SUPREME COURT HOLDS THAT IBC DOES NOT ALLOW ADMISSION OF CLAIMS POST-APPROVAL OF RESOLUTION PLAN BY THE COMMITTEE OF CREDITORS

A Two Judge Bench of the Supreme Court comprising of Justice Sanjay Kishan Kaul and Justice Sudhanshu Dhulia passed a Judgment dated 11-09-2023 in the matter of M/s. RPS Infrastructure Ltd. vs. Mukul Kumar & Anr. Civil Appeal No. 5590 / 2021 and observed the potential consequences of accepting claims after approval of the resolution plan by the Committee of Creditors (COC). The concern is that it could make the Corporate Insolvency Resolution Process never-ending, making it impossible to move forward.

FACTS:

(i) That the aforesaid Appeal filed before the Supreme Court by one, M/s. RPS Infrastructure Ltd. (Appellant) against Mukul Kumar [Resolution Professional (RP)[1]/ Respondent No. 1] and the KST Whispering Heights Residents Welfare Association, the party impleaded in this Appeal was the Successful Resolution Applicant before the Apex Court (the Corporate Debtor[2]/ Respondent No. 2), challenged the decision of the Ld. National Company Law Appellate Tribunal (NCLAT), which held that allowing new claims, especially those submitted late, could endanger the resolution plan approved by COC, due to potential disruptions and uncertainty for the Successful Resolution Applicant.

(ii) That the Appellant and the Corporate Debtor entered into an Agreement for the Development of Land into a residential group housing complex on 02.08.2006. However, a dispute arose, as the Corporate Debtor allegedly advertised the Project under its name without mentioning the Appellant’s name.

(iii) Thereafter, the Appellant initiated Arbitration Proceedings on 02.05.2011 due to the Corporate Debtor’s wrongful act. The Appellant was granted an Award dated 01.08.2016. Further, the Arbitral Tribunal directed the Corporate Debtor, in addition to a monetary claim, to transfer the necessary licenses to the Appellant.

(iv) Aggrieved, the Corporate Debtor challenged the Award by filing a Petition under Section 34 of the Arbitration and Conciliation Act, 1996 (Application for Setting Aside Arbitral Award). Meanwhile, a Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor in connection with three real estate projects.

(v) Subsequently, the CIRP resulted in the approval of a resolution plan, and the Appellant, having a pending claim against the Corporate Debtor under the Arbitration Award, sought consideration of its claim under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) (Adjudicating Authority for Corporate Persons). The Adjudicating Authority granted relief to the Appellant, allowing the claim to be considered.

(vi) Thereafter, the Respondent No.1 proceeded to challenge the Adjudicating Authority’s decision under Section 61 of the IBC (Appeals and Appellate Authority) by taking the matter to the NCLAT. Despite this, the NCLAT ultimately dismissed the Appellant’s case based on various factors, such as (a). the validity of the claim invitations, (b). the Appellant’s delay in filing, (c). the Resolution Professional’s diligent efforts, and (d). the potential repercussions of introducing new claims to the already approved resolution plan. The Appellant has now approached the Supreme Court seeking a review of the NCLAT’s decision in Case No. CAAT(I)-1050-2020.

NCLAT FINDINGS:

Aggreived by the Order passed by Adjudicating Authority dated 03.11.2020 the Respondent No.1 filed an Appeal under Section 61 of the IBC, before NCLAT.

(I) The Ld. NCLAT found that the Resolution Professional (RP) had followed the proper procedures for inviting claims, as mandated by Regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (Public Announcement). The RP had published a Public Announcement in newspapers, and there was no dispute regarding this aspect.

(II) Further, the Ld. NCLAT noted that the Appellant had filed its Claim after a significant delay, well beyond the 90-day period from the commencement of the Corporate Insolvency Resolution Process (CIRP). The Appellant’s Claim was filed 287 days late, according to the RP.

(III) That the Ld. NCLAT pointed out that the Appellant had not demonstrated that it filed the Claim as soon as it became aware of the initiation of the CIRP. Additionally, the Appellant had issued a Special Power of Attorney in favour of the Corporate Debtor after the Arbitration Award had been confirmed on 25.04.2019, which raised questions about its knowledge and timing of the Claim.

