The Insolvency and Bankruptcy Code, 2016 (“IBC”) is silent on the treatment of a disputed or contingent claim, which is pending adjudication before a judicial or quasi-judicial body, giving rise to a contentious issue. The decision of the Hon’ble Supreme Court in Committee of Creditors of Essar Steel Limited v. Satish Kumar Gupta[1] brought some clarity vis-à-vis the status of the contingent/ disputed claims for the corporate insolvency resolution process (“CIRP”). The Hon’ble Supreme Court in Essar Steel (supra) upheld a resolution plan, wherein a contingent claim pending adjudication was accorded a notional value of INR 1/-. Subsequently, it became an accepted norm for Resolution Professionals (“RP”) to admit claims that are sub-judice, at a notional value of INR 1/. Though this answers the question of how undisputed claims must be treated by the RP, the Essar judgment also leaves a few issues open to interpretation.
The present blog attempts to put into perspective one of these open issues, i.e., whether a liquidator can resort to the Essar judgment to accord a notional value of INR 1 to disputed/ contingent claims. Essentially, answering this question, would require introspection into the role, powers and functions of a liquidator, and whether it is the same as that of an RP.
Under the scheme of the IBC, a liquidator is required to receive or collect claims of creditors within 30 (thirty) days from the date of commencement of the liquidation process[2]. The liquidator is further mandated to verify the claims submitted before it and[3], pursuant to such verification, either admit or reject the claim[4]. Further, Regulation 25 of the IBBI (Liquidation Process) Regulations, 2016, requires a liquidator to make the ‘best estimate of the amount of claim based on the information available with him’, even in cases where the amount claimed is not precise. Pertinently, the decision of the liquidator admitting/ rejecting a claim is itself appealable under Section 42 of IBC before the adjudicating authority, i.e., National Company Law Tribunal (“NCLT”).
Despite the provisions of the IBC detailing the powers and duties of a liquidator, it is evident from the reading of the foregoing provisions that the IBC does not expressly envisage the treatment of a contingent claim at the liquidation stage. Pertinently, in view of this statutory vacuum, liquidators have also adopted an approach similar to RPs, i.e., to admit contingent claims at a notional value of INR 1/-. However, this approach may not be in sync with the provisions of the IBC, which is also reflected in various decisions of the Hon’ble NCLT. Applicable law suggests that a liquidator, unlike an RP, has the specific responsibility of determining the value of a claim, based on an independent assessment of the merits, even if such claim is sub-judice, and hence cannot accord a notional value of INR 1/- to such claims. The broader rationale behind this is explained in more detail hereinbelow:
- Under the scheme of the IBC, the role of a liquidator is different from an IRP/ RP: A bare reading of the provisions of the IBC clearly establishes that the roles of IRP/ RP and that of a liquidator are distinct and different. The IRP/ RP’s role is to assist in the process of continuation of a corporate debtor, whereas a liquidator’s role is to prepare the liquidation estate to institute the eventual dissolution of the corporate debtor. In such circumstances, the considerations that govern decision making by an IRP/ RP and a liquidator, in the context of treatment of claims, cannot be equated. This difference is further substantiated by the fact that unlike CIRP, post completion of liquidation of a corporate debtor, creditors do not have any recourse to claim settlement. This view has been taken and upheld by the NCLT New Delhi Bench in Anurag Sachdeva v. Kashi Viswanathan Sivaraman[5].
- Liquidator performs a quasi-judicial function: Further differentiating the role and functions of an IRP/ RP and a liquidator, the Hon’ble Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India[6] observed that the function of a liquidator under Section 40 of the IBC, i.e., to determine the value of a claim, is quasi-judicial in nature. Similarly, the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in NPGPL & Anr. v. Ram Ratan Modi, Liquidator of DCIPSPL & Anr.[7] has observed that unlike a RP, who performs administrative functions, the liquidator performs a quasi-judicial function and is required to admit or reject a claim, basis documentary evidence. Thus, a quasi-judicial body such as the liquidator must act judicially while performing its duties, under a statute, of determining the rights of the subjects before it. This is in consonance with the statutory position set out under Sections 41 and 42 of the IBC, whereunder the liquidator “determines” the value of claims admitted under Section 40, and such determination being a quasi-judicial “decision”, can be appealed against to the adjudicating authority under Section 42 of the IBC.
- Liquidator cannot admit a disputed claim (which is sub-judice) at a notional value of INR 1/-. Drawing from the decision of the Hon’ble Supreme Court in Swiss Ribbons (supra), and also the IBC’s statutory scheme, it is evident that a liquidator cannot admit a contingent claim at a notional value of INR 1/- on the sole ground that such claim is sub-judice. In Maharashtra State Electricity Distribution Company Limited v. Vijay Kumar Garg[8], the liquidator had rejected the claim of the appellant on the ground that the same was pending adjudication. This decision of the liquidator was challenged in appeal by the appellant under Section 42 of the IBC. The NCLT Hyderabad Bench, while allowing the appeal, observed that the order of the liquidator suffers from non-application of mind and that it is improper for the liquidator to not consider the appellant’s claim on merits, merely on the ground that the claim is sub-judice.
Similarly, in Bharat Heavy Electricals Limited v. Anil Goel, the Liquidator of Visa Power Limited[9], the liquidator rejected a part of the claim on the ground that the said claim was sub-judice before an arbitral tribunal. The NCLT Kolkata Bench, relying on Swiss Ribbons (supra), concluded that a liquidator while determining the value of a claim, performs a quasi-judicial function and is mandated to determine the value of the claim independently, basis the documents adduced before it, and cannot simply accord a notional value on the pretext that the claim is sub-judice.
Recently, the Principal Bench of the NCLT in PTT Public Company Limited v. Punj Lloyd Limited[10],concerning admission of a claim at a notional value of INR 1/- by the liquidator, allowed the appeal and observed that there was non-application of mind by the liquidator and also directed the liquidator to reconsider the claim of the appellant, basis an independent assessment of the merits of the claim.
Conclusion:
It is clear that a liquidator performs a quasi-judicial function while admitting/ rejecting claims of a creditor as against the administrative functions of an IRP/RP. Therefore, even if a creditor puts forth a disputed/ contingent claim, which is pending adjudication, the liquidator, while discharging its quasi-judicial function, is required to independently assess the merits of such claim, based on the documents/ evidence adduced by such creditor. It would be improper for a liquidator to admit a claim at a notional value of INR 1/-, without any application of mind, solely on the ground that such claim is pending adjudication before a court of law/ tribunal.
For further information, please contact:
Gyanendra Kumar, Partner, Cyril Amarchand Mangaldas
gyanendra.kumar@cyrilshroff.com
[1] (2020) 8 SCC 531
[2] Section 38(1) of the IBC
[3] Section 35(1)(a) read with Section 39 of the IBC
[4] Section 40 of the IBC
[5] (IB) 470 (ND)/ 2017, decided on May 05, 2021
[6] (2019) 4 SCC 17
[7] 2023 SCC OnLine NCLAT 1168
[8] 2022 SCC OnLine NCLT 194
[9] 2019 SCC OnLine NCLT 7964
[10] Company Appeal (IBC) No. 3 of 2023, decided on May 17, 2023.
