To Verify or Not? The Saga of Belated Claims During the CIRP

The Insolvency and Bankruptcy Code, 2016¹ (the Code) was introduced with a staunch and unambiguous objective of making the process of debt resolution more efficient, streamlined and time-bound. A regulatory supplement to the Code, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016² (the CIRP Regulations) prescribes timelines for various steps and actions required for completion of the corporate insolvency resolution process (CIRP). Upon commencement of CIRP, it is a resolution professional’s primary and foremost duty in terms of Section 18 of the Code³ to collate and verify claims of creditors of the corporate debtor, without which a Committee of Creditor (CoC) cannot be constituted. Needless to say, deliberations and decisions taken in CIRP contribute immensely to the overall progress of a CIRP and therefore, claim verification being a precursor, becomes critical for the entire process.

Notably, prior to the amendment of the CIRP Regulations on 3-7-2018⁴ (the 2018 Amendment), Regulation 12(2) of the CIRP Regulations permitted the creditors of a corporate debtor to submit their claims till the approval of a resolution plan by the Committee. The aforesaid liberty available to creditors subjected the process to delay due to repeated revisions to incorporate the belated claims of the creditors. As a corrective step, through the 2018 Amendment, the timeline for filing claims was limited to on or before the ninetieth day of the insolvency commencement date. However, in view of the timelines prescribed under the CIRP Regulations declared as “directory” by various judicial precedents (discussed below), the belated claims have been invariably allowed to be verified at a belated stage of the CIRP which, in effect, brought the position to status quo ante. Consequently, the CIRP Regulations were amended yet again on 18-9-2023⁵ (the 2023 Amendment) to bring a concrete time-frame for the purposes of claim verification, thereby deleting Regulation 12(2) of the CIRP Regulations and circumscribing the period for filing the claim up to the date of issue of request for resolution plans under Regulation 36-B or ninety days from the insolvency commencement date, whichever is later.

The position of law prior to the 2018 Amendment (Phase I) was amply clear and much more liberal, tilting towards the creditors filing belated claims. However, the changes brought about by the 2018 Amendment (Phase II) which intended to make the timelines stricter, inadvertently created legal debates on (a) the nature of timelines prescribed whether mandatory or directory; (b) the power of the adjudicating authority and the resolution professionals to condone such delays; and (c) if the aforesaid is answered in affirmative, what would be the extent of time up to which such condonation can be permitted. This article deals with the aforesaid issues that arose in Phase II and argues that the 2023 Amendment (Phase III) is expected to end the debate.

Nature of timelines under Regulations 12(2) and 40-A of the Regulations: Directory or mandatory?

In practice, it is widely observed that the submission of claims by creditors is many a time, for various reasons, belated i.e. beyond the timeline provided in the public announcement inviting claims from creditors and in certain cases, much beyond the period of 90 days [period stipulated in the 2018 Amendment of Regulation 12(2) and the “model timeline” provided in Regulation 40-A of the CIRP Regulations]. Given the aforesaid, a resolution professional could not accept and verify such belated claims during the sustenance of Regulation 12(2) (omitted by the 2023 Amendment). Thus, the questions which arose were:

(i) whether the timeline provided in CIRP Regulations are directory or mandatory in nature; and

(ii) could a resolution professional, solely and merely on grounds of delay, reject the claims of a creditor?

Anent the legal question on the nature of the timeline, adherence to the timeline stipulated in Regulations 12(2) and 40-A of the CIRP Regulations has been repeatedly held to be directory in nature, and not mandatory. The National Company Law Appellate Tribunal (NCLAT) in Standard Surfa Chem India (P) Ltd. v. Kishore Gopal Somani⁶ held that the model timeline is only directory in nature. It was also held that the timeline provided under the CIRP Regulations is a guiding factor to complete the resolution process in a time-bound manner and in exceptional circumstances, such a timeline could be extended. The National Company Law Tribunal (NCLT), Mumbai Bench in SBI v. Videocon Industries Ltd.⁷, while dealing with the identical issue of the nature of timelines provided in Regulation 40-A of the CIRP Regulations clarified that the very reason a model timeline is provided, suggests an ideal frame of time within which the proceedings must be concluded in the best interest of a resolution process. However, there could be a wide number of reasons that could prevail and cause the occurrence of a delay in processes, such as the submission of a creditor’s claims. The NCLT observed that,

18. … model timelines provided in Regulation 40-A of the CIRP Regulations are directory in nature and are not required to be mandatorily adhered to. This is an established position of law which has been upheld by the courts and tribunals on several occasions. It may be noted that the Supreme Court has, in multiple decisions, observed that the timelines prescribed in the CIRP Regulations are directory in nature and not mandatory [Brilliant Alloys (P) Ltd. v. S. Rajagopal⁸].⁹

However, in spite of the nature of the timeline being directory in nature, it was never open to a resolution professional to consider and verify a claim if submitted beyond the period of 90 days, as inclusion of a claim at a belated stage is likely to have a cascading effect on the overall process, including formulation of plans by prospective resolution applicants as well as deliberation and discussions on their legality and feasibility.

