Sirpur Paper Mills Limited vs I.K. Merchants Pvt. Ltd. ...
2021 Latest Caselaw 415 Cal/2

                     IN THE HIGH COURT AT CALCUTTA
                       Ordinary Original Civil Jurisdiction
                                ORIGINAL SIDE


Present:
The Hon'ble JUSTICE MOUSHUMI BHATTACHARYA


                                A.P. 550 of 2008

                          Sirpur Paper Mills Limited
                                       Vs.
      I.K. Merchants Pvt. Ltd. (Formerly Known as I.K. Merchants)



For the Petitioner               :     Mr. Jishnu Saha, Sr. Adv.
                                       Mr. Sakabda Roy, Adv.
                                       Ms. Trisha Mukherjee, Adv.


For the Respondent              :      Mr. Sudip Deb, Adv.
                                       Mr. Deepak Jain, Adv.
                                       Mr. R. Ghosh, Adv.


Last Heard on                    :     04.05.2021.



Delivered on                     :     07.05.2021.



Moushumi Bhattacharya, J.

1. This is an application for setting aside of an Award dated 7th July,

2008 passed by a learned Sole Arbitrator in arbitration proceedings between

the respondent (claimant in the arbitration) and the petitioner herein. The

petitioner before this court is the Award-debtor and the respondent before

the learned Arbitrator.

2. According to the petitioner, the present proceeding under Section 34

of The Arbitration and Conciliation Act, 1996, has become infructuous by

reason of the management of the petitioner company (the Award-debtor)

being taken over by a new entity following the approval of a Resolution Plan

of the petitioner company by the National Company Law Tribunal (NCLT)

under The Insolvency and Bankruptcy Code, 2016 (IBC). The petitioner's

case is that by reason of the subsequent developments after the impugned

Award, the application for setting aside of the Award is not maintainable any

more.

3. Mr. Jishnu Saha, Senior Counsel appearing for the petitioner relies on

the provisions of the IBC, particularly Section 31 thereof, which provides

that an approved Resolution Plan is binding on the corporate debtor and its

employees, members and other stakeholders and relies on a decision of the

Supreme Court in Committee of Creditors of Essar Steel India Limited vs.

Satish Kumar Gupta; (2020) 8 SCC 531. Counsel contends that a successful

Resolution applicant cannot be faced with undecided claims after the

Resolution Plan has been accepted. Counsel places strong reliance on Essar

to urge that the debts of the corporate debtor (the petitioner before this

court) hence stands extinguished save to the extent of the debts which have

been taken over by the resolution applicant under the approved Resolution

Plan. Counsel cites Gaurav Dalmia vs. Reserve Bank of India & Ors.; 2020

SCC Online Cal 668, Axis Bank Limited vs. Gaurav Dalmia;

MANU/WB/0739/2020; Sumitra Devi Shah & Ors. vs. Tata Steel BSL

Limited; 2021 SCC Online Cal 114 in support of the aforesaid contention.

Counsel further relies on Section 3(11) of the IBC-"Debt"- which includes a

financial debt and an operational debt and on Section 3(6)(a) of the IBC to

contend that the word "claim" - which has been defined as a right to

payment, whether or not such right is reduced to judgment leaves no room

for doubt that a claim would also include a disputed claim and a right to

payment whether such right is reduced to judgment. Counsel places the

scheme of the IBC and submits that Regulation 38 of the Insolvency and

Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Person) Regulations, 2016 ("CIRP Regulations") provides that a Resolution

Plan must mandatorily contain the amount payable under it including the

amount payable to the operational and financial creditors. Counsel submits

that in the event a creditor fails to submit his claims before the RP, it forfeits

its rights to the claim.

