Resolution of disputed claims in insolvency process

By Charanya Lakshmikumaran and Gopal Machiraju, Lakshmikumaran & Sridharan

One of the key issues in the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (code), is the status and resolution of disputed claims. This has now been set to rest by the Supreme Court in the recent Essar Steel case. The National Company Law Appellate Tribunal (NCLAT), in the Essar Steel case, had held that disputed claims can be decided by the appropriate forums after the expiry of the moratorium period.

Charanya Lakshmikumaran
Lakshmikumaran & Sridharan

The Supreme Court set aside the NCLAT judgment and held that the existence of claims other than those decided on merits by the resolution professional (RP) or the National Company Law Tribunal (NCLT) or NCLAT, goes against the rationale of section 31, which provides that the resolution plan is binding on the corporate debtor (CD) and its employees, members, creditors, guarantors and other stakeholders in the resolution plan. It held that all claims must be submitted to and decided by the RP such that a prospective resolution applicant’s (RA) exposure is certain, and that no “undecided claims” can arise after the resolution plan is accepted. As per section 14, all pending proceedings with respect to disputed claims during the CIRP are stayed and no new proceedings can be initiated for adjudicating disputes. Originally, creditors with disputed claims had to wait for the completion of the CIRP before pursuing their claims, unless their claims were admitted by the RP.

A disputed claim cannot initiate a CIRP under section 9. Most cases of disputed claims are rejected by RPs on the grounds that such claims could not have secured an admission under the code. This was regarded to be consistent with the Supreme Court’s decision in the Swiss Ribbons case, which held that the RP is not vested with any quasi-judicial power and cannot adjudicate disputed claims. The decision of the RP to admit or reject a claim is not appealable. However, in practice, stakeholders have succeeded in applications (under section 60(5)) challenging rejected claims. In such cases, it was held that only claims that can be summarily disposed, may be decided.

Gopal Machiraju
Senior associate
Lakshmikumaran & Sridharan

Thus, stakeholders with claims, which cannot be decided by the RP or the NCLT, are not included in a resolution plan. Such stakeholders may not be regarded as parties to or “involved in” such a plan. These claims are against the CD and not the RA. The Supreme Court’s decision is founded on the premise that an RA cannot be suddenly faced with “undecided claims”. The details of pending litigations against the CD are disclosed to the RA in terms of section 29. An RA accepts the risk that such proceedings may be decided against the CD after the expiry of the moratorium, which will have to be discharged out of the CD’s assets and not from those of the RA.

The code also does not provide for any abatement or extinguishment of proceedings. The underlying principle under section 14 is that the moratorium only operates to stay proceedings during the CIRP period, and adjudication of claims that are in dispute before the appropriate forums may continue after its expiry. The Report of the Bankruptcy Law Reforms Committee, 2015, and the Report of the Joint Committee on the Code, 2016, also characterize and understand the moratorium as a stay of proceedings for a limited period.

The effect of the Supreme Court’s judgment is that disputed claims that were rejected by the RP or not decided by the NCLT or NCLAT stand extinguished, which is detrimental to operational and other creditors, and may warrant reconsideration.

Vesting adjudicatory powers with RP: Earlier, the liquidator had the power to adjudicate and decide disputed claims of creditors. Similarly, company courts were empowered to decide on questions arising out of winding-up application by creditors, including those for disputed claims ( as in the Indo-Allied Industries case). It may be prudent to vest the RP with summary powers to decide claims of stakeholders, with recourse to appeal to the NCLT on limited grounds, to ensure that all stakeholders are covered under the resolution plan. This would entail closure of all pending proceedings; but may also impede early resolution.

Creating a provision: Alternatively, a provision for discharge of disputed claims of stakeholders, may be made a part of the resolution plan under section 30(2), without which a resolution plan cannot be approved. Similar provisions are seen in the regulations for voluntary liquidation, which state that, for any pending litigation against the corporate person, sufficient provision be made to meet the payment obligations that may arise from such litigation. This would entail continuation of proceedings after the expiry of the moratorium period, which appears to be the intent. Recognizing this, in the Essar Steel case, before the NCLAT, the RA offered to establish an escrow account to provide certain amounts for discharge of disputed claims.

Charanya Lakshmikumaran is a partner and Gopal Machiraju is a senior associate at Lakshmikumaran & Sridharan.

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