The Calcutta High Court (HC) in Sirpur Paper Mills Ltd. v. IK Merchants (P) Ltd.1 recently ruled a crucial judgment in which it determined the fate of an arbitral award after the approval of a resolution plan. The court followed the path of fresh slate theory and held that the award claim which was not filed during the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP) is extinguished as the resolution plan is approved. This post analyses Sirpur Paper Mills case2 while supporting the reasoning given by the court.
Factual matrix and issues of the case
The present case arose from a petition under Section 343 of the Arbitration and Conciliation Act, 1996 (ACA) to set aside an award passed by a sole arbitrator. Meanwhile, during the pendency of Section 34 petition, the CIRP of the petitioner (Sirpur Mills) was initiated by its other operational creditors and soon after the resolution plan of Sirpur Mills4 was approved by the adjudicating authority (AA), it filed an additional application contending that the present petition under Section 34 is to be rendered infructuous and dismissed as the resolution plan for corporate debtor (CD) is already passed. It is to be noted that the respondent (IK Merchants) did not lodge its claim concerning the award before the resolution professional (RP). Resultantly, the question of the status of this award after approval of the resolution plan by the AA.
The two issues raised in this case were: firstly, whether the award claim is extinguished after the approval of the resolution plan or not; secondly, whether the Section 34 petition has become infructuous after the resolution plan is passed or not.
Contentions of the parties
Sirpur Mills5 contended that: firstly, as per Section 316 of the Insolvency and Bankruptcy Code, 2016 (IBC), a resolution plan is binding on all the stakeholders involved. Therefore, the claim of IK Merchants7 should not be entertained after approval of the same. If a creditor fails to submit his claim in accordance with Section 15(1)(c)8 of the IBC and Regulation 6(2)(c) of the CIRP Regulations9 he forfeits his right of payment. Secondly, the 2015 Amendment to Section 3610 of the ACA did away with the provision of the automatic stay of an award when Section 34 petition is filed. This development has been held to be applied retrospectively in the BCCI v. Kochi Cricket (P) Ltd.11 Therefore, IK Merchants12 were not restrained due to the automatic stay for filing a claim during CIRP.
While IK Merchants13 contended that default could be said to occur only when it becomes due and payable14 and the award was automatically stayed at the moment when Section 34 petition was filed in the court. Hence, the filing of a claim in NCLT could not be done by them due to this automatic stay.
Judgment of Calcutta High Court
In a nutshell, Justice Maushami Bhattacharya declared the petition infructuous rendering its dismissal. Majorly relying upon Essar Steel judgment15, the Court held that the award-holder’s claim is extinguished after the approval of the resolution plan.
Essar Steel case
In Essar Steel case16, the two-Judge Bench while deciding the fate of personal guarantors’ right of subrogation after the approval of resolution plan, observed that the approval of a resolution plan binds all the stakeholders. It states that: 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 would successfully take over the business of the corporate debtor. The Court emphasised on the need of certainties and to bring clarity to ascertain the exact amount payable by the future owner of a business. He must start running the business on a “fresh slate”.
Provisions of IBC
The Calcutta HC also relied upon the provisions of IBC, namely, Sections 2517, 2918, 3019, and 31 to infer the fate of undecided or pending claims such as the one of the respondents before this Court. At the time of making a resolution plan, the applicant relies on an information memorandum containing relevant information. The collective reading of the judgments of Essar20 and Ghanashyam Mishra and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.21 makes it quite evident that only the claims which are featured in the information memorandum can be considered by RP and further by the resolution applicant. This information memorandum is relied upon by the resolution applicant to decide its future endeavours concerning CD.
The court stated that the operational creditor was given notice of initiation of the CIRP against the CD at various stages. The purpose of the provision of these notices under the insolvency regime is not only to make all the creditors aware of the ongoing CIRP but also to invite their claims for the preparation of a list of claims by the RP. The court held that IK Merchants22, in this case, had ample opportunity to approach the NCLT for suitable relief.
Regarding the argument of the automatic stay, the Court relied on the BCCI judgment23 wherein the Supreme Court observed that for the enforcement of an award under Section 36, the amended provisions would be applicable retrospectively to those proceedings for claims as well, which were commenced before the arrival of the Amendment Act. The IK Merchants24 was under a false impression that the provisions of Section 34 of the ACA prior to the amendment would be applicable to his claim. However, the Court was of the opinion that the amended Section 36 requires the award debtor to make a separate application to get a stay on the award, departing from the earlier provision of the automatic stay on the application of the award. Therefore, an award under Section 34 is enforceable unless it is stayed by a court order by an application made under Section 36(3).
The first question that may come up while reading the case is whether the Calcutta HC was right to consider the award as a claim. Courts in earlier cases25 have considered an award as a valid claim under IBC. Even the unenforced foreign awards have also been considered as a claim under IBC. Also, it is clear from the definition of a claim under Section 326 of the IBC that it aims to include all the possible claims which could affect the financial condition of a CD. Although the claim was valid even in this case also, its non-filing to the RP at the right time i.e. during CIRP, resulted in its extinguishment. The rationale behind this was that no new management should have to deal with the claims from before CIRP especially when the whole systematic process has been followed under IBC to get the corporate debtor on its feet again.
A question could also pop up about the status of an award as a pre-existing dispute. A Section 34 petition made the award claim disputed which takes it outside the purview of IBC.27 But it is to be noted that the cases, which state that the pre-existing dispute is to be outside the purview of IBC, were related to the “initiation” of CIRP by the operational creditor, and not the “filing” of claim after CIRP is started. In this case, the issue was not concerning an operational creditor’s ability to initiate the CIRP due to a pre-existing dispute. Rather, the question was with respect to the need for filing a claim by the award holder. Therefore, although the award holder could not have initiated the CIRP of the corporate debtor due to the claim being disputed, he could have filed the claim when the CIRP was initiated by other operational creditors.
It is clear from the facts of the case that IK Merchants28 had time to submit the claim, as per Regulation 12(2), within 90 days from the insolvency commencement date. But the time-limit to submit the claim is directory in nature rather than being a compulsion.29 Therefore, even after the BCCI judgment30 which established the applicability of amended provisions of the ACA, IK Merchants31 had enough time of around two months in their hands to submit their claim.
The authors opine that for India to become an investor-friendly country, its insolvency regime must stay robust while giving due regard to creditors’ rights of payment. Keeping the objective of IBC in mind, the Calcutta HC in the present case rightly followed the fresh slate theory which goes in favour of resolution applicants. This certainty in law will go a long way in solving issues of extinguishment of claim particularly after passing of resolution plan. IBC being a special legislation should get a priority over general legislations such as ACA, in the present case. The approach of Calcutta HC shows strict compliance of procedural aspects of IBC, which is crucial in keeping the IBC strong and effective, unlike its predecessors.
† 4th year student, BA LLB (Hons.), Hidayatullah National Law University, Raipur.
†† 4th year student, BA LLB (Hons.), Hidayatullah National Law University, Raipur.
9 Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, available at <https://ibbi.gov.in/uploads/legalframwork/da571b238fd759552d3782100f410323.pdf>, last accessed on 22-5-2021.
25 Annapurna Infrastructure (P) Ltd. v. Soril Infra Resources Ltd., 2017 SCC OnLine NCLT 82