CIRP & ARBITRATION
What will be the implication of a claim
raised by a Financial Creditor (FC) or Operational Creditor (OC) if a corporate
debtor admitted to Corporate Insolvency Resolution Process (hereafter ‘CIRP’) under
the Insolvency and Bankruptcy Code, 2016 (hereafter ‘IBC’)
if the claim of such creditors are not part of Resolution Plan. This is of course, with regard to the
claim arising out after Insolvency Commencement Date (ICD). No doubt, the
creditors can file claim on being aware of the CIRP proceedings either as
Operational Creditor (OR) or as Financial Creditor (FC), before the Resolution
Professional (RP) so appointed by National Company Law Tribunal (NCLT), as the
case may be. Thus, whether all existing as well as future claims against the
respondent/ corporate debtor (CD) company, which were not expressly noted in
the Resolution Plan shall stand extinguished pursuant to approval of resolution
plan by NCLT, after its submission through RP & CoC (Committee of Creditor)
are the topic of deliberation herein. If it is indeed extinguished, then what
remedy the creditor shall have qua claims post ICD.
The issue has generated much heat in
view of the fact that the Delhi High Court has recently faced a similar
situation in a matter captioned as BHARAT PETRORESOURCES LIMITED (BRPL) versus JSW ISPAT SPECIAL PRODUCTS
LIMITED ARB.P. 1154/2021
The hon’ble Delhi High court at the
outset, thus, has referred to the common order dated 19.08.2019 passed by the
NCLAT in respect of the appeals preferred against the order dated 24.07.2018
passed by the NCLT, Mumbai approving the Resolution Plan in respect of the
respondent/corporate debtor company. The
said appeals include Company Appeal (AT) (Insolvency) No. 550 of 2018 preferred
by BPRL. The said appeal was dismissed. However, the following paragraphs which
prima facie indicate the reasons for dismissing the appeal are relevant:
“30. From
‘I&B Code’, it is clear that on initiation of ‘Corporate Insolvency
Resolution Process’ (after admission), the public announcement of the
‘Corporate Insolvency Resolution Process’ is made under Section 15.
Thereafter, the ‘Interim Resolution Professional’ is empowered under Section
18(1) (b) to receive and collate all the claims submitted by creditors.
31. The
aforesaid claim(s) relates to the debt payable to a creditor(s) before
initiation of the ‘Corporate Insolvency Resolution Process’ and do not
relate to any amount payable during the ‘Corporate Insolvency Resolution Process’.
32. ‘Bharat
Petro Resources Limited’ submitted its claim on 5th January, 2018 towards the
‘operational debt’ amounting to Rs.9,58,88,886/- as on the Insolvency Commencement Date,
which has been admitted by the ‘Resolution Professional’. Therefore,
any claim of the Appellant towards future claim accrued after the Insolvency Commencement
Date, cannot be considered under Section 18(1) (b) by the ‘Resolution Professional’.
33. If any
cost incurred during the ‘Corporate Insolvency Resolution Process’ that cannot
be treated to be the claim of an ‘Operational Creditor’ and therefore, further claim
amounting to Rs.9,92,86,892/- towards future claim made by ‘Bharat Petro Resources
Limited’ was rightly not collated by the ‘Interim Resolution Professional’/ ‘Resolution
Professional’.
34. For the
reason aforesaid merely on the ground that the future claim has not been collated by
the ‘Resolution Professional’, the Appellant- ‘Bharat
Petro Resources Limited’ cannot assail the order of approval of plan (dated 25th July,
2018) passed under Section 31 of the ‘I&B Code’.
It is apparent from the above that
NCLAT was of the view that BPRL’s
appeal was in respect of claims
arising post the ICD and could not be accepted by the Resolution Professional.
Therefore, its grievance that the same had not been considered was not
sustainable.
The BRPL had invoked arbitration clause
between the parties and an application under Section 11 (6) of Arbitration
& Conciliation Act 1996 ( In short A & C Act) was filed before the Delhi
High Court for appointment of Arbitrator.
