Legal Implications of Contingent Claims under The Insolvency and Bankruptcy Code, 2016: Balancing The Clean Slate Theory and Creditors Rights
Sachin Raj & Sakshi Sinha
4th Year, B.A. LL.B. (Hons.) Symbiosis Law School, Noida
Introduction
The Insolvency and Bankruptcy Code, 2016 provides the codified resolution mechanism for the resolving of the claims of creditors against the corporate debtors as well as Individuals. This code was enacted with a view to progress the economy of India and would maximize the value of the assets of the corporate Debtors and revive the business of the India. The corporate Debtors facing insolvency after initiating the Corporate Insolvency Proceedings under the Section 7 of the IBC and thereafter the creditors submit their claims which are being reviewed by the Resolution Professional and if the resolution of the insolvency has failed then, the Company or Corporate Debtor will be liquidated. The critical question in this situation about the claim i.e., the legitimate claim which is being more complex when dealing with contingent claim. In this blog the author seeks to analyse the legal Implication of the Contingent Claim under the Insolvency and Bankruptcy Code, 2016. As the Definition of the Contingent claim i.e., any claim against the CD which has been pending or not crystallised at the time of the initiation of Insolvency is said to be the contingent Claim. When the moratorium under section 14 of the IBC has been imposed or adjudicated, then the contingent claim cannot be adjudicated after the initiation of the CIRP Proceedings.
Legal Framework of Contingent Claim
As the term Contingent claim in a general sense are dependent upon the uncertain occurrence or non-occurrence of a future event. These claim are not crystallized at the time they are framed i.e., dependent upon the value and validity of the contingent claims hinge whether the specific future event happens or not. Contingent claims have a significant impact on the distribution of the assets among the creditors if the contingent occurred although the term has not been defined under the code, Such claim are come under the broad definition of the section 3 of the code which states that;
“(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured.
(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;”
As the section 3 provide the broad definition of the term claim which includes the right to a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured as In the case of the Innoventive Industries Ltd. Vs. ICICI Bank & Anr. (2017) ibclaw.in 02 SC, This definition extends to the contingent claim as well nonetheless it is not explicitly provided in the act. As the Regulation 13 of the Insolvency and Bankruptcy Board of India (IBBI), 2016 which states that the after the initiation of the CIRP Proceedings, Resolution Professional shall have to verify the every claim submitted by the creditors and reject or accept the claim on the available evidence or records. Regulation 14 states the acknowledgment of the possibility of the contingent claim i.e., the resolution professional shall have to estimate the claim that are not fully crystallized. In case of the liquidation, Regulation 25 of the act empowered the liquidators to the estimate the value of the claims i.e., undetermined thereby allowing the liquidator to inclusion of the contingent claim in the recovery process. Therefore both the CIRP and liquidation proceedings acknowledged the contingent claims and give power to IRP/RP to exercise the contingent claim and make reasonable estimation regarding such claims. However the section 14 of the code states that after the moratorium has been issued, then the claim cannot be adjudicated as the it prohibits all the pending suits or proceedings including the execution, decree or order of the any court, tribunal arbitration etc. Nonetheless, The Hon’ble Apex Court of India in the case of Fourth Dimension Solutions Ltd. Vs. Ricoh India Ltd. & Ors. (2022) ibclaw.in 06 SC. has allowed the pending arbitration involving the creditors after the initiation of CIRP and issuance of the moratorium and significantly provide the comprehensive clarification of the application of the “clean slate theory” with regards to the contingent claim.
Global Legal scenario of the Contingent Claim
The UNICTRAL in the legislative guide i.e., page no. 259 also defined the claim as conditional, contingent and not mature included in the term of claim as the time of the submission of claim and the amount has not been claimed due to disputed claim, Many country insolvency laws talks about the same designate the claim as contingent claim by admitted provisionally at the notional value.
The United Kingdom laws also stated the same in the case of the LB Holdings Intermediate 2 UK Limited v. Anthony Victor Lomas, stated that the insolvency laws have been framed for the revival of financial distress company and return the debt to the creditors even if the debt is dependent upon the occurrence and non-occurrence if the future event of the adjudication. Under the UK Insolvency Act, Section 382(3) stated that the claim include the all claim i.e., conditional present or future, liquidated, fixed etc.
The United states has explicitly and comprehensive mention the word contingent claim in their statutes i.e., under the section 101(5) of the United States Bankruptcy Code, and even in the case of the In Epstein v. Official Committee of Unsecured Creditors, a striking balance between present and future claims was established by the use of the Piper test. To safeguard the position of future claimants create a reasonable resolution plan that considers the interests of all creditors, this test allocates the best assessed value to all claims (current and contingent) that are due to a corporation. The legislation of the US Code shows that the term “claim” was intended to be construed as far as possible to cover all of the debtor’s legal obligations in the bankruptcy case, regardless of how contingent or dependent they may be.
