Exploring the current state of undecided claims under the IBC
Aparana Sharan
3rd Year, B.A. LL.B., Government Law College, Mumbai
Contingent claims refer to those claims that were either contingent because they were pending before a court or arbitral tribunal at the time of approval of the resolution plan or they were excluded from the Information Memorandum (‘IM’) . Due to the moratorium invoked under Section 14 of the code, the adjudication of a contingent claim is precluded subsequent to the initiation of the Corporate Insolvency Resolution Process (“CIRP”).
The doctrine of “clean slate”, as propounded in the Committee of Creditors of Essar Steel India Limited (through its authorised signatory) v. Satish Kumar Gupta & Ors[i] (‘Essar Steel’), is marked as a pivotal event concerning the rights conferred upon a successful resolution applicant in relation to claims categorised as “undecided”. The doctrine, rooted in Section 31(1) of the code, essentially specifies that once the Committee of Creditors (‘CoC’) accepts and the adjudicating authority approves the resolution plan, all claims – whether decided or undecided – stand obliviated. This preceding section operates in tandem with Section 14, prohibiting the revival of any outstanding claims, including ongoing legal proceedings and arbitrations, against the Corporate Debtor (‘CD’).
In the precedent set by the Essar Steel case, the apex court affirmed conclusively that all claims relating to a period prior to the commencement of CIRP are mandated to be submitted and considered by the Resolution Professional (‘RP’) for the purpose of portraying the financial position of the CD, for the scrutiny of a potential resolution applicant. Solely those claims incorporated within an officially approved Resolution Plan endorsed by both CoC and the Adjudicating Authority (‘AA’), are recognised as valid. Any claims beyond this ambit are effectively extinguished, affording a clean slate for the CD. The court emphasised that the conclusive resolution of all creditor claims predating the initiation of CIRP is contingent upon the approval of the resolution plan.
Furthermore, the Supreme Court of India (‘SC’) underscored the imperative for a prospective resolution applicant to have a precise understanding of the liabilities tethered to a CD. This would enable a resolution applicant to accurately ascertain the acquisition value attributed to the CD. If, post conclusion of the CIRP, contingent claims are found to be detrimental to the CD, it would lead to an artificial inflation of the acquisition value for the resolution applicant. The implication being that, owing to their inherent uncertainty, contingent claims are ineligible for admission or determining subsequent to the completion of the CIRP.
Following this development, the Hon’ble SC, in the matter of Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.[ii] (‘Ghanashyam Mishra’) crystallised the legal tenets surrounding the ‘clean slate’ doctrine. It is pertinent to note that the ruling in Ghanashyam Mishra, contextualised within the IBC and its definition of ‘claim’ in Section 3 (6) as a right to payment or a remedy for a contract breach leading to payment, states that extinguished claims upon RP approval only pertain to the CD’s assets and liabilities to creditors. This includes a liability owed to a creditor, leading to the cessation of direct claims on property or outstanding debts. However, the proceedings related to incidental claims like boundary disputes or partition suits regarding the CD’s property persist in relevant courts or tribunal.
Subsequent to the ruling in Essar Steel and Ghanashyam Mishra, it became customary among resolution applicants to adopt a uniform approach in addressing potential liabilities stemming from undecided claims with the protocol established for operational creditors in the distribution waterfall under Section 53(1) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and nullifying any prospective liability arising from undecided claims within the ambit of the resolution plan.
Complicating The Clean Slate Doctrine
The well-established stance regarding the handling of undecided claims encountered a degree of complexity due to the Supreme Court’s pronouncement in Fourth Dimensions Solutions Ltd v Ricoh India Ltd & Ors. [iii] (‘Fourth Dimension’). The court noted that ongoing arbitration proceedings between a CD and an operational creditor, which were ongoing at the time of approval of the resolution plan by the National Company Law Tribunal (‘NCLT’), retain their legal standing.
The SC’s remark seemed to challenge the established fresh slate principle elucidated in the Essar Steel and Ghanashyam Mishra. According to this, undecided claims, pending before a court or arbitral tribunal at the time of initiation of insolvency proceedings of the CD, can be re-agitated against the CD under Section 60(6) of the IBC. Further, such claims cannot be extinguished within the resolution plan, departing from the conventional approach of treating them on par with operational creditors.
Subsequently, the National Company Law Appellate Tribunal (‘NCLAT’), relying on the aforesaid SC observation, decided in Shapoorji Pallonji & Co. Pvt. Ltd. vs Kobra West Power Company Limited [iv](‘Shapoorji’) that exclusion of a claim against the CD, merely due to its pending status before an arbitration tribunal was erroneous. Furthermore, it affirmed that arbitration could proceed based on its merit according to the law even subsequent to the approval of the CD’s resolution plan by the NCLT.