Thus, the question whether the liability sought to be enforced by BPRL against
the respondent (corporate debtor) stands extinguished after approval of
resolution plan or whether claim post ICD could be raised in arbitration, if
there are arbitration clause existing and subsisting between the parties is a
moot point. The High Court has noted
that it is a contentious issue. The high court had to adjudicate whether
arbitration clause between the parties could be invoked, in the light of the
contentions that claim of a party post ICD cannot be excluded on the premise
that CIRP was approved. The High Court
has deliberated on the issue that if the claim and controversy involved in the above
case, arises after ICD, whether the same shall be subject to arbitration clause
and if so, whether the arbitration proceedings should be allowed to commence to
that extent.
Arbitration clause
In the above backdrop, the high court in Bharat Petro (Supra) had
occasion to deal with 19.3 i.e the
arbitration clause between the parties. The same is as under:
“19.3
Resolution of disputes through Arbitration:
19.3.1 Subject to the provisions of this
Agreement, the Parties hereby agree that any controversy, difference,
disagreement or claim for damages, compensation or otherwise (hereinafter in
this Clause
referred to as a “Dispute”) arising between the Parties in relation to, arising under or arising out of
this agreement including termination or validity of this Agreement, which cannot
be settled amicably, may be referred to an arbitral tribunal for final decision
as hereinafter provided.
19.3.2 Any Party desiring to refer any such
difference for arbitration shall send a notice in writing to the Party against
whom such dispute is raised, along with a Statement, specifying therein the
facts, issues & claims for appointment of an Arbitrator to the Arbitral
Tribunal under the provisions of Art. 19, along with a copy of the said notice
to the Operator.
19.3.3 The arbitral tribunal shall consist of
odd number of Arbitrators in total. Each Party to the dispute shall appoint one
arbitrator and the Party or Parties shall so advise the other Parties to the
dispute. However, in the case of even number of Parties to the dispute, the
Arbitrators so appointed shall appoint another Arbitrator, in order to make the
total number of Arbitrators to the Arbitral Tribunal odd in number.
19.3.4 If any Party fails to appoint an
Arbitrator within thirty (30) days of receipt of the written request to do so,
or if the Arbitrators, so appointed by or on behalf of the Parties fail to
agree on the appointment of the next Arbitrator within thirty (30) days of the
appointment of the last arbitrator to the Arbitral Tribunal and if the Parties
do not otherwise agree, at the request of either Party, the next arbitrator
shall be appointed in accordance with Arbitration and Conciliation Act, 1996.
19.3.5 If any of the arbitrators fails or is
unable to act, his successor shall be appointed by the Party who originally
appointed such in the manner set out in this Article as if he was the first
appointment.
19.3.6 The Arbitrators to the Arbitral
Tribunal shall, from amongst themselves select a Presiding Arbitrator for
conducting the arbitration proceedings. Arbitration proceedings shall be
conducted in accordance with the rules for arbitration provided in the
Arbitration and Conciliation Act, 1996 or any amendment or further enactments
thereto.
19.3.7 The fees and expenses of the
Arbitrator shall be payable as per schedule of Indian Council of Arbitration,
Delhi, and shall be shared in equal proportion by the parties to the dispute.
19.3.8 The parties shall freeze the claim of
interest, if any, and shall not claim the same for the period the proceedings
are pending before the arbitral tribunal.
19.3.9 The decision of the arbitral tribunal
shall be pronounced within four (4) months of the appointment of the last
arbitrator to the Arbitral Tribunal unless otherwise extended by the Parties or
by arbitral tribunal. The arbitral tribunal shall give a reasoned award in
English in writing.
19.3.10
This
arbitration agreement shall be governed by the Arbitration and Conciliation
Act, 1996 and any amendments thereto or further enactments thereof prior to
submitting a dispute to arbitration, the Parties may by mutual agreement submit
the matter for conciliation as per Art.19.2.1 of this Agreement and in
accordance with Part III of the Arbitration and Conciliation Act,1996 and any
amendments thereto or further enactments thereof.
19.3.11 The venue of the arbitration
proceedings pursuant to this Article, unless the Parties agree otherwise, shall
be New Delhi, India and shall be conducted in the English language.
19.3.12 The right to arbitrate disputes under
this Agreement shall survive expiry or the termination of this Agreement and
the Contract. Insofar as practicable, the Parties shall continue to implement
the terms of this Contract notwithstanding the initiation of proceedings before
the Joint Experts Committee (JEC) or Arbitral Tribunal and any pending claim or
dispute.”
