A Single Judge Bench of Calcutta HC Bench comprising Justice Moushumi Bhattacharya, while dealing with the question of whether an arbitral award holder's claim would stand extinguished upon the approval of a Resolution Plan for the award debtor's revival when it was not pressed during the Corporate Insolvency Resolution Process (CIRP)- has held that the claim would get extinguished once the Resolution Plan was accepted by the National Company Law Tribunal. [Sirpur Paper Mills Limited Vs. I.K. Merchants Pvt. Ltd. (Formerly Known as I.K. Merchants)]
Background of the Case
The present case is an application for setting aside an award passed by a learned Sole Arbitrator in arbitration proceedings between the respondent (the claimant in the arbitration) and the petitioner. The petitioner before this Court is the Award-debtor and the respondent before the learned Arbitrator.
As per the Petitioner 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 was that by reason of the subsequent developments after the impugned Award, the application for setting aside of the Award is not maintainable anymore.
Submissions made by the Counsels:
Mr. Jishnu Saha Senior Counsel who appeared for the petitioner relied 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 relied 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 contended that a successful Resolution applicant cannot be faced with undecided claims after the Resolution Plan has been accepted. Counsel placed 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 cited Gaurav Dalmia vs. Reserve Bank of India & Ors.; Axis Bank Limited vs. Gaurav Dalmia; Sumitra Devi Shah & Ors. vs. Tata Steel BSL Limited; in support of the aforesaid contention.
Counsel further relied 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 placed the scheme of the IBC and submitted that Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations, 2016 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.
Mr. Sudip Deb, counsel who appeared 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 submitted that the issue was finally decided in the orders passed and that such orders have not been challenged by the petitioner.
Counsel relied 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 submitted that upon the filing of the application under Section 34 of 1996 Act in October 2008, the Award automatically stayed and the respondent could not approach the NCLT for lodging its claim. Reliance was also placed 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 submitted 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.
Order of the Court
Upon hearing counsel appearing for the parties, the question which had to be answered in the present proceeding was 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 was whether a court sitting in 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.
Court taking into consideration the submission made by the counsels stated that,
“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.”
The Court relied upon 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 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 was pending in a Civil Court.
Further Court held that,
“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”
Accordingly, the Petition was disposed of.
Case Details
Title: Sirpur Paper Mills Limited v. I.K. Merchants Pvt. Ltd.
Bench: Justice Moushumi Bhattacharya
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