The Calcutta High Court ("High Court") in its recent judgement of Sirpur Paper Mills Limited v. I. K. Merchants Pvt. Ltd.1 settled the debate on an integral point of law on the interplay between the Insolvency and Bankruptcy Code, 2016 ("IBC") and the Arbitration and Conciliation Act, 1996 ("Arbitration Act"). The High Court held that the approval of a resolution plan under the IBC in relation to a corporate debtor, would extinguish the claims of the award holder under the Arbitration Act against such corporate debtor.
On 31 October 2008, Sirpur Paper Mills Limited ("Petitioner") preferred an application before the High Court under Section 34 of the Arbitration Act seeking annulment of award dated 07 July 2008, passed in arbitration proceedings against I. K. Merchants Pvt. Ltd. ("Respondent").
During pendency of the Section 34 proceedings, corporate insolvency resolution proceedings ("CIRP") were initiated against the Petitioner sometime in September 2017 and subsequently moratorium was also issued under Section 14 of the IBC.
In lieu of the CIRP, the Petitioner contended that the Section 34 application should be kept in abeyance following invocation of the provisions of the IBC against it. However, the contention was rejected by the High Court vide its judgement dated 10 January 2020 wherein the High Court observed that CIRP cannot be used to defeat a dispute which existed prior to initiation of insolvency proceedings.
Subsequently, in light of the judgment rendered in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta2 (" Essar Steel") & more recently in Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited3 ("Edelweiss"), and in lieu of the fact that the resolution plan vis-à-vis the Petitioner company under the IBC proceedings stood approved, the maintainability of the Section 34 proceedings was once again challenged by the Petitioner before the High Court.
Contentions of the parties
The Petitioner contended that the proceedings under Section 34 of the Arbitration Act had become infructuous, since the management of the Petitioner company had been taken over by a new entity following the approval of the resolution plan for the Petitioner by the NCLT. While relying on the case of Essar Steel and Edelweiss, the Petitioner made the following submissions:
- Section 31 of the IBC states that an approved resolution plan is binding on the corporate debtor and its employees, members and other stakeholders.
- A successful resolution applicant cannot be faced with undecided claims after the resolution plan is accepted.
- The debts of the corporate debtor stand extinguished save to the extent of the debts which have been taken over by the resolution applicant under the approved resolution plan4.
- The word 'claim' has been defined under the IBC as a right to payment, whether or not such right is reduced to a judgement. Therefore, even a disputed claim as under challenge before the High Court is maintainable under the IBC.
On the other side, the Respondent submitted that submissions on maintainability of the proceedings had been considered and rejected by the High Court twice on earlier occasions vide orders dated 10 January 2020 & 03 February 2020. The Respondent further contended that res judicata would apply to different stages of the same proceedings, therefore the Petitioner was prevented from raising such plea again.
The Respondent contended that upon filing of the proceedings under Section 34 of the Arbitration Act, the award was automatically stayed, thereby preventing it from approaching the NCLT to lodge its claim. It was further contended that once an application under Section 34 is filed, the dispute raised vis-à-vis the award amounts to a pre-existing dispute, which takes the Respondent's claim outside the purview of the IBC.5
The High Court noted that the question which had to be answered in the present proceedings was whether the claim of an award-holder can be frustrated upon the approval of a resolution plan under Section 31 of the IBC.
The High Court took note of the Supreme Court's judgements in Essar Steel and Edelweiss, 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 such resolution plan.
The High Court firstly observed that the Supreme Court in Essar Steel held that a 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'. This view was reiterated by the Supreme Court in its decision in Edelweiss, where it held that an approved resolution plan would be binding on the corporate debtor, its employees and other stakeholders by virtue of Section 31 of the IBC. The Supreme Court was of the view that any debt which does not form part of the approved resolution plan shall stand extinguished and no person will be entitled to initiate or continue any proceeding in respect of a claim which is not a part of such resolution plan.
In light of the observations contained in Essar Steel and Edelweiss judgment read with Section 25, 29, 30 and 31 of the IBC, the High Court observed that for a claim to be considered by the resolution professional and later by the committee of creditors for approval of a resolution plan, such claim must feature in the information memorandum provided to the resolution applicant, who will ultimately takeover the business of the corporate debtor.
The High Court found that the IBC envisaged several stages where an operational creditor is given notice of commencement of the CIRP against the corporate debtor i.e., the Petitioner. It observed that the arrangement of sections under the IBC are conducive to not only making all creditors aware of the CIRP but also to invite claims and include them as part of the list of claims to be collated by the resolution professional.
Keeping the various stages of IBC in mind, the High Court noted that the Respondent had sufficient opportunities to approach the NCLT for appropriate relief. Hence, the Respondent 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 Arbitration Act.
While answering the question of whether the Respondent could have lodged a claim before the NCLT when the impugned award was under challenge by the Petitioner, the High Court relied on the judgment of Board of Control for Cricket in India vs. Kochi Cricket Private Limited & Ors6, wherein the Supreme Court held that execution of a decree pertains to the realm of procedure and that there is no vested right in a judgement debtor to resist execution. The amendment to Section 36 of the Arbitration Act pertaining to filing separate stay application would thus apply to all Section 34 applications pending on the date of commencement of the amendment act.
In view of the above, the High Court found that firstly, the Respondent was free to enforce the award against the Petitioner, especially in the absence of an application for stay under the amended provision of Section 36 of the Arbitration Act. Secondly, the Respondent could have pursued its claim before a forum contemplated under the IBC.
The High Court eventually re-affirmed the position of law laid down in Essar Steel and Edelweiss judgments that pre-existing and undecided claims which have not featured in the collation of claims and consequent consideration by a resolution professional, shall be treated as extinguished upon approval of a resolution plan under Section 31 of the IBC.
The High Court thus concluded that the claim of the award holder had extinguished upon approval of the resolution plan under Section 31 of the IBC. Further, it also noted that the exercise of deciding the arbitration petition i.e., whether the award should be set aside or sustained is a complete waste of judicial time as well as of the parties.
1. 2021 SCC OnLine Cal 1906
2. (2020) 8 SCC 531
3. 2021 SCC OnLine SC 313
4. Gaurav Dalmia vs. Reserve Bank of India & Ors. [2020 SCC Online Cal 668]; Axis Bank Limited vs. Gaurav Dalmia [MANU/WB/0739/2020]; Sumitra Devi Shah & Ors. vs. Tata Steel BSL Limited [2021 SCC Online Cal 114]
5. Mobilox Innovations Private Limited vs. Kirusa Software Private Limited [(2018) 1 SCC 353]; K. Kishan vs. Vijay Nirman Company Private Limited [(2018) 17 SCC 662]
6. (2018) 6 SCC 287
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