4. Counsel relies on Board of Control for Cricket in India vs. Kochi Cricket

Private Limited & Ors.; (2018) 6 SCC 287 to urge that Section 36 of the 1996

Act, as amended, would apply to pending Section 34 applications on the

date of commencement of the Amendment Act of 2016. Counsel argues that

the Arbitral Award does not survive and no purpose will be served by

pursuing the application for setting aside the Award and relies on Shipping

Corporation of India Limited vs. Machado Brothers & Ors.; (2004) 11 SCC 168

and Soumik Sil vs. Subhas Chandra Sil; (2015) 5 SCC 732 for the aforesaid

submission. Counsel submits that the question of maintainability of the

Section 34 application has not been finally decided by the judgment dated

10th January, 2020.

5. Mr. Sudip Deb, counsel appearing for the respondent/Award-holder

submits at the very outset that the submissions of the petitioner Award-

debtor have been raised and argued on two earlier occasions. Counsel

submits that, the issue was finally decided in the orders passed and that

such orders have not been challenged by the petitioner. Counsel relies on

Satyadhyan Ghosal vs. Deorajin Debi (Smt); AIR 1960 SC 941 and Arjun

Singh vs. Mohindra Kumar; (1964) 5 SCR 946 for the proposition that res

judicata can apply to different stages of the same proceeding. Counsel

submits that upon filing of the application under Section 34 of 1996 Act in

October 2008, the Award was automatically stayed and the respondent

could not approach the NCLT for lodging its claim. Counsel relies on Board

of Control for Cricket in India vs. Kochi Cricket Private Limited; (2018) 6 SCC

287 and Government of India vs. Vedanta Limited (Formerly Cairn India

Limited); (2020) 10 SCC 1 for the proposition that amendments will only have

prospective application. Counsel submits that with the filing of an

application under Section 34 is filed, the dispute raised by the party

amounts to a pre-existing dispute which takes the respondent/Award-holder

outside the purview of the IBC; Mobilox Innovations Private Limited vs.

Kirusa Software Private Limited; (2018) 1 SCC 353 and K. Kishan vs. Vijay

Nirman Company Private Limited; (2018) 17 SCC 662. On the factual aspect,

counsel submits that the petitioner continues to exist and is hence under an

obligation to pay the dues of the respondent Award-holder. Counsel

reiterates that the respondent Award-holder could not have lodged its claim

before the NCLT by reason of the impugned Award being stayed upon filing

of the Section 34 application. Counsel further submits that the petitioner

has not addressed the Section 34 application on merits.

6. Counsel relies on Swiss Ribbons Pvt. Ltd. vs Union of India; (2019) 4

SCC 17 for the proposition that a default would occur only when a debt,

arising from a claim becomes due and payable and is not paid by the debtor.

Counsel submits that in the present case, the respondent being the

operational creditor does not have any claim since nothing is due from the

petitioner (corporate debtor) in view of the pendency of the Section 34

application.

7. Upon hearing learned counsel appearing for the parties, the question

which has to be answered in the present proceeding is whether the claim of

an Award-holder can be frustrated on the approval of a Resolution Plan

under Section 31 of The Insolvency and Bankruptcy Code, 2016. The related

issue is whether a court sitting in a Section 34 (of the 1996 Act) jurisdiction

can recognize and accept the futility of the Section 34 proceedings on the

claim of the Award-holder being extinguished upon approval of the

Resolution Plan and a resolution applicant taking over the management of

the Award-debtor.

8. This court must however travel the road to the adjudication of the

above issues by first dealing with the roadblock of the two earlier orders by

which the contentions of the Award-debtor on the relevance of the IBC were

rejected.

The Orders:

9. By a judgment dated 10th January, 2020 on the question whether the

present application under Section 34 of the Act should be kept in abeyance

following invocation of the provisions of the IBC against the

petitioner/Award-debtor, this Court held that corporate insolvency

resolution proceedings (CIRP) cannot be used to defeat a dispute which

existed prior to initiation of the insolvency proceedings. It was further held

that the respondent Award-holder could not have filed a claim before the

National Company Law Tribunal since there was no final or adjudicated

claim on the date of initiation of the CIRP against the Award-debtor.