LAW
The judicial precedents are
varied as may be noted below:
1.
The
Supreme Court in Ghanshyam Mishra and Sons (P.) Ltd. v. Edelweiss Asset
Reconstruction Company: 2021 SCC OnLine SC 313, was pleased to set aside the order of the NCLAT
granting permission to an operational creditor to file a suit in respect of a
claim which was not included in the resolution plan. The moot point is whether
the Court had reiterated the “Clean
Slate” principle,
which postulated that not only all claims but also all causes of action against
the company admitted to CIRP would stand extinguished on approval of the
Resolution Plan. The decision of the Supreme Court in Essar Steel India
Ltd. Committee of Creditors v. Satish Kumar Gupta: (2020) 8 SCC 531 is also to the
aforesaid effect.
2.
In recent decision in Mohammed
Masroor Shaikh v. Bharat Bhushan Gupta & Ors: Civil Appeal No. 874 of 2022,
decided on 02.02.2022 while referring to the decision in Vidya
Drolia v. Durga Trading Corporation (2021) 2 SCC 1 held that “the
Court by default would refer the matter when contentions relating to non arbitrability
are plainly arguable.”
3. In Andhra Bank v. M/s. F.M. Hammerle Textile Limited: Company
Appeal (AT) (Insolvency) No. 61 of 2018, decided on 13.07.2018 It is held that
the scope of examination under Section 11 of the A&C Act was
limited and it was not necessary for the high court to examine the disputes
between the parties, if the arbitration agreement was not disputed. Thus, an
arbitrator or Arbitral tribunal as the case may be, should be constituted. What
is also relevant in the context is that whether the NCLT, had expressly indicated
that that only the liabilities and obligations of the respondent prior to the
ICD were extinguished. There is no dispute that a creditor is precluded from
initiating any proceedings in respect of a claim which is not a part of the
Resolution Plan or one that was not preferred at the relevant time. However,
the said principle is not applicable to claims that become due after the ICD. Thus,
if the claims raised by BPRL related to
a period after the ICD, it cannot be deemed to be precluded from seeking
adjudication of its claim and recovery of the amounts claimed by it. All future
claims of a corporate debtor arising after the ICD cannot be considered by the
Resolution Professional and outlet to that effect may be stipulated. Reference
in this regard may be have to the decision of the NCLAT in Andhra Bank (Supra)
it is held by the NCLAT that
the claims arising after the ICD would not be automatically
extinguished.
4. That the Delhi High Court in a matter reported
as Nitin Fire Protection Industries Limited v. Gail (India) Limited:
OMP (COMM) 332/2017, decided on 05.09.2017 has held that forfeiture
of the participating interest of the respondent did not absolve the respondent
of its liability.
It
is well settled that in terms of sub-section (6A) of Section 11 of the A&C Act,
the scope of examination under Section 11 of the A&C Act is limited to the
existence of an arbitration agreement between the parties. Notwithstanding the
same, in cases where it is ex facie clear that the disputes cannot be
entertained, the courts would refrain from entertaining the petition to appoint
an arbitrator as the same would be an exercise in futility. (Ref: Vidya
Drolia v. Durga Trading Corporation (2021) 2 SCC 1, N. N. Global Mercantile Private Limited v. Indo Unique
Flame Limited & Ors.: 2021 SCC OnLine SC 13 and Bharat
Sanchar Nigam Limited and Anr. v. Nortel Networks India Pvt. Ltd.: 2021 5 SCC
738).
5. The
Delhi High Court in this context has in NCC Limited v. Indian Oil
Corporation Limited: (2019) SCC OnLine Del 6964, set out the principle
in the following words:
“107. In my view, the scope of
examination as to
whether or not the claims lodged are Notified Claims has narrowed down
considerably in view of the language of Section 11(6-A) of the 1996 Act. To my
mind, once the Court is persuaded that it has jurisdiction to entertain a
Section 11 petition all that is required to examine is as to whether or not an
arbitration agreement exists between the parties which is relatable to the
dispute at hand. The latter part of the exercise adverted to above, which
involves correlating the dispute with the arbitration agreement obtaining
between the parties, is an aspect which is implicitly embedded in sub-section
(6-A) of Section 11 of the 1996 Act, which, otherwise, requires the Court to
confine its examination only to the existence of the arbitration agreement.
