The Calcutta High Court (“CHC”) has in its judgment dated May 7, 2021, in the matter of Sirpur Paper Mills Limited v. I.K. Merchants Private Limited (Formerly Known as I.K. Merchants) [A.P. 550 of 2008] (“Judgement”), held that the claim of the arbitral award-holder will be frustrated once the resolution plan of the award-debtor is accepted under Section 31 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts

In the instant case, the petitioner is Sirpur Paper Mills Limited (“Petitioner”) and the respondent is I.K. Merchants Private Limited, formerly known as I.K. Merchants (“Respondent”). This is an application for setting aside an award, dated July 7, 2008, passed by a sole arbitrator in arbitration proceedings between the Petitioner and Respondent (“Award”), as a result of subsequent developments after the passing of the impugned Award. By a judgment dated January 10, 2020 (“2020 Order”) on the question whether application by the Petitioner under Section 34 (Application for setting aside arbitral awards) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) should be kept in abeyance following invocation of the provisions of the IBC against the Petitioner, the CHC had held that corporate insolvency resolution proceedings (“CIRP”) cannot be used to defeat a dispute which existed prior to initiation of the insolvency proceedings. Subsequently, the Petitioner applied to recall the 2020 Order, which was rejected. The present application is the second round in the recourse against the Award where the Petitioner has urged that the application for setting aside of the Award cannot be proceeded with after approval of the resolution plan (“Resolution Plan”) in relation to the Petitioner.

Issues

Whether the claim of an award-holder can be frustrated on the approval of a resolution plan under Section 31(Approval of resolution plan) of the IBC.

Arguments

Contentions raised by the Petitioner:

The Petitioner averred that the proceedings initiated under Section 34 of the 1996 Act, pursuant to the Award were infructuous in nature, and that the Respondent’s claim ceased to exist since the control of the Petitioner was vested in a new entity, following the approval of a Resolution Plan of the Petitioner by the National Company Law Tribunal (“NCLT”) under the IBC. The Petitioner relied on Section 31 of the IBC which provides that an approved resolution plan is binding on the corporate debtor and its employees, members and other stakeholders. Placing reliance on the decision of the Supreme Court (“SC”) in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [(2020) 8 SCC 531] (“Essar”), Petitioner contended that a successful resolution applicant cannot be faced with undecided claims after the resolution plan has been accepted, and hence as per Essar, in the instant case, the debts of the Petitioner stood extinguished, save to the extent of the debts which were taken over by the resolution applicant under the approved Resolution Plan. Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations, 2016 (“CIRP Regulations”) provides that a resolution plan must mandatorily contain the amount payable under it including the amount payable to the operational and financial creditors. The Petitioner submitted that in the event a creditor fails to submit his claims before the resolution professional, it forfeits its rights to the claim. Relying on Board of Control for Cricket in India v. Kochi Cricket Private Limited & Others [ (2018) 6 SCC 287] (“Kochi Cricket”), the Petitioner urged that Section 36 (Enforcement) of the 1996 Act would apply to pending applications under Section 34 of the 1996 Act on the date of commencement of the Arbitration and Conciliation (Amendment) Act, 2016 (“2016 Amendment”).

Contentions raised by the Respondent

The Respondent contended that the same arguments were made by the Petitioner on two earlier occasions as well in 2020, which had been decided and that such orders had not been challenged by the Petitioner. Relying on Satyadhyan Ghosal vs. Deorajin Debi (Smt) [AIR 1960 SC 941] and Arjun Singh v. Mohindra Kumar [(1964) 5 SCR 946], it was argued that res judicata would apply to different stages of the same proceeding. It was further submitted that upon filing of the application under Section 34 of the 1996 Act in October 2008, the Award was automatically stayed, and the Respondent could not approach the NCLT for lodging its claim. Relying on Kochi Cricket and Government of India v. Vedanta Limited (Formerly Cairn India Limited)[(2020) 10 SCC 1], it was contended that amendments will only have prospective application. It was thus submitted that with the filing of an application under Section 34 of the 1996 Act, the dispute raised, amounted to a pre-existing dispute, taking the Respondent outside the purview of the IBC. The Respondent relying on Swiss Ribbons Private Limited v. Union of India [(2019) 4 SCC 17], argued that a default would occur only when a debt, arising from a claim, becomes due and payable and is not paid by the debtor. It was submitted that in the instant case, the Respondent being the operational creditor does not have any claim since nothing is due from the Petitioner, in view of the pendency of the application under Section 34 of the 1996 Act.

Observations of the Calcutta High Court:

The CHC observed that in the 2020 Order, it was held that CIRP cannot be used to defeat a dispute which existed prior to initiation of the insolvency proceedings. It was observed that subsequently, on February 3, 2020, the Petitioner’s application for recalling of the judgment, was rejected by the CHC as well. The CHC clarified that the reason for revisiting the 2020 Order, was the pronouncement of the law by the SC in Essar and in the recent Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited [2021 SCC OnLine SC 313] (“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 the resolution plan.

