The Hon’ble Supreme Court in the landmark RPS Infrastructure Ltd vs. Mukul Sharma[1] judgement, once again delved into the issue of claims being made beyond the statutorily prescribed timelines in a Corporate Insolvency Resolution Process (“CIRP”). In this case, an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), was pending against a Section 34 award and the Appellant submitted a claim for the same subsequent to the committee of creditors (“COC”) approving the resolution plan.
The Apex Court, while deciding on the above-mentioned question of law, upheld National Company Law Appellate Tribunal’s (“NCLAT”) decision and concluded that admitting claims after acceptance of resolution plan by the COC would go against the primary objectives of the Insolvency and Bankruptcy Code, 2016 (“Code”), and render the CIRP as an endless process. This article analyses the Hon’ble Supreme Court and the NCLAT’s reasoning in deciding the often debated significant issue of discretion in admitting/ allowing a claim beyond the statutorily prescribed period under the Code, and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IBBI Regulations”).
Factual overview
KST Infrastructure Ltd. (“Corporate Debtor”), a real estate company, entered into an agreement dated August 2, 2006, with RPS Infrastructure (“Appellant/ RP Infrastructure”) for developing a land licensed with the Appellant.[2] Subsequently, owing to an alleged misconduct in advertising, the Appellant sought reference to arbitration on May 2, 2011. On August 1, 2016, an award was passed in favour of the Appellant, which was subsequently challenged by the Corporate Debtor under Section 34 of the Arbitration Act.[3] Following this, proceedings under Section 34 culminated and the award was upheld by the A.D.J. (Special Commercial Court, Gurugram), although with some modifications on April 25, 2019. Aggrieved by the order of the A.D.J, the Corporate Debtor preferred an appeal under Section 37 of the Arbitration Act.[4]
Meanwhile, CIRP was initiated against the Corporate Debtor in relation to three of its real estate projects and a Section 7 application under the IBC was admitted by the National Company Law Tribunal (“NCLT/ Adjudicating Authority”) on March 27, 2019. Subsequently, on July 11, 2020, KST Whispering Heights Residential Welfare Association emerged as the successful resolution applicant. Following this, a resolution plan was submitted by Respondent No.1 (“Resolution Professional”) before the Adjudicating Authority for approval under Section 31 of the Code. On August 19, 2020, the Appellant via an email highlighted their pending claim of around Rs 35 crore against the Corporate Debtor. However, the Resolution Professional rejected this claim on the ground that the time period for submitting a claim is 90 days from the commencement of CIRP and the applicant was late by 287 days, with the resolution plan already been approved by the COC.[5]
In the chain of events, the Appellant filed an application under Section 60(5) of the Code before the NCLT, seeking directions to the Resolution Professional to consider the Appellant’s claim on merits. The NCLT vide its order dated November 3, 2020, allowed the application filed by the Appellant on the following grounds:
- Respondent No. 1/ Resolution Professional could not have summarily rejected the Appellant’s claim, as this claim would have appeared in the Corporate Debtor’s books of accounts;
- In case the book of accounts were unavailable, the Resolution Professional was duty bound to obtain them and verify the financial position; and
- Since the announcement was made through public newspapers, it is likely that the Appellant missed out on the same.[6]
Aggrieved by this order, the Resolution Professional preferred an appeal under Section 61 of the Code before the Hon’ble NCLAT.
Nclat’s Decision
The Resolution Professional’s appeal before the NCLAT was primarily based on the ground that allowing such belated claims when the COC had already approved the resolution plan might result in potential consequences. The Appellant made the claim almost a year after claims were invited by a public notice and allowing the same would set the clock back on the CIRP and set a precedent, thereby making CIRP prolonged and inefficacious.[7] On the other hand, RPS Infrastructure contended that belated claims should not be shut out as time-periods in the IBC are merely directory and not mandatory. It relied on Brilliant Alloys Private Limited vs Mr. S. Rajagopal[8], wherein the Hon’ble Supreme Court had rejected a Special Leave Petition for allowing withdrawal of an application after the invitation for expression of interest in light of timelines provided for under Section 12A of the Code and Regulation 30A of the IBBI Regulations.[9]
The Hon’ble NCLAT decided the appeal in favour of the Resolution Professional and disagreed with the reasoning given by NCLT based on the following grounds:[10]
- The Resolution Professional had fulfilled its statutory responsibilities as mandated under Regulation 6 of the IBBI Regulations, i.e. to pronounce through newspapers and not through personal service.[11]
- The Resolution Professional had made sincere efforts to procure the records of the Corporate Debtor and therefore did not fail to discharge its obligation as stipulated under the Code and IBBI Regulations.
- Brilliant Alloys[12] dealt with the timelines under Section 12A of the Code and Regulation 30A of the IBBI Regulations, which pertains to withdrawal of an application, and therefore the same cannot apply to the facts and circumstances of the present case. More importantly, the Resolution Professional is not vested with any legal discretion under the law to admit/ accept claims beyond the 90-day period, as per Regulations 12 and 13 of the IBBI Regulations.
- The COC had already approved the resolution plan and it was pending before the adjudicating authority. If new claims were to be entertained at this stage, it would significantly jeopardize the CIRP, ultimately defeating the objective of the IBC Code i.e., to maximize the value of the Corporate Debtor in a time-bound manner.