Therefore, if on a bare perusal of the agreement it is found that a particular
dispute is not relatable to the arbitration agreement, then, perhaps, the Court
may decline the relief sought for by a party in a Section 11 petition. However,
if there is a contestation with regard to the issue as to whether the dispute
falls within the realm of the arbitration agreement, then, the best course
would be to allow the arbitrator to form a view in the matter”.
It is also held in para 108 in the above judgment that:
“Thus,
unless it is in a manner of speech, a chalk and cheese situation or a black and
white situation without shades of grey, the court concerned hearing Section 11
petition should follow the more conservative course of allowing parties to have
their say before the Arbitral Tribunal.”
It is also trite law that it is only in
exceptional cases where it is absolutely clear that the disputes cannot be
entertained that the court will decline to entertain a petition under Section
11 of the A&C Act. The standards of examination under Section 11 of the
A& C Act do not permit the court to carry out any adjudicatory exercise in
respect of any contentious issue.
6. That in a recent decision of the
Supreme Court in Inter Continental Hotels Group (India) Pvt. Ltd. &
Anr. v. Waterline Hotels Pvt. Ltd: Arbitration Petition (Civil) No. 12 of 2019,
decided on 25.01.2022, had highlighted that as a matter of default, the
parties must be referred to arbitration and it is only in cases where it is
clear that the disputes are deadwood that the courts would refrain from appointing
an arbitrator. The court had once again reiterated the principle ‘when in doubt refer’.
It is apparent from the above that
NCLAT was of the view that BPRL’s
appeal was in respect of claims
arising post the ICD and could not be accepted by the Resolution Professional.
Therefore, its grievance that the same had not been considered was not
sustainable.
The Delhi High Court has thus held that
the question whether the liability sought to be enforced by BPRL against the
respondent stands extinguished is a contentious issue and therefore, the high
court has held that it is unable to accept that the controversy involved in the
present case falls within the standards of examination under Section 11 of the
A&C Act and the controversy be relegated to the arbitration for a decision.
7.
The Supreme Court in Mohammed Masroor
Shaikh v. Bharat Bhushan Gupta & Ors: Civil Appeal No. 874 of 2022, decided
on 02.02.2022 while referring to the decision in Vidya Drolia v.
Durga Trading Corporation (supra) held that “the Court by default would refer the matter when contentions
relating to non arbitrability are plainly arguable.”
CONCLUSION
What therefore clearly emerges from the
above discussion that the basic rule is that the claim which is not part of approved
Corporate Insolvency Resolution Process (CIRP) cannot be claimed further. What
also emerges however is that claim after Insolvency Commencement Date (ICD)
shall not be included in CIRP. Any claim of a Financial Creditor or Operational
Creditor thus emerges subsequent to ICD shall not pass muster CIRP. If this is to be accepted as finality, the losses
to all such claimants which may arise after ICD shall be completely negated.
This may cause colossal loss to such claimant. Therefore, it evolves that claim,
post ICD, though cannot be part of CIRP, but a party/claimant cannot be
relegated to suffer the peril, if the cause of action is post ICD and therefore,
the claim of such party beyond CIRP should be adjudicated. If there are arbitration clause in an agreement
between the parties, the said clause could be invoked. It is also settled proposition
in law that arbitration clause shall survive even post termination of
agreement. The appointment of Arbitrator as per the clause of the agreement
therefore can be prayed for and the claim post ICD could be adjudicated by
Arbitrator if duly appointed or by such other forums. When a party to the lis
seeks appointment of Arbitrator as per Section 11 (6) of A & C Act, the
Court is not required to examine and adjudicate any contentious issue and the
parties must be relegated to the forum of their choice for adjudication of their
disputes. It is so, as the NCLT or NCLAT order approving resolution plan could
not possibly encompass the claim of operational creditor post ICD. If there is
an agreement between parties and if arbitration clause is admitted the same
should be left on the domain of arbitrator to adjudicate on merit and all
contentious issues post ICD could be raised in arbitral proceedings.
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Anil k Khaware
Founder & Senior Partner
Societylawandjustice.com
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