Extinguishment of Claims Under the IBC: A Fresh Slate

By: Mangesh Krishna and Akshay Sharma


INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (hereinafter the ‘IBC’) is on the course of becoming one of the most dynamic legislations in India so far. In a short span of over three years, the IBC has undergone a sea of changes by way of amendments, ordinances and judgments. The Hon’ble Supreme Court of India has played a pivotal role by interpreting various provisions of the IBC to make it a workable legislation. Accordingly, the Supreme Court in its much-anticipated judgment of Committee of Creditors of Essar Steel v Satish Kumar Gupta & Ors (hereinafter the ‘Essar judgment’) has put a quietus to various contentious issues under the IBC. Albeit, at the same time it has opened a Pandora’s box of issues amongst which is the extinguishment of the undecided claims of the creditors after the approval of the resolution plan. 

ANALYSING THE ISSUE

The Supreme Court in the Essar Judgment for the purpose of providing a fresh slate to the resolution applicant has held that the undecided claims against the corporate debtor after the approval of resolution plan shall stand extinguished:

67. For the same reason, the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him 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 successfully takes over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove.

Prior To The Essar Judgment 

Pertinently, prior to the Essar Judgment, the National Company Law Appellate Tribunal in its judgments Dynepro Private Limited v V. Nagarajan and G.V. Suresh Kumar & Ors. v Kapil Dev Taneja had clearly held that after the approval of the resolution plan, a party shall have the right to file its claim before appropriate forum and the time period of the moratorium will be excluded as provided under Section 60 (6) of the IBC for the purposes of the limitation period. Furthermore, the NCLAT in Prasad Gempex v Star Agro Marine Exports Pvt. Ltd had held that notwithstanding any order passed under Section 31 of the IBC, i.e. the approval of resolution plan, a party can pursue its claim before the appropriate forum after the expiry of the moratorium period. In the instant case, the NCLAT was dealing with an order of the National Company Law Tribunal passed under Section 31 of the IBC, wherein the NCLT had held that any pending or future proceedings against the corporate debtor in relation to the period prior to the approval date of the resolution plan shall stands dismissed.

Aftermath Of The Essar Judgment 

The NCLAT in its decision Santosh Wasantrao Walok v Vijay Kumar V.Iyer, relying on the Essar judgment has categorically held that the claims that are not submitted to or are not accepted or dealt with by the resolution professional would stand extinguished after the approval of the resolution plan. Recently, the Rajasthan High Court in Ultra Tech Nathdwara Cement Ltd. v Union of India, relying upon the Essar judgment rejected the claim of the GST department by stating that all dues and liabilities will stand extinguished after the approval of the resolution plan. Hence, the ball has already started rolling.

GLARING ISSUES WITH THE ESSAR JUDGMENT 

There are several issues with the reasoning of the dictum as laid down by the Supreme Court in the Essar judgment, but before proceeding further it is to be borne in mind that the Bankruptcy Law Reform Committee Report, 2015 states that the discharge order i.e. approval of resolution plan will be with regard only to the specified debts. 

Firstly, the Essar Judgment based its conclusion on the reasoning that all the claims against the corporate debtor shall be submitted to and decided by the resolution professional. This reasoning is contrary to the Swiss Ribbons v Union of India judgment wherein the Supreme Court itself had explicitly held that the resolution professional cannot adjudicate/decide the claims and only has administrative powers to collate the claims. 

Secondly, if the claims cannot be decided by the resolution professional then they have to be decided by the adjudicating authority under Section 60 (5) of the IBC. There can be claims which may involve a dispute and may require a complete trial, especially in the case of an operational creditor. However, the proceedings under the IBC are summary in nature and the NCLAT in M/s Roma Enterprises v Mr. Martin S.K. Golla, R.P. has observed that neither the resolution professional nor the adjudicating authority can decide a dispute involving a question of fact and evidence for adjudication of the claim of the creditor. 

Thirdly, there may be instances where the claims of the creditors can remain undecided under the resolution plan for a number of reasons apart from being disputed such as the claim could not have been submitted within the stipulated time period or the claim was rejected due to a technical reason etc. However, the Essar judgment fails to take into consideration this aspect.

In light of the above, all such creditors, especially operational creditors, have been left in a predicament since their undecided claims can neither be adjudicated by the resolution professional nor by the adjudicating authority under the limited jurisdiction of the IBC and due to the Essar Judgment, such undecided claims shall now stand extinguished after the approval of the resolution plan without being given any opportunity of being considered appropriately.

Fourthly, the Essar Judgment has effectively read down Section 60(6) of the IBC without ascribing any reasons for doing so. Section 60(6) of the IBC provides that the moratorium period shall be excluded for the purpose of the limitation period for any suit or application. The rationale behind this particular provision is clearly based on the premise that the creditors can pursue their claims against the corporate debtor before other forums even after the approval of the resolution plan. Quite interestingly, the Supreme Court in its judgment in B.K. Educational Services Private Limited v Parag Gupta And Associates had considered Section 60(6) to be a necessary provision in the IBC and relied upon it while deciding the applicability of the Limitation Act, 1963 on the IBC. Despite the same, the Essar Judgment effectively sets aside Section 60(6) of the IBC without providing any reasoning. 

The NCLAT in Santosh Wasantrao Walokar v Vijay Kumar V. Iyer had given due consideration to the said issue and accordingly has suggested the Insolvency and Bankruptcy Board of India to frame appropriate provisions in the IBBI (Insolvency for Corporate Persons) Regulations 2016 to aid and smoothen the entire resolution process leaving behind no claims of any creditors.

CONCLUSION

To achieve the objective of resolution under the IBC, it is imperative to provide the resolution applicant with a fresh slate at the end of the resolution process however, it can still be done by resolution of the claims in a judicious manner rather than simply extinguishing them. Therefore, the Essar judgment warrants reconsideration on this aspect. By way of amendments, provisions may be introduced in the IBC which may vest the resolution professional with limited powers to decide all the claims of the creditors prior to the approval of the resolution plan, or provide a better framework to deal with such claims as suggested by the NCLAT in Santosh’s case. Alternatively, provisions may be made in the IBBI (Insolvency for Corporate Persons) Regulations 2016 similar to those in the voluntary liquidation process which shall necessarily provide for dealing with the future liabilities arising out of such undecided claims under the resolution plan. Such amendments shall not only remedy the conundrum brought by the Essar Judgment but shall also do away with the unwarranted interpretations by the judicial authorities in this regard.


(Mangesh is an advocate practising in New Delhi specialising in Commercial Litigation, Insolvency, Company Laws and Arbitration while Akshay is a final year law undergraduate at National University of Study and Research in Law, Ranchi. They may be contacted here and here, respectively.)

Cite as: Mangesh Krishna and Akshay Sharma, ‘Extinguishment of Claims Under the IBC: A Fresh Slate’ (The RMLNLU Law Review Blog, 20 June 2020) <https://rmlnlulawreview.com/2020/06/20/extinguishment-of-claims-under-the-ibc-a-fresh-slate> date of access.

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