The Principal Bench of the NCLT in Twenty First Century Wire Rods Ltd., In re ¹⁰ was pleased to allow an application seeking condonation of delay in filing the claim with the resolution professional. In doing so, the NCLT also held that the claims of a creditor could not be rejected solely on the grounds of delay in claim submission. Interestingly, in SBI v. ARGL Ltd.¹¹ the Principal Bench of the NCLT, while considering an application of a similar nature filed by the Central Board of Goods and Service Tax Department indicated that it was irrelevant whether the claim is considered or not, since the government dues would always be reflected in the books of accounts of the corporate debtor. As such, the resolution professional would be required to take cognizance of the dues as per the books of accounts without waiting for the submission of the claim form. However, in Ahluwalia Contracts (India) Ltd. v. Logix Infratech (P) Ltd.¹², the NCLT clarified that a resolution professional is duty-bound to entertain the claims before the 90th day and thereafter advice the claimant to approach NCLT/adjudicating authority to condone the delay of the claims. The Supreme Court in State Tax Officer v. Rainbow Papers Ltd.¹³, while answering the question of the validity of rejection of a belated claim on the ground of delay by a resolution professional (the claim was filed after the approval of the resolution plan), observed that the delay in filing of a claim could not be the sole ground for rejection of such a claim as the timeline prescribed under the Regulation 12(2) was directory, and not mandatory. Accordingly, the Supreme Court set aside the resolution plan approved by the NCLT and directed the resolution professional to consider a fresh resolution plan which also accounts for the claim of the creditor (viz. the GVAT Authority held to be a secured creditor by virtue of statutory charge under GVAT Act¹⁴).

As such, while delay was not the sole factor for rejecting a claim, albeit when delay was beyond 90 days, it became a practice for the resolution professionals to reject the claims on the ground of delay, to be subsequently verified upon receiving orders from the adjudicating authority. This resulted in delays and laches, with creditors knocking at the doors of the adjudicating authority for condonation of delay and adding extra weight to an already overburdened NCLTs. The said practice, in result, consumed more time making this practice antithetical to the object of the Code, more so there being no rationale for treating 90 days period as sacrosanct threshold to reject claims. The position of law while perusing the Regulations and upon glancing the judicial precedents continued to confuse stakeholders in the process.

Extent of time up to which delay could be reasonably condoned

The other important question that required an answer pertained to the length of time up to which belated claims could be allowed for verification. In this regard, it is important to understand the milestone/stage in a CIRP after which entertaining further claims would derail the process and affect the information shared with the prospective resolution applicants. Therefore, while the Principal Bench of the NCLT in Ahluwalia Contracts (India) Ltd. v. Logix Infratech (P) Ltd.¹⁵ (vide order dated 24-2-2023) held that,

… the applicant is not legally permitted to move the present application as the applicant is duty-bound to entertain the claims before the 90th day and thereafter advice the claimants to approach NCLT/adjudicating authority to condone the delay in filing of the claims.,

However, the 90 days’ period has no rational nexus. A better approach is illustrated in NCLT, Ahmedabad Bench’s order in Assistant Commissioner CGST & Central Excise Division v. Pradeep Kumar Kabra RP of Cengres Tiles Ltd.¹⁶, wherein it held that an application under Section 60(5)¹⁷ of the Code cannot be entertained against the resolution professional’s decision on rejection of claims once the resolution plan has been approved by the CoC and is pending approval before the adjudicating authority. The reasoning given in the aforesaid ruling buttresses an objective i.e. to not derail or delay a CIRP process by entertaining creditors to challenge claim verification by a resolution professional. However, a better approach would be to limit the time period for challenging claim rejection up to the date of issuance of request for resolution plan (RFRP) since at that stage of CIRP, a prospective resolution applicant could be beneficially informed about the total exposure/liability of the corporate debtor and/or any possible liability in the event challenge to resolution professional’s rejection is set aside. The 2023 Amendment has taken care of the aforesaid concern, which is explained in the next part of this article.

The IBBI (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2023 and the way forward

In pursuit of streamlining the process and making it more efficient, the Insolvency and Bankruptcy Board of India (IBBI) has taken a reasoned and equitable approach towards the delay in filing of claims. In the case laws discussed above, it is evident as to how the courts and tribunals’ indulgence on the petty issue of deciding if a delay in filing claims is to be condoned or not, itself end up causing more delay. Moreover, the said question of delay is an issue that can be objectively dealt with, without causing wastage of precious judicial time of the courts and tribunals. IBBI has thus, in the recent amendment to the CIRP Regulations (i.e. the 2023 Amendment) omitted Regulation 12(2) of the CIRP Regulations which provided time until ninetieth day from the insolvency commencement for filing a claim. Instead, it inserted a proviso to Regulation 12(1) of the CIRP Regulations, providing a strict milestone/threshold of CIRP process up to which claims can be accepted. As per the 2023 Amendment, (w.e.f. 18-9-2023), the last date for submission of a claim to a resolution professional is the date of issuance of RFRP. The said change is a much-needed step in the larger interest by keeping the authorities from indulging in matters which a resolution professional can very well deal with without any wastage of the time of both the courts and the parties involved.

Not only does the extension in timeline for submission of claims come as a relief to the creditors, it also strengthens the purpose of the Code which is to have a hassle-free and efficient resolution process. Regulation 12(1), while providing for the submission of proof of claims, explicitly mentions in the proviso that claims, if not filed within the timeline mentioned in the public announcement, can very well be submitted “up to the date of issue of request for resolution plans under Regulation 36-B or ninety days from the insolvency commencement date, whichever is later”. A bare perusal of the proviso inserted vide the 2023 Amendment, clarifies that a resolution professional will continue to entertain and verify claims up to the date of issuance of the RFRP without having to seek condonation for such delay before the NCLT. It is expected that this clarity in provision is not convoluted by excessive litigation on this point, thereby recreating the confusion that existed in Phase II.

To put it in perspective, the 2023 Amendment has certainly added to materialise the vision of a well-structured, coherent, and time-bound resolution process and reduce the rather excessive load of pending applications before adjudicating authority.