10. The Award-debtor applied for recalling of the judgment which was

rejected by this court by an order dated 3rd February, 2020. In rejecting the

application, it was clarified that the question on which the judgment was

pronounced was whether the Section 34 application can be proceeded with

in view of the Award-holder not having filed a claim in the resolution

proceedings before the NCLT. The court also held that the apprehension of

the Award-debtor that it may risk the effect of the observations made by the

Court at the time of enforcement of the Award was misplaced since the

Court had not gone into the merits of the application.

11. This is the second round in the recourse against the Arbitral Award

dated 7th July, 2008 where the petitioner/Award-debtor has urged that the

application for setting aside of the Award cannot be proceeded with after

approval of the Resolution Plan in relation to the petitioner (corporate debtor

before the NCLT). The petitioner has relied upon Essar in respect of its

renewed plea before the court. This court is of the view that the three-

member Bench decision of the Supreme Court in Essar constitutes a

significant -and subsequent- development of the law in relation to the fate of

existing claims during and after corporate insolvency resolution proceedings

which, in turn, would constitute a sufficient reason for this court to re-visit

the judgment dated 10th January, 2020. It should be stated that the order

dated 3rd February, 2020 rejecting the application for recalling of the

judgment made it clear that the court had refrained from expressing any

views on the maintainability of the Section 34 application since the matter

under consideration was wholly on a different aspect. The reason for having

a re-look at the judgment at this stage is the pronouncement of the law by

the Supreme Court in Essar and more recently in a judgment delivered on

13th April, 2021 in Ghanshyam Mishra and Sons Private Limited vs.

Edelweiss Asset Reconstruction Company Limited; 2021 SCC OnLine SC 313,

wherein it was held that once a Resolution Plan is approved, a creditor

cannot initiate proceedings for recovery of claims which are not part of the

Resolution Plan.

12. A decision-making process must be attuned to a dynamic legal

landscape shaped by legislative intervention and judicial pronouncements.

The most predictable aspect of law is its constant evolution. It would hence

be judicial short-sightedness, even stubbornness, to hold on to a view when

the law, in the meantime, has transformed into a different avatar.

13. The contentions of the respondent with regard to the principles of res

judicata applying to different stages of the same proceedings must therefore

be read down in fit cases where orders are capable of being altered or varied

on the emergence of new facts or situations. The principle essentially is to

guard the court from abuse of process where the same matter in issue,

which had been heard and finally decided by a court, is urged again between

the same parties. This is unlike the present case as the question of

maintainability of the application under Section 34 of the 1996 Act can be

considered at any point of time on the legal aspect and particularly on the

pronouncement of a decision relevant to the matter.

14. Since this court is of the view that the earlier orders would not stand

in the way in considering the maintainability of the present application, the

decision of the Supreme Court in Essar needs to be dealt with in some

detail.

15. In Essar, the Supreme Court held that a Resolution Plan, once

approved under Section 31 of the IBC, is binding on the corporate debtor

and its employees, members, creditors, guarantors and other stakeholders,

as emphasized in paragraph 107 of the report which is reproduced below;

"107. For the same reason, the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the

Resolution Professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with "undecided" claims after the Resolution Plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the Resolution Professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, NCLAT judgment must also be set aside on this count."

