interpretation made in the Rainbow Papers case, to the extent it allows submission of claims after the last date provided under the Amended Regulation 12(2), needs to be reconsidered.
Through an invitation dated January 18, 2023, the Ministry of Corporate Affairs ("MCA") had sought public comments on the changes being considered to IBC. Interestingly, one of the changes proposed by MCA is to add a clarification that after the approval of a resolution plan, no proceedings may be commenced/continued by any government or authority regarding claims arising before the commencement of the CIRP, unless otherwise provided in the resolution plan.
In the final amendments to the IBC, the MCA may also consider expanding the scope of such clarification to include any proceedings that may be initiated by any person for challenging any decision of the CoC or the approval of a resolution plan by the NCLT on the ground of non-acceptance of delayed claims. An unambiguous statutory provision to this effect will help put to rest the back and forth of the legal position on acceptance of belated claims.
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