Arbitration: Pending a challenge to an award that is not a prohibition for filing your claim with the RP: High Court of Calcutta – Insolvency / Bankruptcy / Restructuring
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Reaffirming the principles set out in
Edelweiss2, the High Court of Calcutta (“Supreme Court“) in a recent judgment3 held that an operational creditor who failed to file a claim in a corporate insolvency resolution process (“CIRP“)”literally failed to board the protest bus for seeking the fruits of an award, even when a challenge to the award is pending in civil court. “The High Court ruled that once a resolution plan is approved, all claims that are not part of the resolution are extinguished.
A request was made under section 34 of the Arbitration and Conciliation Act 1996 (“Act“) set aside an arbitration award rendered by a sole arbitrator (“Price“) in a matter between Sirpur Paper Mills Limited (“Sirpur“/“Petitioner“/“Allocation debtor“) and IKMerchants Pvt. Ltd. (“CI Merchants“/“Respondent“/“Prize holderThe challenge before the High Court was that the Section 34 proceedings had become unsuccessful due to the approval of a resolution plan and subsequent changes in the management of the petitioner, in the proceedings of insolvency of the applicant under the Insolvency and Bankruptcy Code, 2016 (“IBC“).
The petitioner relied on Article 31 of the IBC and argued that once a resolution plan is approved, it is binding on all debtor companies and their stakeholders.4. A resolution requester cannot be faced with indecisive complaints once the resolution plan has been accepted.5. We relied on the definition of ‘Claim‘6 which is defined as a right to payment, whether or not it is reduced to judgment; including a contested claim and the right to such payment, whether reduced to judgment or not. We also relied on the definition of ‘debt‘7, which includes both financial debt and operational debt. A resolution plan must contain the amount payable under it to operational and financial creditors.8. In addition, it has been argued that the amended section 36 of the Act applies prospectively9. Thus, arguing that it would be pointless to pursue the request for annulment of the awardten.
The Respondent argued that the Applicant’s arguments had been raised twice before and had already been rejected; and that res judicata applies to different stages of the same procedure11. In addition, when filing an application under section 34 of the Act, the award was automatically suspended taking into account the prospective application of the amendments.12; and the Respondent could not have gone to the NCLT to file his claim. Filing a claim under section 34 of the Act would amount to a pre-existing dispute, which would put the defendant outside the jurisdiction of the IBC.13. As article 34 / contestation of the award procedure was pending, nothing as such was due from the applicant, as a default only arises when a debt is due and payable14.
The High Court observed that this was the second time that the sentencing debtor had requested that the section 34 proceeding could not continue in light of the approval of a resolution plan. The High Court observed that, since the law is continually evolving, this would amount to “judicial myopia, even stubbornness‘cling to the views of the past and therefore to the argument about res judicata should be read down.
The Supreme Court in Essar15ruled that once a resolution plan is approved, it is binding on the debtor company and all of its stakeholders. The successful resolution applicant must start the business of the debtor company on a “new slate”. The Supreme Court in
Edelweiss ruled that once a resolution plan is approved, a creditor cannot initiate debt collection proceedings, which are not part of the resolution plan. A successful resolution seeker cannot suddenly be faced with indecisive claims, making the amounts payable under the plan uncertain. The Supreme Court noted that reviving the debtor business is the overriding goal of the IBC and that no sudden surprises could be caused by the resolution applicant. Any debt that is not part of the approved resolution plan will be extinguished and no one will then have the right to initiate proceedings in respect of such extinguished debts. Article 31 of the IBC being of a clarifying nature, it comes into force as of the date of the IBC.
The IBC is considering different stages16 during which operational creditors are notified of the opening of a CIRP against a debtor company, also taking into account the claims of parties who have not initiated proceedings against the debtor company. For example, the information note includes all the details relating to the financial position of the debtor company, including information relating to existing disputes. The result is that all creditors are informed of the CIRP and provisions exist to invite the claims to be included in the list of claims. In view of the many possibilities available to the scholarship holder under the IBC to submit their applications, the scholarship holder was under an obligation to take active action under the IBC instead of waiting for judgment. of the request under article 34 of the law.
The High Court further noted that under the amended Section 36 of the Act, the award is not automatically stayed upon filing a Section 34 claim.17. The Supreme Court ruling in
Kochi Cricket18 clarified that pending applications at the time of the pronouncement of said judgment would also be governed by amended article 36 of the Law and that the debtor of the award would not benefit from an automatic stay of the award. Thus, the High Court held that the judgment debtor was not prevented in the present case from pursuing his claim under the law.
The High Court noted that the provisions of the IBC should not be used in terror where there are pre-existing ongoing disputes between the parties and the CIB should not be used as a recovery mechanism. One of the objectives of the IBC is to ensure that operational creditors do not prematurely bankrupt the debtor for foreign considerations.
In essence, the High Court ruled that an operational creditor who does not file a claim with the CIRP missed the opportunity to claim its assessments on an arbitration award, despite a challenge to the arbitration award pending in a civil court.
Finally, the High Court declined to consider whether the award should be set aside or maintained, as it would constitute a waste of judicial time; the claim of the Holder of the Stock Exchange is extinguished upon approval of the resolution plan.
1. Essar Steel India Limited v. Satish Kumar Gupta (2020) 8 CSC 531
2.2021 CSC online SC 313
3. Sirpur Paper Mills Ltd. vs. IK Merchants Pvt. Ltd., AP 550 from 2008
4. Essar Steel India Limited v. Satish Kumar Gupta (2020) 8 CSC 531
5.2020 SCC in line Cal 668, MANU / WB / 0739/2020, 2021 SCC in line Cal 114
6. Section 3 (6) (a) of the IBC
7. Article 3 (11) of the IBC
8. Regulation 38 of the Insolvency and Bankruptcy Board of India Regulation 2016 (Insolvency Resolution Process for Legal Persons) (“CIRP Regulations“)
9. (2018) 6 SCC 287
10. (2004) 11 SCC 168, (2015) 5 SCC 732
11. AIR 1960 SC 941, (1964) 5 RCS 946
12. (2018) 6 CSC 287, (2020) 10 CSC 1
13. (2018) 1 CSC 353, (2018) 17 CSC 662
14. (2019) 4 SCC 17
15. Paragraph 107
16. Rule 7 of Chapter IV – Proof of claims; Article 12 – Public announcement
17. (2018) 6 SCC 287
18. (2018) 6 SCC 287
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