16. In this decision, the Supreme Court considered questions relating to

the role of resolution applicants, Resolution Professionals and the

Committee of Creditors constituted under the IBC as well as the jurisdiction

of NCLT and the NCLAT with regard to Resolution Plans that have been

approved by the Committee of Creditors. In the facts of that case, NCLAT

had allowed admission of certain additional and belated claims of

operational creditors and had held that claims which have been decided by

the Adjudicating Authority or the Appellate Tribunal on merits may be

decided by an appropriate forum under Section 60(6) of the IBC. In answer

to the issue of undecided claims, the Supreme Court expressed its view in

paragraph 107 of the Report which has been set out above. The view of the

Court was that the successful resolution applicant who takes over the

business of the corporate debtor must start running the business of the

corporate debtor on a "fresh slate". This view has been reiterated in the

recent three-member decision of the Supreme Court in Ghanshyam Mishra

vs Edelweiss Asset Reconstruction Company Limited. This decision

considered Section 31 of the IBC and held that once the Resolution Plan is

approved by the Adjudicating Authority, it shall be binding on the corporate

debtor and its employees, members etc. since revival of the corporate debtor

is one of the dominant purposes of the IBC. The Court was of the view that

any debt which does not form a part of the approved Resolution Plan shall

stand extinguished. The conclusions of the Supreme Court in paragraph 95

of the Report reiterates that once the Resolution Plan is duly approved by

the Adjudicating Authority, claims which form part of the Resolution Plan

shall stand frozen and would be binding on the corporate debtor. More

significantly, the Court opined that claims which are not part of the

Resolution Plan shall stand extinguished and no person will be entitled to

initiate or continue any proceeding in respect to a claim which is not a part

of the Resolution Plan. The relevant paragraph reiterating the aforesaid is

reproduced below:-

"95........

(i) 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 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;

(ii) 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect;

(iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the Resolution Plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued."

The opinion of the Court culminates in:-

"As held by this Court, the successful resolution applicant cannot be flung with surprise claims which are not part of the Resolution Plan."

17. The fate of undecided or pending claims such as the one of the

respondent before this court can also be gleaned from Sections 25, 29, 30

and 31 of the IBC. Section 25-"Duties of Resolution Professionals"- which

contemplates maintenance of an updated list of claims by the Resolution

Professional [25(2)(e)]. Section 29-"Preparation of information memorandum"-

provides for the Resolution Professional preparing an Information

Memorandum containing relevant information for formulating a Resolution

Plan. "Relevant information" has been explained as the information which

would be required by the resolution applicant to make the Resolution Plan

for the corporate debtor and which shall include the financial position of the

corporate debtor including all information related to disputes by or against

the corporate debtor. Section 30-"Submission of Resolution Plan"-provides for

the payment of the debts of operational creditors in the manner as may be

specified by the Board which shall not be less than the amount to be paid

to the operational creditors in the event of liquidation of the corporate

debtor. Section 31 comes at the stage of approval of the Resolution Plan and

mandates that upon the Resolution Plan being approved by the Adjudicating

Authority, it shall be binding on the corporate debtor and its employees,

members and other stakeholders. The aforesaid provisions of the IBC read

with Essar and Edelweiss makes it evident that for a claim to be considered

by the Resolution Professional and later by the Committee of Creditors for

approval of the Resolution Plan, the said claim must feature in the

Information Memorandum prepared by the Resolution Professional and

provided to the resolution applicant which will ultimately take over the

business of the corporate debtor.

18. On a specific question put to counsel for the petitioner, it has been

submitted - one day before delivery of this judgment - that the Information

Memorandum mentioned the amount demanded by the respondent as on

31st March, 2014 under the heading "SUPPLIERS & SERVICE CONTRACTS

AS ON MARCH 31, 2015". This fact should be explored further including

whether it would have any bearing on the petitioner's contention that the

respondent's claim does not survive anymore.

19. The IBC contemplates of several stages where an operational creditor

is given notice of the commencement of the CIRP against a corporate debtor.

The provisions also take into account claims of parties who have not

initiated proceedings against the corporate debtor as operational creditors.

