Admitting Claims Post Approval Of Resolution Plan Would Derail The Corporate Insolvency Resolution Process: Supreme Court

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Recently a division bench of the Supreme Court comprising of Justices Sanjay Kishan Kaul and Sudhanshu Dhulia in the matter of M/s. RPS Infrastructure Ltd. vs. Mukul Kumar & Anr, observed that admitting claims subsequent to the approval of the resolution plan by the Committee of Creditors (CoC) could potentially render the Corporate Insolvency Resolution Process (CIRP) interminable and ineffectual. In the instant case, since the appellant has been deficient and not being vigilant in filing its claim within stipulated time, the Court observed that the claim cannot be allowed at such belated stage more so when the Resolution Plan has already been accepted by the CoC.

The question which fell for consideration before the Supreme Court was limited to the extent as to whether the appellant’s claim pertaining to an arbitral award, which is in appeal under Section 37 of the said Act, is liable to be included at a belated stage – i.e. after the resolution plan has been approved by the CoC.

Brief facts

An agreement was entered into between the appellant i.e. M/s. RPS Infrastructure Ltd. and M/s KST Infrastructure Private Limited (the Corporate Debtor) on August 2, 2006, for development of land licensed with the appellant admeasuring 8 acres into a residential group housing complex at Faridabad, Haryana. However, the appellant, being aggrieved by the Corporate Debtor’s alleged misconduct in advertising the project under its own name without mentioning the name of the appellant, sought reference to arbitration on May 2, 2011.
The arbitral proceedings culminated in an award dated August 1, 2016 in favour of the appellant. Aggrieved by the award, the Corporate Debtor filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 on September 26, 2016. On the same date, the appellant filed execution proceedings in respect of the said award, which were subsequently adjourned sine die (without designating a future date). These proceedings under Section 34 of the Arbitration Act culminated in the award being upheld by the Special Commercial Court, Gurugram, albeit with some modifications, on April 25, 2019. An appeal filed against the same under Section 37 of the Arbitration Act is stated to be pending.

Meanwhile, the Corporate Insolvency Resolution Process was initiated against the Corporate Debtor in respect of three real estate projects by certain home buyers who had invested in the projects under Section 7 of the IBC. The said petition came to be admitted by order dated March 27, 2019 and 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. The approved plan by CoC was subsequently placed before the Adjudicating Authority for approval under Section 31 of the IBC on September 8, 2020. On August 19, 2020, the appellant sent an email to Resolution Professional, highlighting their pending claim of Rs.35,67,05,337 against the Corporate Debtor arising from the arbitral award dated August 1, 2016, confirmed with certain modifications in the proceedings under section 34 of the Arbitration Act. The Resolution Professional rejected this claim on August 25, 2020 on the ground that the time period for submitting claim under the IBC was withing 90 days of initiation of CIRP wherein the claim was filed with the delay of 287 days, that also when the CoC has already approved the Resolution Plan.

NCLT Order

Faced with the aforesaid situation, the appellant preferred an application under section 60(5) of the IBC, seeking directions so that their claim may be considered on merits. This application was allowed by the Adjudicating Authority through an order dated November 3, 2020 on the grounds that-

(a) the Resolution Professional could not have summarily rejected appellant’s claim, as this claim would have appeared in the Corporate Debtor’s books of accounts;

(b) in case such books of accounts were not available, Resolution Professional had a duty to obtain them and verify the financial position;

(c) as such announcement was made through public newspapers, it was likely that the appellant missed out on the same.

NCLAT Order

The Resolution Professional, thereafter, challenged the said order before the NCLAT primarily based on the potential consequences of allowing such a belated claim when the CoC had already approved the Resolution Plan. The appellant further contended that having made the claim more than a year after the invitation of claims by the public notice dated March 30, 2019; it was urged that allowing such claims would set the clock back on the CIRP and set a precedent, thereby making CIRP prolonged and inefficacious.

In support of this plea, reliance was placed on the judgment in Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Ors, where the Supreme Court opined that a successful resolution applicant cannot be faced with undecided claims after the resolution plan has been accepted.
NCLAT, in its order dated July 30, 2021, held that the respondent had appropriately invited claims as per IBBI Regulations, effectuated proper service, made public announcements, and the Appellant had failed to demonstrate timely filing. The Judgment of Brilliant Alloys was distinguished on the ground that the same is in respect to timelines under Section 12A and Regulation 30A of the IBBI Regulations and that is in this context it was held that the IBBI Regulations can be directory depending on the facts of each case.

NCLAT Order Assailed Before SC

NCLAT’s decision was a pivotal moment that drove the appellant to seek recourse in the Supreme Court.

The appellant asserted that the arbitral award was a contingent claim, given the ongoing proceedings under Section 37 of the Arbitration Act. It was also contended that the resolution plan should encompass provisions for contingent claims, citing the precedent set in the case of State Tax Officer v. Rainbow Papers Limited. Additionally, the appellant contended that the time-limit stipulated under Section 12 of IBC is not to be viewed as a strict mandate but rather in a more discretionary manner. Since the resolution plan had not yet been approved by the Adjudicating Authority, the appellant believed that its claim should have been included as a contingent liability by the respondent. The appellant also pointed to its lack of awareness regarding the CIRP’s initiation, as the Corporate Debtor did not disclose it during the pending proceedings under the Arbitration Act.
The Respondent contended that the Appellant should have been aware of the CIRP, as the necessary procedures for inviting claims under IBC and IBBI Regulations had been scrupulously adhered to. The respondent further argued that allowing the appellant’s belated claim would open the floodgates of litigation, referencing the case of Committee of Creditors of Essar Steel India Limited, where the Supreme Court held that unresolved claims after the resolution plan’s acceptance could not be entertained. The respondent asserted that no provision for contingent claims should be made since the resolution plan was crafted in accordance with the comprehensive information memorandum that adequately addressed the claims of homebuyers.

SC’s Observations

The Supreme Court, during its deliberation on the case, made several crucial observations. It observed that the respondent had reasonably followed the procedures for inviting claims, and there was no fault on their part, except that they should have made efforts to locate liabilities related to the arbitral award from the Corporate Debtor’s records. Given the nature of the Corporate Debtor as a commercial entity, it was evident that litigation against it was a reality. The appellant should have been diligent in identifying the CIRP’s initiation, Court noted.

Furthermore the apex court noted that the respondent had made efforts to procure the Corporate Debtor’s records and had even filed an application under Section 19 of IBC. The public announcement of CIRP through newspapers, as mandated by IBC and IBBI Regulations, constituted deemed knowledge for the appellant. Therefore, the appellant’s plea of not being aware of newspaper pronouncements did not hold validity. Further the Court also took note of the fact that the IBC is a time bound process and there are certain circumstances in which the time can be increased. However, the present case did not fall within those parameters. It also observed that the mere fact that the Adjudicating Authority has yet not approved the plan does not imply that the plan can go back and forth, thereby making the CIRP an endless process. This would result in the reopening of the whole issue, particularly as there may be other similar persons who may jump onto the bandwagon. As described above, in Essar Steel, the Court cautioned against allowing claims after the resolution plan has been accepted by the COC.

In view of these observations and relying upon the Judgment of Essar Steel, the Supreme Court issued a decisive ruling. The Court held that, after the approval of the resolution plan, admitting fresh claims was impermissible. Allowing such claims would lead to a proliferation of unresolved claims, rendering the CIRP perpetually ongoing and ineffectual.

Contributors: Deepak Deshmukh (Associate Partner) & Vivek Dwivedi (Senior Associate) Assisted by Ashutosh Jadhav (Intern).


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Interns and Paralegals.

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