The CHC observed that a decision-making process must be attuned to a dynamic legal landscape shaped by legislative intervention and judicial pronouncements. The most predictable aspect of law is its constant evolution. The CHC stated that it would hence be judicial short-sightedness, even stubbornness, to hold on to a view when the law, in the meantime, had transformed into a different avatar.

Addressing the contention of res judicata raised by the Respondent, the CHC observed that the principle of res judicata was essentially to guard the court from abuse of the process where the same matter in issue, which had been heard and finally decided by a court, is urged again between the same parties. However, it was observed that the question of maintainability of the application under Section 34 of the 1996 Act could be considered at any point of time on the legal aspect and particularly on the pronouncement of a decision relevant to the matter.

Analysing the SC judgements in Essar and Edelweiss, and the IBC, the CHC noted that for a claim to be considered by the resolution professional and later by the committee of creditors (“CoC”) for approval of the resolution plan, the said claim must feature in the information memorandum prepared by the resolution professional and provided to the resolution applicant which would ultimately take over the business of the corporate debtor. The CHC observed that the IBC contemplates of several stages where an operational creditor is given notice of the commencement of CIRP against a corporate debtor. The IBC also takes into account claims of parties who have not initiated proceedings against the corporate debtor as operational creditors. The CHC deemed the arrangement of the sections to be not only conducive to making all creditors aware of the CIRP but also to invite claims and include them as part of the list of claims which are collated by the resolution professional and approved in the resolution plan by the CoC and finally by the adjudicating authority.

Analysing Regulations 7 (Claims by operational creditors) and 12 (Submission of proof of claims) of the CIRP Regulations, the CHC opined that from the date of the admission of the application of initiation of CIRP against the petitioner, that is, on September 18, 2017, until approval of the Resolution Plan on May 16, 2018, the Respondent had sufficient opportunity to approach the NCLT for appropriate relief. The Respondent was obligated to take active steps under the IBC instead of waiting for the adjudication of the application under Section 34 of the 1996 Act. Addressing the issue of whether or not the Respondent could have lodged and pursued a claim before the NCLT, when the Award was challenged by the Petitioner in the CHC on October 31, 2008, the CHC noted the stance of the Respondent that in light of Section 34 of the 1996 Act, prior to 2016 Amendment, impugned Award was automatically stayed upon filing of the application under Section 34 of the 1996 Act. The CHC observed that post the 2016 Amendment, Section 36(2) of the 1996 Act requires the court to grant an order of stay of the operation of the award in accordance with Section 36(3) of the 1996 Act, on a separate application for stay taken out by the award-debtor. The CHC noted that the amended Section 36(2) of the 1996 Act marks a significant departure from the erstwhile provision in clarifying that filing of an application for setting aside of an award under Section 34 of the 1996 Act shall not by itself make the award unenforceable unless the award is stayed by an order of court in an application made in the manner provided under Section 36(3) of the 1996 Act.

Placing reliance on Kochi Cricket, the CHC clarified that with regard to Section 34 of the 1996 Act, applications which were pending at the time of the judgment in Kochi Cricket would also be governed by the new Section 36 of the 1996 Act, as amended. Thus, the Petitioner would not have the benefit of the Award being automatically stayed upon filing of the application and the Respondent would be free to enforce the Award against the Petitioner in the absence of an application for stay of the Award under the amended Section 36 of the 1996 Act.

The CHC heavily relied on the view of the SC, as crystallized in Essar and Edelweiss, that pre-existing and undecided claims which have not featured in the collation of claims and the consequent consideration by the resolution professional, shall be treated as extinguished upon approval of the resolution plan under Section 31 of the IBC.

Judgement

The CHC rendered the Award as infructuous. The CHC ruled that the Respondent could have enforced the Award against the Petitioner, in the absence of an application for stay of the Award under the amended Section 36 of the 1996 Act, and that the Award would not automatically stay on filing of the application under Section 34 of the 1996 Act. It was further held that an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus for chasing the fruits of an award, even where a challenge to the award is pending in a civil court. Thus, it was held that an award-holder’s claim will stand extinguished on approval of the award-debtor’s resolution plan under Section 31 of the IBC.

VA View:

The CHC has thus clarified that an award-holder’s claim will get frustrated on the approval of the resolution plan of the award debtor. Through this Judgement, the CHC has upheld the intent of the IBC, and has protected the rights of a successful resolution applicant. The Judgement recognized the necessity of featuring all the claims beforehand, in the information memorandum, to be provided to the resolution applicant, as claims which do not form a part of the resolution plan would stand extinguished.

This Judgement has reiterated the fact 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, rendering uncertain the running of the business of a corporate debtor by a successful resolution applicant. This Judgement has reaffirmed that a successful resolution applicant who takes over the business of the corporate debtor must receive the opportunity to start running the business of the corporate debtor on a fresh slate.

For more information please write to Mr. Bomi Daruwala at [email protected]

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