The arrangement of the sections are conducive not only to making all

creditors aware of the CIRP but also to invite claims and include them as

part of the list of claims which are collated by the Resolution Professional

and approved in the Resolution Plan by the Committee of Creditors and

finally by the Adjudicating Authority. The sequence of stages would be

evident from :-

 Section 8 - Insolvency resolution by operational creditor  Section 9 - Application for initiation of creditor insolvency resolution process by operational creditor  Section 15 - Public announcement of corporate insolvency resolution process  Section 21 - Committee of Creditors: collation of claims received by the Interim Resolution Professional  Section 25 - Maintaining an updates list of claims by the Resolution Professional  Section 29 - Preparation of Information Memorandum  Section 30 - Submission of resolution plan  Section 31 - Approval of resolution plan.

20. Regulation 7 under Chapter IV- "Proof of claims"- of the CIRP

Regulations, 2016, provides that an operational creditor shall submit the

claim with proof to the Interim Resolution Professional on or before the last

date mentioned in the "Public Announcement" (Regulation 12). In the

present case, the public announcement was made by the interim Resolution

Professional on 25th September, 2017. Regulation 6 of the CIRP Regulations

mandates that an Insolvency Professional shall make a public

announcement immediately on his appointment as an Interim Resolution

Professional. These facts would show that from the date of the admission of

the application of initiation of the CIRP against the petitioner namely 18th

September, 2017 until approval of the resolution plan on 16th May, 2018,

the respondent, as an Award-holder had sufficient opportunity to approach

the NCLT for appropriate relief. Second, the amount demanded by the

respondent/ Award-holder as on 31st March, 2014 featuring in the

Information Memorandum does not really help the respondent since the IBC

and the CIRP regulations provide for specific procedural provisions for

submission of claims (Ref: Regulations 7 and 12 read with Form B of the

Schedule to the CIRP Regulations, 2016). The Award-holder hence was

under an obligation to take active steps under the IBC instead of waiting for

the adjudication of the application under Section 34 of the 1996 Act.

21. The next issue which would naturally fall for consideration is whether

the respondent could have lodged and pursued its claim before the NCLT

when the impugned Award was challenged by the Award-debtor/petitioner

in this Court on 31st October, 2008. The respondent/ Award-holder

contends that there was no scope for the respondent to approach any other

forum since the impugned Award was automatically stayed upon filing of the

Section 34 application. The respondent has relied on Section 34 of the 1996

Act as it stood prior to amendment of 2016 which came into effect from 23rd

October, 2015. The merit of the stand taken must be seen in the light of

Section 36 which has been modified and added by the 2016 amendment.

The new Section 36 and sub-section (2) thereunder requires the Court to

grant an order of stay of the operation of the Arbitral Award in accordance

with Section 36(3) on a separate application for stay taken out by the

Award-debtor. Section 36(2) marks a significant departure from the

erstwhile provision in clarifying that filing of an application for setting aside

of an Award under Section 34 shall not by itself make the Award

unenforceable unless the Award is stayed by an order of Court in an

application made in the manner provided under Section 36(3) of the Act. In

Board of Control for Cricket in India vs Kochi Cricket Pvt. Ltd.; (2018) 6 SCC

287 the Supreme Court held that Section 36, prior to the amendment, can

only be seen as a "clog" on the right of a decree-holder who is unable to

execute the Award in his favour in the absence of the conditions set forth in

Section 36. The Supreme Court further clarified that the aforesaid does not

translate to a corresponding right in the judgment debtor to stay the

execution of the Award. The most significant clarification of the Supreme

Court in Kochi Cricket was expressed in the following words:-

"Since it is clear that execution of a decree pertains the realm of procedure, and that there is no substantive vested right in a judgment debtor to resist execution, Section 36, as substituted, would apply even to pending Section 34 applications on the date of commencement of the amendment Act."

