Creditors with Discarded Claims: Their Plight and a Feasible Solution

Mohd. Fahad Ansari*

When the Sick Industrial Companies (Special Provisions) Act, 1985 (now repealed) was replaced by the Insolvency & Bankruptcy Code, 2016 [hereinafter, “IBC”], it was perceived that all the lacunae and shortcomings present in the former would be cured by the latter. But ever since its inception, great controversies and problems have started going around the IBC. Besides many large problems which the IBC fails to address, the major setback was that it confers minimal protection to some specific creditors. Although, the intent & objective behind the enactment of IBC was to ensure the maximisation of the value of assets of corporate debtor and at the same time balance the interests of “all the stakeholders,” creditor’s interests were many times disproportionally prejudiced due to lack of protective measures for the creditors in the IBC itself.

Through this post, the author will show how, when a claim of a creditor is discarded by the resolution professional and the same is challenged before the National Company Law Tribunal [hereinafter, “NCLT”], the completion of a Corporate Insolvency Resolution Plan [hereinafter, “CIRP”], in the meantime, extinguishes such a claim and harms the interest of such creditor. Moreover, this post will suggest some feasible solutions to address such inadequacies by suggesting a solution in line with the United Kingdom’s [hereinafter, “UK”] Insolvency laws regime.

Current position of discarded claims

In the controversial case of Committee of Creditors of Essar Steel India limited v. Satish Kumar Gupta, the Apex Court ruled that once a resolution plan is approved and a successful resolution applicant emerges, all the undecided/pending/rejected claims will be extinguished. The adoption of this approach places successful resolution applicant in a protected place to ensure they don’t bear the burden of any extra debt besides what has been approved in the resolution plan. However, the negative connotation of this judgement is faced by the creditors whose claims are lying before the adjudicating authority for inclusion in the CIRP.

Before the Essar Steel judgment, a situation came before the NCLAT in Prasad Gempex v. Star Agro Marine Pvt. Ltd. In this case, the Adjudicating Authority approved the resolution plan even before the status of discarded claims by the resolution professional could be verified by it. The NCLAT held that although, changing the status of an already accepted resolution plan would not be permitted, the creditor can still file a claim before other appropriate authority.

However, the Essar Steel judgement declined to accept this approach and held that all “undecided” claims of the corporate debtor will be rejected post the approval of a resolution plan. Hence, once a resolution plan has been accepted, none of the creditors whose claims have been discarded would have a suitable remedy. 

Post the Essar Steel Judgement, in Santosh Wasantrao Walokar v. Vijay Kumar Iyer, a situation arose where the claims of a few creditors were discarded by the resolution professional and the challenge of the same was lying before the Mumbai bench of NCLT. During this time, the resolution plan was passed and the NCLT extinguished all these claims. Citing the Essar Steel judgement, the NCLT held that claims which are not a part of the resolution plan (rejected/undecided claims) would stand extinguished once a resolution plan has been approved.

These judgements render the rights of the creditors nugatory. There is no provision in the IBC which could protect the interest of these creditors. To solve this problem, it is necessary to cross the geographical limits of Indian laws and find a probable solution in other jurisdictions. One such jurisdiction is the UK which efficiently addresses these problems.

The underlying issues

The Essar judgement exposes creditor’s interest prejudice while their claims are pending before the NCLT. To solve this disturbing situation, there are two problems which need serious attention. While the first problem is pertinent to the unfeasible power structure of the resolution professional, the second problem is related to the absence of a strict timeline for NCLT to dispose of claims of creditors under Section 60(5) of the IBC.

Need to shift from administrative to quasi-judicial power for the resolution professional

Under the IBC, resolution professionals do not have any quasi-judicial power. They are empowered with only the administrative powers as held by the Supreme Court in Swiss Ribbons v. Union of India. Because of empowering the resolution professional with only administrative powers, a resolution professional cannot check the admissibility of a claim which requires a judicial determination.