Clean Slate Theory under the IBC, 2016
The clean slate theory states in the Committee of Creditors for Essar Steel India Limited v. Satish Kumar Gupta, (2019) ibclaw.in 07 SC that the when the resolution plan has been approved by the Committee of the creditors and approved the adjudicating authority is binding on all the creditors whether satisfied or not. This theory came from the section the 31(1) of the code which implies that the resolution plan approved by the adjudicating authority is binding on all the stakeholders. Consequently, this theory states that the Once the resolution plan has been approved, all the pending claims and liability stand extinguished. Similarly in Case of the Ghanashyam Mishra & Sons Pvt Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.(2021) ibclaw.in 54 SC, The Supreme Court has stressed the same theory and further clarified as the after the approval of the resolution plan, no person will initiate the proceeding of the such claim which are not the part of the resolution plan. Furthermore, In the case of Ruchi Soya Industries & Ors. vs. Union of India & Ors., The Hon’ble Apex Court has observed the same and stated that the all the claims which are not part of the resolution plan are stand frozen.
Interplay between The Clean Slate Theory and Contingent Claims
As stated above the clean slate theory restricted the claim which are not the part of the resolution plan however the contingent claims provide the procedure to take the claim which are not the part of the resolution plan as in the case of case of Fourth Dimension Solutions ltd v. Ricoh India ltd & Ors., has allowed continuation of the pending arbitration involving the creditors after the initiation of CIRP and imposed the moratorium. As the fact of the case is that RP has passed the resolution plan without the claim of the creditor stated as NIL. The RP has stated that the as the claim is disputed before the tribunal, thus the claim is totally depend upon the outcome of the proceedings. Thus, The Hon’ble Supreme Court has denied the notion of the RP and stated the claim will be allowed as a contingent claim despite the approval of the resolution plan. Similarly, In the another case of the Tata Steel BSL ltd V. Varsha (2019) ibclaw.in 63 SC, the claim was disputed and pending before the civil court despite the Hon’ble High Court has allowed the claim of an operational creditor as a contingent claim to include the as notional face value of Rupees One in the information memorandum which is in contradict of the the Ghanashyam Mishra & Sons Pvt Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.(2021) ibclaw.in 54 SC, and various NCLT relied on the same judgment by stating that the intention of the legislature behind the framing of the code is to revive of the company which have been bankrupt and return the debt to the creditors in a prescribed manner. Any creditors comes anytime with new claim will consequently become very difficult to revive the company.
Notably, In the another case of the Ultra tech Cement Ltd. V. Minita D Raja. (2021) ibclaw.in 209 NCLT , held that the contingent claim are valid as it is the exception to the doctrine of clean slate theory and declared that the claim which are totally dependent upon the adjudication of the arbitral tribunal for the same. The resolution professional shall have to be designate such claim as contingent claim not explicitly cite over there “NIL” in the information memorandum. The priority for the contingent claim is totally dependent upon the principle of the just, equity and fairness as stated in the case of Phoenix ARC Private Limited V. Spade Financial Services Limited (2021) ibclaw.in 03 SC.
However, In the case of the liquidator’s claim SBS Holding V. Mohanlal Jain (2024) ibclaw.in 587 NCLAT, Liquidator has denied to designate the claim as the claim arises after the commencement of the liquidation in lieu of regulation 14 of the code and the claim is arising from the arbitral award. The Hon’ble NCLAT has stated that the even though the creditors has participated in the liquidation are not designate as the claim because the claim has been arisen after the commencement of the liquidation nonetheless, the claim have been arisen out of the arbitral award as by the literal interpretation of the statute explicitly stated that the claim only be arisen before the liquidation commencement.
Conclusion
As of India does not have an explicit provision under the Insolvency and Bankruptcy Code, 2016 i.e., evolve out of the judicial precedents and it is remains an evolving and complex area of law. However, as per the Section 3 of the code, Contingent claim has been included in the broad definition of the claim but there are many instances wherein the tribunal has rejected the contingent claim by stating that the, if the creditors came any anytime for the admission of the claim it will leads to the impossible for code to revive the company which totally contradict to the scheme of the Code. Balancing the stakeholder interest is imperative after initiation of the CIRP as the potential validity of the legal claim needs to be consider for the integrity of the resolution process by following the due procedure of the code.
Since, the code does not have any legislation or mechanism for the contingent claim. In my opinion the legislature should amend the code provide the exception to the clean slate theory as well as the exception of the Section 14 (1) for maintaining the integrity, feasibility and fairness of the code.
References:
1. Ignorance is Bliss: Analysing the Treatment of Contingent Claims under the Insolvency and Bankruptcy Code, 2016 (IndiaCorpLaw, 4 November 2023) [accessed 18 December 2024]
2. Aparna Sharan, Exploring the Current State of Undecided Claims under the IBC’ (IBCLaw Blog, ) [accessed 18 December 2024] https://ibclaw.blog/exploring-the-current-state-of-undecided-claims-under-the-ibc-aparana-sharan/
3. Bar & Bench, ‘Has the Dust Settled on the Status of Un-Decided Claims under IBC’ (Bar & Bench, 19 April 2023) [accessed 18 December 2024]
4. Adimesh Lochan, Arjun Gupta, and Vyapak Desai, Treatment of Contingent Claims Under IBC: Issues and Solutions (National Law Review, 13 May 2022) [accessed 17 December 2024] https://natlawreview.com/article/treatment-contingent-claims-under-ibc-issues-and-solutions
5. Deepak Joshi, “Once Resolution Plan Is Approved, No Creditor Can Initiate Proceedings To Recover Claims Not Part Of Resolution Plan: SC Upholds “Clean Slate Theory” (Live Law, 13 April 2021) [accessed 16 December 2024]