The dictum hence is clear with regard to Section 34 applications which were

pending at the time of the judgment in Kochi Cricket; namely that such

pending applications would also be governed by the new Section 36, as

amended. In other words, the petitioner/Award-debtor would not have the

benefit of the Award being automatically stayed upon filing of the

application and the Award-holder would be free to enforce the Award against

the Award-debtor in the absence of an application for stay of the award

under the amended Section 36 of the Act. The opinion of the Supreme Court

in Kochi Cricket would also militate against the argument that the Award-

holder/Respondent before this Court was rendered immobile in the matter

of pursuing its claim in respect of the Award under the 1996 Act or before a

forum contemplated under the IBC or otherwise. The decisions cited on

behalf of the respondent in Swiss Ribbons Pvt. Ltd. vs Union of India; (2019)

4 SCC 17 has therefore to be seen in the context as discussed above.

22. Since this court had placed reliance on K. Kishan in the judgment

dated 10th January, 2020, the said decision should be referred to at this

stage. The thrust of the decision in K. Kishan was that the provisions of the

IBC should not be used "in terrorem" (in the words of the Supreme Court)

against a corporate debtor where there was a pre-existing ongoing dispute

between the parties. The concern of the Supreme Court was against the use

of the IBC by an operational creditor to extract its due despite an

adjudication pending for setting aside of an Award under Section 34 of the

1996 Act on the date of initiation of the corporate insolvency resolution

process. The Supreme Court relied on paragraphs 38 and 51 of Mobilox

Innovations to opine that one of the objects of the IBC is to ensure that the

amount of an operational debt does not enable operational creditors to put

the corporate debtor prematurely into the insolvency resolution process or

initiate the same for extraneous considerations. The Supreme Court sought

to create a protective barrier around corporate debtors in cases where the

provisions of the IBC were invoked by an operational creditor by jettisoning

an ongoing and pending dispute for setting aside of an Arbitral Award under

the 1996 Act. The facts of the present case are quite the opposite to that of

K. Kishan. The corporate debtor/Award-debtor before this court seeks to

take recourse in the culmination of the CIRP and the approval of the

Resolution Plan whereas the Award-holder/operational creditor seeks to

proceed with the application for setting aside of the Award. As stated above,

the view of this court as to a "pre-existing dispute" in the judgment of 10th

January, 2020 must be revisited -and revised- in the light of both Essar and

Edelweiss.

23. The view of the Supreme Court as crystallized in Essar and Edelweiss

is that pre-existing and undecided claims which have not featured in the

collation of claims and consequent consideration by the Resolution

Professional shall be treated as extinguished upon approval of the

Resolution Plan under Section 31 of the IBC. This can be seen as a

necessary and an inevitable fallout of the IBC in order to prevent, in the

words of the Supreme Court, a "hydra head popping up" and rendering

uncertain the running of the business of a corporate debtor by a successful

resolution applicant. In essence, 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 is pending in a Civil

Court.

24. Every litigant has a right to argue that an action commenced in a

court of law or a statutory forum is not maintainable by reason of the law

existing as on that date. A challenge to maintainability of an action must be

considered by the court before the substance of the dispute is adjudicated

on merits. A court must also decide whether the argument pertaining to

maintainability is such that the entire proceeding is rendered infructuous.

The present proceeding is precisely such a case where deciding on the

merits of the application, i.e. whether the Award should be set aside or

sustained, would be a complete waste not only of judicial time as well as of

the parties since the claim of the Award-holder has been extinguished upon

approval of the Resolution Plan under Section 31 of the IBC. Further

adjudication on the legality of the impugned Award cannot lead to its logical

conclusion and would hence be irrelevant. The parties would only be

compelled to travel the road to further proceedings (appeal, enforcement

etc.) without an end-point in the resolution to the dispute or any consequent

relief to either of the parties. This surely cannot be the objective of any

proceedings before any court of law.

25. In view of the above discussion, A.P. 550 of 2008 is disposed of as

being rendered infructuous. There shall be no order as to costs.

Urgent Photostat certified copy of this Judgment, if applied for, be

supplied to the parties upon compliance of all requisite formalities.

(MOUSHUMI BHATTACHARYA, J.)