Thus, there arise instances where claims of creditors have been discarded by the resolution professional merely because the resolution professional cannot admit claims where the nature of the claim is in dispute.

Quasi-judicial powers entitled to the administrators in UK

In the UK, an administrator (resolution professional in the UK) is inherited with quasi-judicial powers. As can be seen in The Matter of Lehman Brothers International (Europe) (In Administration), an administrator is empowered with quasi-judicial powers, thus enabling them to check the admissibility of claims. Relying on Tanning Research Laboratories Inc judgment, the court propounded that in deciding whether or not to accept proofs of debt, conferring quasi- judicial powers to the administrators gives them a standard to that of a court. Giving such powers to administrators at the stage of admission of debt ensures the correct status of claims in the first place.

There are no substantial differences between the India’s and UK’s insolvency framework. While in India, the absence of quasi-judicial powers with resolution professionals wipes off some of the debts, UK’s insolvency laws ensure the realisation of true value of all the bonafide debts. Rather than appealing and filing a claim before the adjudicating authority, conferring quasi-judicial powers to resolution professionals in India will have a beneficial impact. Firstly, it will save the time of the creditors in checking the admissibility of their claims. Secondly, it will decrease the burden from an already over-burdened adjudicating authority. Thirdly, conferring quasi-judicial power to resolution professionals rather than to NCLT to decide whether a claim is operational or financial in nature, would enable the resolution professionals in the first place to check and decide the nature of such claims. As can be seen in ICICI Bank Limited v. Anuj Jain (before the Swiss Ribbons judgement) the resolution professional rejected granting the appellant the status of financial creditor, which was subsequently upheld by the Ahmedabad bench of NCLT. Thus, recognising the ability of resolution professionals to decide the nature of the claim will to a great extent decrease the chances of a genuine creditor’s claim from getting extinguished.

A need for a strict timeline under section 60(5) of the IBC

Regulation 13 of the Indian Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 makes it mandatory for the resolution professional to verify each claim within seven days of the receipt of the claim. A timeline is also needed for adjudicating authority to decide the validity of the claim under section 60(5) of the IBC. The absence of a strict timeline delays the claim of creditors from getting included in the resolution plan and thus increases the chances of approval of the resolution plan without taking into account the pending claims. Moreover, Section 12 of the IBC limits the maximum number of possible days to 180 for the completion of a CIRP and this timeline can only be extended on the instruction of Committee of Creditors [hereinafter, “COC”] to the resolution professional. Since creditors whose claims are pending before the adjudicating authority cannot be a part of the COC, they cannot file an application before the adjudicating authority via a resolution professional to extend this timeline, so as to get more time for their claims to be a part of CIRP.

Greater powers to the administrator in UK

The solution to this problem is also present in the UK. Rule 14.33 of the Insolvency (England and Wales) Rules, 2016 empowers the administrator to postpone a dividend if there is any difficulty to reject or admit proofs of claims. Moreover, Rule 14.34(2) further protects creditors by debarring the administrator from declaring a dividend till a matter to decide the admissibility of a claim is pending before a court. In the Indian context, a duty as well as power must be entrusted on the resolution professionals to prohibit the realisation of assets of corporate debtors by any creditor till all the disputed/discarded claims are verified either by itself or by the court. Moreover, a mandatory timeline under Section 60(5), as discussed above, will also ensure that creditors with accepted claims do not have to wait for long periods.

Conclusion

There is an urgent need to amend the IBC to ensure that all the creditors stand on an equal footing. Just because a creditor’s claim is pending before the adjudicating authority, the approval of CIRP in the meantime defeats the very purpose of IBC, thus, negatively affecting the rights of such creditors. To protect such interests, it is crucial to empower resolution professionals with quasi-judicial powers. Even if this suggestion is not incorporated, the adjudicating authority has to be mindful of the pending claims of the creditors before approving any CIRP so as to ensure all creditors stand pari-passu with each other.

*The author is a second year student at National University of Study and Research in Law (NUSRL), Ranchi.