SC Reiterates Finality And Binding Nature Of A Resolution Plan In CIRP Under IBC

In Electrosteel Steel Ltd v Ispat Carrier, 2024 SCC OnLine SC 829, the SC reiterated well-established principles regarding treatment of an operational creditor's claims in a CIRP under the Insolvency and Bankruptcy Code, 2016 ('IBC').

Factual Background:

1. The Respondent was an operational creditor ('OC') responsible for the supply of telescopic and type-mounted cranes, 75-ton crawler cranes, hydra and trailers on hiring basis to the Appellant. The Appellant did not make payment for INR 1,59,09,214.33 for the supply of the aforesaid. Owing to this failure, the Respondent filed two claim petitions before the West Bengal Micro, Small and Medium Facilitation Council ('Facilitation Council') under the Micro, Small and Medium Enterprises Development Act, 2006 ('MSME Act') for a total amount of INR 1,59,09,214.

2. As per the MSME Act, conciliation proceedings were initiated but failed, thereafter arbitration proceedings were commenced. During the pendency of arbitration proceedings, the financial creditors of the Appellant invoked Section 7 of the the IBC before NCLT, Kolkata and a moratorium was imposed on the arbitral proceedings. In view of the moratorium, arbitral proceedings before the Facilitation Council were kept in abeyance.

3. In the IBC proceedings, the Respondent filed its claims before the Resolution Professional who partially admitted the claims. Thereafter, the resolution plan submitted by Vedanta Limited was approved by the NCLT and the claim of the Respondent was not included in the Resolution Plan. NCLT in its order further mentioned that the claims of all OCs were settled at 'nil'. The Respondent did not challenge the order of the NCLT; however, some of the other OCs challenged the said NCLT order but the appeals were dismissed by the NCLAT and subsequently, by the Supreme Court.

4. On the moratorium being lifted, the Facilitation Council resumed the arbitral proceedings and passed an award directing the Appellant to make a payment of INR 1,59,09,214 along with interest to the Respondent under Section 16 of the MSME Act which award was not challenged by the Appellant under Section 34 of the Arbitration and Conciliation Act, 1996 ('Arbitration Act').

5. Thereafter, the Respondent instituted execution proceedings at which stage the Appellant contended that the arbitral award was a nullity as the claim of the Respondent had been settled as 'nil' under the resolution plan, and therefore, nothing was payable to the Respondent, however, the contentions of the Appellant were dismissed. Subsequently, the Appellant challenged this order before the Jharkhand High Court.

Genesis of the Appeal - Issue before the High Court and its finding

6. While the judgment deals with other issues as well, we focus on the following issue framed by the High Court:
   
   "....whether on facts, the Facilitation Council lost its jurisdiction to proceed and pronounce the arbitral award in view of the insolvency resolution plan of the petitioner which was duly approved under Section 31 of the IBC?"

7. In this regard, the High Court held that the Facilitation Council did not lose its jurisdiction to proceed and pronounce the arbitral award notwithstanding approval of the resolution plan by the NCLT under Section 31 of IBC as the arbitral proceedings were initiated prior to the insolvency resolution date, kept suspended during the moratorium period and resumed after lifting of the moratorium and the approved resolution plan simply determined the claim of the Respondent as 'nil' and thus, dismissed the appeal. This finding was based on the understanding that the Respondent was not included in the top 30 OCs whose claims were settled at 'nil'.

8. Hence, the present appeal came to be filed before the Supreme Court by the Appellant.

Arguments before the Supreme Court

9. Before the Supreme Court, the Appellant, relying upon the judgment of Adani Power vs. Shapoorji Pallonji & Co Pvt Ltd, contended that the Respondent's claims stood extinguished once the Resolution Plan was approved and the objective of the IBC was to give a fresh start to the Corporate Debtor. Further, as per Section 63 read with Section 238 of the IBC, the Facilitation Council could not have continued arbitration and passed the award. On the other hand, the Respondent contended that upon approval of the resolution plan, the proceedings that were kept in abeyance due to the moratorium would not be automatically terminated but would stand revived once the moratorium was lifted.

Findings by the Supreme Court

• After hearing the contentions of the parties, the Supreme Court observed that certain key provisions of the Resolution Plan provided for the extinguishment of all claims and pending proceedings against the Appellant and further that 'nil' payment would be made to all OCs against their debts due to the liquidation value of the Appellant being insufficient to cover the debts of the financial creditors.Furthermore, the Supreme Court relied upon the judgments of Essar Steel India Ltd. Committee of Creditors Vs. Satish Kumar Gupta: (2020) 8 SCC 531, Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657 and Ruchi Soya Industries Ltd. v. Union of India, (2022) 6 SCC 343 to highlight the aspect that the successful resolution applicant could not suddenly be faced with 'undecided' claims after the approval of the Resolution Plan as this would amount to a hydra-head popping up and that once a Resolution Plan was duly approved, all claims which were not a part of the Resolution Plan stood extinguished.

• The Supreme Court further observed that if the claims of the top 30 OCs were settled at 'nil', then the Respondent's claims could not be placed higher than the top 30 OCs. Moreover, the resolution plan itself provided that any suit, cause of action, arbitration etc shall be settled at 'nil'. Therefore, Respondent's claim would be treated at par with the top 30 OCs.

• The Supreme Court further held that the lifting of the moratorium would not mean that the claim of the Respondent before the Facilitating Council would stand revived notwithstanding approval of the Resolution Plan by the adjudicating authority. The Supreme Court reiterated that a Moratorium is intended to ensure that no further demands are raised or adjudicated upon during the IBC process so that the process can be proceeded with and concluded without further complications, therefore, the view taken by the High Court was unsustainable and was set aside and accordingly, the Respondent's claim stood extinguished.

The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up, please contact Khaitan & Co at editors@khaitanco.com.