CIRP & ARBITRATION

 

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