Extinguishment of claims on approval of Resolution Plan of award-debtor

Anugya Mukati and Kirti Dhoke*

Following the footsteps of the precedent laid down in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta (“Essar Steel”) & in Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited(“Ghanshyam Mishra”), the Calcutta High Court (“the Court”) attempted to clarify the interplay between Insolvency and Bankruptcy Code, 2016 (“IBC”) and Arbitration and Conciliation Act, 1996 (“Arbitration Act”). In its recent decision in Sirpur Paper Mills Limited v. I. K. Merchants Pvt. Ltd., the Court held that “the approval of a resolution plan under the IBC in relation to a corporate debtor, would extinguish the claims of the award-holder under the Arbitration Act against such corporate debtor when award holder has not pressed his claim during CIRP”. 

Background of the case

An arbitration award (“impugned award”) dated 07 July 2008 was passed in favor of I. K. Merchants Pvt. Ltd. (Respondent/ Award-holder) whereby Sirpur Paper Mills Limited (Petitioner/ Award-debtor) filed an application before the Court under section 34 of the Arbitration Act for setting aside the impugned award. During the pendency of the abovementioned application under section 34, the Operational Creditors initiated corporate insolvency resolution proceedings (“CIRP”) against the Petitioner. Due to the failure of the Respondent to submit a claim to the Resolution Professional, there was no provision for his claim in the approved resolution plan.

The Petitioner opposed the maintainability of its application under section 34upon the initiation of CIRP and the shift in the management of the Petitioner to JK Paper Limited (Resolution Applicant). It was contended that the Respondent was at fault in not submitting its claim before the Resolution Professional although “Claim” under Section 3(6)(a) of IBC includes ‘disputed claim’.

But paying no heed to this prayer, the Court observed in its judgment dated 10th January 2020 that “CIRP cannot be used to defeat a dispute which existed prior to initiation of insolvency proceedings”. It went on to say that due to the pendency of the section 34 proceeding there was no final claim that could have been filed before NCLT/IRP.

On 7th May 2021, the Court revisited its judgment dated 10th January 2020. The Petitioner raised the same issue of maintainability of the application under section 34 of the Arbitration Act in light of the subsequent developments after the impugned award, including change in management of the Petitioner and approval of Resolution Plan.

The Respondent pointed out the repetition in arguments by the Petitioner and argued that res judicata will apply. It further contended that as a result of Petitioner’s application under section 34 there was an automatic stay on the impugned award since the law prevailing before 2016 Amendment of the Arbitration Act would apply. Hence, there was no ‘claim’ in terms of the IBC for the Respondent to press before the Resolution Professional. 

Analysis of the Law and Judgment

• Applicability of Res judicata to an application under Section 34

The Court narrowed down the operation of res judicata while examining the applicability of res judicata since the petitioner had moved the Court with the same prayer at an earlier instance.

The Court recognized that the purpose of the principle is to avoid any abuse of process in a case where the matter in issue, which has already been heard and decided on, is brought up again between the same parties. The Court reasoned that the most basic feature of the law is its constant evolution and res judicata would not stand in the way of revising maintainability of application at any point of time under section 34 on the legal aspect and particularly on the pronouncement of a decision relevant to the matter. Consequently, it was held that due to the recent development in law through the Apex Court’s decision in Essar Steel and Ghanshyam Mishra Case with regard to the position of claims under CIRP, the principle of res judicata won’t apply in the present case. The Court observed that the principle of res judicata can be “read down in fit cases where orders are capable of being altered or varied on the emergence of new facts or situations”.

• Extinguishment of claim upon approval of the Resolution Plan

Settling the question of law on extinguishment of award holder’s claim upon the approval of a resolution plan,the Court relied on Essar Steel and Ghanshyam Mishra Case and ruled that “pre-existing and undecided claims which were not included in the list of claims maintained by the Resolution Professional shall extinguish upon approval of the resolution plan u/s 31 of the IBC”. The Court explained that a claim must be a part of the Information Memorandum prepared by the Resolution Professional to be considered for the CIRP. The Court added that the scheme of the IBC is such that enough opportunity is afforded to the Creditors in the form of notices and public announcements for the invitation of claims.In light of this fact, the Court observed that the award-holder is under an obligation to take active steps for the submission of claims under IBC rather than just waiting for adjudication of the application under Section 34 of the Arbitration Act. 

Consequently, the Court noted 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 was pending in a Civil Court”. 

The Court, while referring to the maintainability of an application under section 34 of the Arbitration Act, stated that going into the merits of the application would be a complete waste of time since the claim of the Respondent has been extinguished.

• Filing of claim before NCLT during the pendency of proceedings under Section 34 of the Arbitration Act

The Respondent contended that the impugned award was automatically stayed due to filing of a challenge under section 34 of the Arbitration Act as provided in pre-amendment section 36. Therefore, leaving no scope for pursuing its claims before any other forum as law prevailing before the 2016 Amendment would apply. The Court while dealing with this contention relied on Board of Control for Cricket in India v. Kochi Cricket Private Limited & Ors. and held that the amended section 36 would be the governing law for applications pending under section 34 on the date of the judgment. The Court highlighted that section 36 did away with the automatic stay and made it mandatory to secure an order of stay from the Court upon a separate application made in accordance to Section 36(3) along with an application under Section 34. Thus, there cannot be an automatic stay on the enforcement of the arbitral award and the award holder is entitled to enforce the award in the absence of an order for stay by the Court.

In light of the abovementioned reasons, the Court disposed of the application for being rendered infructuous.

Concluding Remarks

In the present matter, the Court underscored the wide ambit of “claim” under IBC by upholding that pendency of an application for challenge to arbitral award does not bar an award-holder from filing his claim with the Resolution Professional.

This decision supports the clean-slate theory which has been reiterated in many recent judgments and thus aligns with the objectives of the CIRP that is, the revival of Corporate Debtor and a fresh start for the resolution applicant.

The Prospective Resolution Applicant should be aware of all the claims to be paid in order to take over the business of Corporate Debtor and resolve insolvency. A Resolution Applicant cannot be burdened with undecided claims after the approval of Resolution Plan. Additionally, the aim of IBC is economic rehabilitation of the Corporate Debtor and adherence to timelines is important to protect the distressed assets from further dilution and therefore it is imperative to bar belated claims.

The Court rightly pointed out that IBC contemplates enough opportunities for filing of claims with the Resolution Professional. For instance, public announcement of CIRP, collation of claims received by the Interim Resolution Professional, maintaining an updated list of claims by the Resolution Professional and preparation of Information Memorandum by the Resolution Professional which contains all the relevant information that includes financial position of the corporate debtor and disputes by or against corporate debtor. The decision in the present case has settled an important question of law and ensured that no left-out claims should saddle the Resolution Applicant as after the approval of resolution plan all claims which are not a part of the resolution stand extinguished.

The judgment rightly highlights the retrospective nature of the amended section 36 while disregarding any automatic stay on an application filed under section 34 of the Arbitration Act. It is now, therefore, a settled requirement on the part of any Creditor to submit its claim to the Resolution Professional within the stipulated time and in case of any fault on part of the Creditor, his claim will get extinguished.

However, if CIRP fails and there is a state of liquidation, then the question that remains is concerning the pending challenge to arbitral award as claim(s) against a company under liquidation under IBC.

*The authors are fifth-year students at National Law Institute University, Bhopal.