Once approved, a Resolution Plan binds all creditors: Bombay HC on decree holders’ rights under IBC, Read Judgment

“Once a resolution plan is duly approved by the adjudicating authority under sub-section (1) of Section 31, the claims as provided in the resolution plan shall stand frozen… all such claims, which are not a part of the resolution plan, shall stand extinguished.” With these definitive words, the Bombay High Court recently ruled on a significant issue concerning the interconnectedness between a civil court decree and the insolvency resolution framework under the Insolvency and Bankruptcy Code, 2016. The case, arising from a long-pending monetary decree, raised questions about the rights of decree-holders who fail to participate in the Corporate Insolvency Resolution Process (CIRP). The judgment sheds light on the fate of such claims and the enforceability of bank guarantees in the wake of an approved Resolution Plan.

The original Defendant No. 1 filed a First Appeal challenging the judgment and decree dated 20th January 2003, which directed the payment of ₹28,97,629 along with 24% annual interest. A stay on execution was granted upon furnishing a bank guarantee of ₹29,00,000. During the pendency of the appeal, a Corporate Insolvency Resolution Process (CIRP) was initiated against the Appellant in 2020 under the Insolvency and Bankruptcy Code, 2016 (IBC), and the National Company Law Tribunal (NCLT) approved the Resolution Plan on 1st January 2021. The Respondent No.1 did not file its claim with the Resolution Professional, leading to its exclusion from the Resolution Plan. The Appellant, through an Interim Application, sought a declaration that the decree stood extinguished and requested the release of all bank guarantees.

The Appellant contended that once a Resolution Plan is approved under Section 31(1) of IBC, all claims that are not included in the plan stand extinguished. The Respondent No.1, as a decree holder, fell within the definition of a "creditor" under Section 2(10) of IBC. Since the Respondent did not file its claim with the Resolution Professional, the debt no longer subsisted. The Appellant relied on the Supreme Court judgments in Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. and Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta. It was further argued that the bank guarantees, furnished as a condition for the stay, were assets of the Corporate Debtor and should be released since the debt itself was extinguished.

Contentions of the Respondent:

The Respondent contended that the money deposited in Court ceased to be an asset of the Appellant and became custodia legis. Reliance was placed on Rajendra Prasad Bansal v. Reliance Communication Ltd. (2023), which held that once money is deposited in Court, it is beyond the reach of the parties. The Respondent also argued that it had been deprived of the decree’s benefits since 2003, and the Court should exercise its equity jurisdiction to grant relief. It was further submitted that the decision in Siti Networks Ltd. v. Rajiv Suri (2024) did not override the principle laid down in Rajendra Prasad Bansal, and hence, the decree should be enforced.

The Court acknowledged that the Corporate Insolvency Resolution Process (CIRP) against the Appellant commenced in 2020, with the Resolution Plan being approved on 1st January 2021. The key issue was whether the decree-holder’s rights were extinguished due to its failure to submit a claim during the CIRP. Referring to the IBC framework, the Court observed that a decree-holder qualifies as a "creditor" and that the term "debt" includes all liabilities arising from claims.

Relying on Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co., the Court reiterated that: “Once a resolution plan is duly approved by the adjudicating authority under sub-section (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of the resolution plan by the adjudicating authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan.”

The Court emphasized that Respondent No.1 had not filed its claim within the prescribed period, and therefore, its rights stood extinguished. Addressing the contention that bank guarantees deposited in Court fell under custodia legis, the Court distinguished the present case from Rajendra Prasad Bansal v. Reliance Communication Ltd. (2023), stating: “The fate of the money deposited in this Court is no longer subject to the decision in Appeal as the fate has been sealed by the approval of the Resolution Plan on 1st January 2021, which does not include the claim of Respondent No.1.”

The Court concluded that enforcing the decree against the bank guarantees would mean satisfying a debt that had already been extinguished under the IBC. It held that “permitting such enforcement would undermine the binding nature of an approved Resolution Plan and reintroduce claims that the insolvency process had conclusively settled.” Consequently, it ruled against Respondent No.1, holding that no further proceedings could be maintained.

The Court held that the Respondent’s claim had been extinguished due to its failure to file a claim with the Resolution Professional. The decree could not be enforced, and consequently, the bank guarantees submitted by the Appellant were ordered to be released. The application was allowed, and the Respondent’s plea for the enforcement of the decree was rejected.