This deviation from the clean slate principle introduced several issues for potential acquirers or resolution applicants. Firstly, it introduced financial ambiguity with uncertainties surrounding the total additional pay-out for a resolution applicant, as pending claims, may materialise long after resolution plan’s implementation. Secondly, for acquisitions reliant on financing, delays in settling pending claims may increase acquisition costs due to accruing interest. Lastly, the lack of clarity on treating undecided claims akin to operational creditors convolutes designing alternative payment structures, impeding the formulation of a financially sound resolution plan.
The Supreme Court’s Rectification
In Adani Power Limited v. Shapoorji Pallonji and Co. Pvt. Ltd.[v], the SC, in an appeal, appears to have dispelled uncertainty arising from its earlier Fourth Dimension observation. The court upheld the fresh slate principle, emphasising that the approved resolution plan is binding and immune to arbitration or other legal proceedings. Shapoorji’s claim categorised as a “contingent liability”, can proceed through arbitration for adjudication and quantification. However, even if the claim is validated, it will not alter the rights and obligations outlined in the resolution plan for Adani Power Limited. This reaffirms that Adani Power Limited cannot be held liable for obligations beyond the expressly stipulated terms in the resolution plan.
The ruling instilled confidence to successful resolution applicants, allowing them to decline additional payments for contingent claims crystallised post NCLT approval, ensuring transparency in the overall pay-out for acquiring a company undergoing insolvency proceedings.
Analysis
Under Regulation 14(1) of the IBBI (Insolvency Resolution Process of Corporate Persons) Regulations, 2016, the Interim Resolution Professional (‘IRP’) is directed to make a “best estimate” of the amount claimed by a creditor when uncertainties arise due to contingencies. Moreover, as per Regulation 14(2), the IRP has the discretion to update this estimate if novel information becomes available, warranting a revision.
In the case of Ultra Tech Cement Ltd. v. Minita D. Raja[vi], the NCLT Mumbai bench affirmed importance of disclosing contingent claims in a resolution plan. The bench clarified that a counterclaim filed before an Arbitral Tribunal constitutes a dependent claim, obligating the RP to designate it as contingent in IM.
Any oversight in including contingent claims during the CIRP mandates their addition with a ‘nil’ valuation. The NCLAT further affirmed the validity of such resolution plans in the State of Haryana v. Uttam Strips Ltd.[vii] case.
There is no denying that the treatment of contingent claims within the IBC is inherently unjust towards the creditors, devaluing them to INR 1 upon resolution plan approval. Furthermore, Section 14 moratorium exacerbates this, barring creditor proceedings under the CIRP, leaving claimants with no recourse.
Despite being labelled as ‘undecided’, contingent claims hold potential for future validation through civil proceedings, necessitating a reassessment of their status. The current system overlooks this potential, stifling claimant’s recovery efforts. Accommodating contingent claims, allowing them to crystallise against the CD’s assets, is imperative for rectifying the injustice in their treatment under the IBC.
Moreover, the Essar Steel case dictum on clean slate principle is based on the erroneous assumption that the RP has the exclusive authority to decide all claims against the CD. Although the RP is indeed empowered to administratively compile claims, it overlooks instances where the NCLT holds the jurisdiction to adjudicate claims under Section 60(5) of the IBC. This is critical, as the RP may not adequately address disputed, uncrystallised or contingent claims. Consequently, creditors may need to contest the rejected claims before the NCLT risking potential extinguishment if the resolution plan is approved before determining their admissibility.
Furthermore, the absence of provisions in the IBC granting the RP or NCLT the power to admit claims involving questions of facts and evidence, rendering some creditors without an appropriate forum. Addressing these concerns suggests a need to reorient the insolvency framework for a more effective handling of such claims.
Concluding Remarks
The UNCITRAL Legislative Guide on Insolvency Law acknowledges the clean slate approach, emphasising the evaluation of successful insolvency resolution in terms of commercial certainty and simplicity. In this context, the clean slate approach embedded in the IBC aligns seamlessly with these internationally recognised principles.
However, the growing concerns about creditors being left without a proper avenue for their unresolved claims or those insufficiently addressed within a resolution plan. Thus, there is a need to address the evident gaps and reorient the insolvency framework for a more just and effective resolution process, aligning with the principles of fairness and commercial certainty. Moving forward, it is imperative to strike a balance that respects the fresh slate afforded to resolution applicants while also ensuring that the rights of creditors with undecided claims are not unduly compromised.
References:
[iv] (2023) ibclaw.in 146 NCLAT