NCLAT’s order in favour of the Resolution Professional was subsequently challenged by RPS Infrastructure before the Hon’ble Supreme Court.
Supreme Court’s Decision: fortifying the objectives of ibc
The primary issue before the Hon’ble Supreme Court was whether the Appellant’s claim pertaining to an arbitral award, which is in appeal under Section 37 of the Arbitration Act, ought to be included at a belated stage, i.e. after the COC has approved the resolution plan.[13] With respect to the other issue raised by the Appellant, the Apex Court was clear that the Resolution Professional was diligent in discharging its statutory obligations pertaining to procurement of records and making a public announcement under the relevant provisions of the Code and the IBBI regulations.
The Hon’ble Apex Court agreed with the NCLAT’s reasoning and held that allowing such a belated claim to be included in the resolution plan at such a delayed stage will result in reopening of the same issue. The Court further opined that this might lead to a bandwagon effect, allowing new entities/ persons to raise fresh claims against the Corporate Debtor, ultimately rendering the CIRP as an endless process.[14] The mere fact that the resolution plan was not approved by the adjudicating authority does not imply that the plan can go back and forth, ultimately defeating the innate ‘time-bound process’ objective of the IBC. The Hon’ble Court endorsed the reasoning given in its earlier landmark judgement of Committee of Creditors of Essar Steel India Limited through Authorsised Signatory vs Satish Kumar Gupta[15],wherein it had held that “…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 hydra popping up which would throw into uncertainty amounts payable by a prospective resolution applicant would successfully take over the business of the corporate debtor”[16].
Further, the Hon’ble Court’s approach in deciding the above-mentioned issue was significantly guided by the fact that the Appellant was a ‘commercial entity’ actively involved in the litigation against the Corporate Debtor and hence should have been ‘vigilant’ in having knowledge of the CIRP and raising its claim within the stipulated time period. The reasoning of the apex court does not imply a complete bar of claims beyond the 90 days statutory time limit as provided under the IBBI Regulations, rather a fact-specific decision, considering the stalled delay of 287 days by a commercial entity already engaged in litigation against the Corporate Debtor. Such an approach delineates varying standards of vigilance basis the nature of the parties in question.
The reasoning put forth in this judgement upholds the sanctity of the commercial wisdom of the COC, by not interfering with the resolution plan once it has been passed by it, while giving due credibility to the information memorandum. The Hon’ble Supreme Court in the landmark judgement of K Sashidhar vs. Indian Overseas Bank & ors.[17] observed that “The legislature, consciously, has not provided any ground to challenge the ‘commercial wisdom’ of the individual financial creditors or their collective decision before the adjudicating authority. That is made non-justiciable”. Similarly, in yet another landmark judgement of Committee of Creditors of Essar Steel India Limited vs. Satish kumar Gupta & ors.[18], the Hon’ble Apex Court highlighted the significance of COC’s commercial wisdom by stating “What is important is that it is the commercial wisdom of this majority of creditors which is to determine, through negotiation with the prospective resolution applicant, as to how and in what manner the corporate resolution process is to take place[19].
Conclusion
The Hon’ble Supreme Court by virtue of the reasoning put forth in this judgement seems to have followed the judicial trend of protecting and keeping intact the core objectives of the IBC. The evolution of the IBC framework through various reports, legislations and judgements consistently emphasises its predictability and timeliness and the present judgement is an addition to that. The Hon’ble Apex Court through this judgment held that even a pending Section 37 appeal under the Arbitration Act cannot be a ground for entertaining a belated claim once the COC has approved a resolution plan. Further, the Hon’ble Court’s fact-specific approach in putting a higher standard of vigilance on the Appellant (RPS Infrastructure) being a commercial entity is praiseworthy as it does not put a blanket bar on considering belated claims on certain legitimate grounds. Once again, the court has placed its faith on the COC’s commercial wisdom and the discretion of the Resolution Professional to carry on the CIRP smoothly and efficiently with least intervention in the substantive aspects involved in the process. The Hon’ble Court aptly highlighted the consequences of allowing such belated claims after the approval of the resolution plan which would open the floodgates to new claims from various parties, making the CIRP a process of endless oscillation, taking away from its core objective of maximization of the value of assets of the Corporate Debtor in a timely manner.
For further information, please contact:
Sumit Attri , Partner, Cyril Amarchand Mangaldas
sumit.attri@cyrilshroff.com
[1] 2023 SCC OnLine SC 1147
[2] Company Appeal (AT) (Insolvency) No. 1050 of 2020
[3] Company Appeal (AT) (Insolvency) No. 1050 of 2020
[4] Company Appeal (AT) (Insolvency) No. 1050 of 2020
[5] Company Appeal (AT) (Insolvency) No. 1050 of 2020
[6] IA 4589 (PB) of 2020 in CP (IB)-1757 (PB)/2018
[7] Company Appeal (AT) (Insolvency) No. 1050 of 2020
[8] (2022) 2 SCC 544
[9] (2022) 2 SCC 544
[10] Company Appeal (AT) (Insolvency) No. 1050 of 2020
[11] Regulation 6, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016
[12] Supra note 9
[13] 2023 SCC OnLine SC 1147
[14] 2023 SCC OnLine SC 1147
[15] (2020) 8 SCC 531
[16] Supra note 16
[17] 2019 SCC 12 150
[18] (2020) 8 SCC 531
[19] Ibid
