Supreme Court: Admission of claims after the resolution plan has been accepted by CoC would result in making CIRP prolonged and inefficacious October 19, 2023
Published in: Between The Lines
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The Supreme Court has, vide its judgement dated September 11, 2023, in the case of RPS Infrastructure Limited v. Mukul Kumar and Another [CA No. 5590/2021], held that the admission of claims after the resolution plan has been accepted by Committee of Creditors (“CoC”) would result in making the Corporate Insolvency Resolution Process (“CIRP”), an endless process.
M/s. RPS Infrastructure Limited (“Appellant”) entered into an agreement with M/s. KST Infrastructure Private Limited (“Corporate Debtor”) on August 2, 2006, for the purpose of development of land situated at Faridabad, Haryana licensed with the Appellant. However, the Appellant sought arbitration on May 2, 2011, after being aggrieved by the Corporate Debtor’s alleged misconduct pertaining to the advertisement of the project under its own name and without mentioning the name of the Appellant. The arbitral proceedings resulted in an award dated August 8, 2016, in favour of the Appellant. Aggrieved by the award, the Corporate Debtor filed a petition under Section 34 (Application for setting aside arbitral awards) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), on September 26, 2016.
The Appellant filed execution proceedings in respect of the said award which was ultimately adjourned sine die on December 22, 2017, due to the pendency of the arbitration proceedings. The arbitration proceedings upheld the award along with some modifications, on April 25, 2019. An appeal was filed against the said order under Section 37 (Appealable orders) of the Arbitration Act which was pending and meanwhile, CIRP was initiated against the Corporate Debtor in respect of its 3 real estate projects by certain homebuyers who had invested in the said projects. The CIRP application was admitted by National Company Law Tribunal, Delhi (“NCLT”) on March 3, 2019. On March 3, 2019, the interim resolution professional (“IRP”) was appointed who invited the claims from the creditors by issuing a public announcement as per Section 15 (Public announcement of corporate insolvency resolution process) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) read with Regulation 6 (Public announcement) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IBBI Regulations”) on March 30, 2019. The IRP was replaced by the CoC on June 18, 2020, and Mr. Mukul Kumar (“Respondent”) was appointed as the resolution professional of the Corporate Debtor.
The resolution plan submitted by KST Whispering Heights Residential Welfare Association was approved by the CoC by a majority vote of 80.74% on July 11, 2020, and was sent to NCLT for approval under Section 31 (Approval of resolution plan) of IBC on September 8, 2020. The Appellant vide an e-mail to Respondent dated August 19, 2020, highlighted their pending claim of INR 35,67,05,337 against the Corporate Debtor arising from the arbitral award which was confirmed with certain modifications during the proceedings under Section 34 of the Arbitration Act. The claim was rejected by the Respondent on August 25, 2020, citing that the time period for submitting the claim was within 90 days from initiation of CIRP and the Appellant was 287 days late and the resolution plan has already been approved by the CoC.
The Appellant filed an application under Section 60(5) (Adjudicating Authority for corporate persons) of IBC before NCLT seeking direction to the Respondent and for admission of its claim. This relief was granted to the Appellant by NCLT vide an order dated November 3, 2020, on the grounds that the claim would have appeared in the Corporate Debtor’s books of accounts and in case such books of accounts were not available, it was the duty of Respondent to obtain them and verify the financial position and it was likely that the Appellant would have missed the public announcement for inviting claims as it was issued through newspapers.
An appeal was filed under Section 61 (Appeals and Appellate Authority) of IBC before the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) against the order of NCLT on the grounds that the potential consequences of allowing such a belated claim would severely affect the CIRP. NCLAT, vide its order dated July 30, 2021 (“Impugned Order”), held that the Respondent had done proper service of inviting claims in accordance with Regulation 6 of IBBI Regulations which only mandates a pronouncement through newspaper. It was also held by the NCLAT that the Appellant failed to show that it filed its claim as soon as it came to know of the initiation of the CIRP. Additionally, if the new claims are entertained, the resolution plan as approved by CoC would be jeopardized.
Aggrieved by the Impugned Order, the Appellant approached the Supreme Court.
Whether claims can be admitted after the acceptance of the resolution plan by CoC.
Contentions of the Appellant:
It was contended by the Appellant that the award was a contingent claim as the proceedings under Section 37 of Arbitration Act was pending before the High Court of Punjab and Haryana. The Appellant also submitted that there ought to be a provision for contingent claims in the resolution plan, as held in the case of State Tax Officer v. Rainbow Papers Limited [Civil Appeal No. 1661 of 2020].
It was also contended by the Appellant that the timeline provided under Section 12 (Time-limit for completion of insolvency resolution process) of IBC is directory in nature. Further, since the resolution plan has not been approved by the Adjudicating Authority, the claim of the Appellant should have been included by the Respondent as a contingent liability.
The Appellant also put forth its lack of awareness as the Corporate Debtor did not disclose the commencement of CIRP, either during the pendency of the proceedings under Section 34 of the Arbitration Act or in the appeal under Section 37 of the Arbitration Act.
Contentions of the Respondent:
It was contended by the Respondent that the Appellant had deemed knowledge of the CIRP since the applicable procedure for inviting claims under IBC and IBBI Regulations were followed.
The Respondent also contended that the floodgates of litigation would be opened if the Appellant’s belated claim was allowed. In order to substantiate its argument, the Respondent relied on the case of Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Others, [Civil Appeal No. 8766-67 of 2019], wherein it was held by the Supreme Court that a successful resolution applicant cannot be faced with undecided claims after the resolution plan has been accepted.
It was urged by the Respondent that no arrangement for contingent claims should be made as the preparation of the resolution plan has been done in line with the information memorandum which is comprehensive and takes due care of the claims of the homebuyers.
Observations of the Supreme Court
The Supreme Court observed that there was no fault on the part of the Respondent except that the Respondent should have made effort to locate the liabilities pertaining to the said award from the records of the Corporate Debtor.
As the Corporate Debtor is a commercial entity, it was also observed by the Supreme Court that the pendency of litigation against the Corporate Debtor is an undoubtable fact. Therefore, the Appellant should have been vigilant to identify if the Corporate Debtor was undergoing CIRP.
The Respondent did the needful what could be done to procure the Corporate Debtor’s records and even moved an application under Section 19 of IBC. A public announcement of CIRP through newspaper is mandated under Section 15 of IBC and Regulation 6 of the IBBI Regulations and it would result in constituting deemed knowledge of the Appellant. Therefore, the plea of not being aware of newspaper pronouncements does not stand valid.
Decision of the Supreme Court
In view of the entirety of the above, it was held by the Supreme Court that after the acceptance of the resolution plan, the fresh claim cannot be admitted and the hydra-headed monster of undecided claims cannot be unleashed on the resolution applicant.
CIRP is a time-bound process which may be extended in certain circumstances and varies from case-to-case based on the different facts and circumstances of the case. In the present case, the claim filed by the Appellant was 287 days late which depicts the lapses on the part of the Appellant.
This judgement has led to the establishment of a much-needed precedent which contemplates that no admission of claims should take place once the resolution plan has been accepted by CoC as admission of further claims would make the CIRP perpetual. This judgment makes it clear that the potential consequences of allowing such a belated claim after the approval of the resolution plan by the CoC would set the clock back on the CIRP and thus making the entire CIRP, never ending and inefficacious.
For any query, please write to Mr. Bomi Daruwala at [email protected]DOWNLOAD NEWSLETTER