(IV) Thereafter, the Ld. NCLAT acknowledged the RP’s efforts to obtain records and information related to the Claim by filing an Application under Section 19 IBC (Personnel to extend cooperation to interim resolution professional) Although this attempt did not yield results, it was seen as a sincere effort by the RP.

(V) Thus, the Ld. NCLAT referred to Regulations 12 (Submission of proof of claims) and 13 (Verification of claims.) of the IBBI Regulations, which obligate the RP to accept claims filed within the extended period of 90 days from the commencement of CIRP.

(VI) Hence, the NCLAT expressed concerns that allowing new claims, particularly belated ones, could jeopardize the approved resolution plan. This concern was based on its potential to disrupt the process and create uncertainty for the Successful Resolution Applicant.

SUPREME COURT OBSERVATIONS:

Aggrieved by the impugned Order dated 30.07.2021 passed by the Ld. NCLAT, the Appellant filed a Civil Appeal No. 5590/2021 before the Hon’ble Supreme Court on  26.08.2021. The Apex Court, in its observations, addressed the central issue of whether the Appellant’s Claim, related to an Arbitral Award under appeal, should be included at a belated stage after the approval of the resolution plan by the COC.

(1) That the Supreme Court acknowledged that the process followed by the Resolution Professional (Respondent No. 1) was not flawed in any manner, except in terms of whether Respondent No. 1 should have made efforts to locate the liabilities related to the Arbitral Award from the Corporate Debtor’s records.

(2) Further, the Bench noted that Respondent No. 1 had taken reasonable steps to obtain the Corporate Debtor’s records, including filing an Application under Section 19 The lack of success in obtaining these records was due to the Corporate Debtor’s failure to provide the material. Consequently, it remained uncertain whether there was any record reflecting the award-related liabilities.

(3) Thus, the Hon’ble Court considered whether the delay in the Appellant’s Claim filing should have been condoned by Respondent No. 1. The IBC is a time-bound process, and while there are circumstances where time can be extended, the delay in this case amounted to 287 days. Further, the Court believed that the Appellant, as a commercial entity, should have been vigilant enough to ascertain whether the Corporate Debtor was undergoing CIRP. Hence, the Bench noted that the Appellant’s lack of vigilance had left it in a disadvantaged position.

(4) Thereafter, the Court cited Section 15 of IBC (Public announcement of corporate insolvency resolution process) and Regulation 6 of the IBBI Regulations, which mandate a public announcement of the CIRP through newspapers. This, in effect, constitutes deemed knowledge for the parties involved. The Court stated that the Appellant’s Claim of not being aware of newspaper announcements, should not apply to a commercial entity.

(5) Subsequently, the Court emphasized that the mere fact that the Adjudicating Authority had not yet approved the plan did not imply that the plan could go back and forth, potentially making the CIRP an endless process. This could result in reopening the entire issue, especially as other parties might also seek to join the process.

(6) Hence, as a result of the above considerations, the Supreme Court concluded that the NCLAT’s impugned judgment could not be faulted for not reopening the matter at the Appellant’s request. The Court expressed reluctance to reopen the issue and potentially introduce undecided claims into the resolution process.

CONCLUSION:

Thus, based on aforesaid observations, the Apex Court’s judgment in this case stressed the importance of preventing an endless process in the CIRP and avoiding the introduction of new claims after the COC has approved the resolution plan. Further, the Supreme Court stated that allowing new claims at this stage could disrupt the process and introduce uncertainty. Moreover, this decision reflects the Court’s view that the Appellant’s Claim was not timely and should not be included in the CIRP.

Therefore, the Apex Court upheld the NCLAT’s Order dated 30.07.2021, which denied the inclusion of the Appellant’s Claim in the CIRP and thereby, dismissed the Appellant’s Appeal.

 

Sakshi Raghuvanshi

Legal Associate

The Indian Lawyer

 

[1] A Resolution Professional is appointed by an Adjudicating Authority, who is responsible to govern the affairs of the whole Insolvency and Bankruptcy procedure.

[2] Corporate Debtor under the IBC: As per Section 3(8), Corporate Debtor means a corporate person who owes a debt to any person.