Delhi High Court Rules That Accepted Resolution Plans Shield Corporate Debtors From Past Liabilities

Delhi High Court Rules That Accepted Resolution Plans Shield Corporate Debtors from Past Liabilities

Justice Sanjeev Narula of the Delhi High Court has determined that once a resolution plan is approved, stakeholders cannot impose penalties or claim dues from a corporate debtor based on past liabilities.

OCL Iron and Steel Limited (Petitioner), established in 2006 in Orissa, had executed a coal mine development and production agreement with the Ministry of Coal (Ministry) on March 2, 2015. This agreement required a performance security bank guarantee of ₹92.25 crores, valid until the coal mine achieved peak capacity. The agreement also stipulated that this guarantee could be forfeited if the agreement was terminated by the Ministry.

On September 20, 2021, the National Company Law Tribunal (NCLT), Cuttack Bench, initiated the Corporate Insolvency Resolution Process (CIRP) against OCL Iron and Steel Limited at the behest of Indian Bank, triggering a moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC). On December 31, 2021, the Ministry terminated the coal mine agreement due to the lapsed bank guarantee, demanding ₹92.25 crores from the petitioner.

The Resolution Professional challenged the termination before the NCLT, citing the COVID-19 pandemic as a reason for the inability to renew the guarantee. The NCLT issued interim directions restraining the Ministry from enforcing the termination order. However, the NCLT dismissed the challenge on February 7, 2023, leading to an appeal by the resolution professional and successful resolution applicant. On May 8, 2023, the NCLAT restored the interim order, staying the termination order.

The Resolution Professional invited claims from the public, but the Ministry's claims for ₹92.25 crores and ₹9.21 crores (incremental fixed cost) were not recognised as financial debts under the IBC. The resolution plan, approved on March 20, 2023, included a waiver of the Ministry’s claims.

Subsequently, on May 22, 2024, the Ministry barred the petitioner from participating in coal mine auctions due to unpaid dues. The petitioner challenged this decision in the Delhi High Court, arguing that past dues addressed in the resolution plan should not impact their current eligibility.

The Ministry contended that the petitioner was ineligible for future auctions due to outstanding dues, citing relevant statutes and documents. They argued that the resolution plan did not exempt them from these claims and that the petitioner was not entitled to relief contrary to the plan's provisions.

The High Court noted that the Ministry had not contested the resolution plan or its categorization, thus accepting the final outcomes of the resolution process. It was observed that the approved resolution plan extinguished unsubmitted or rejected claims, including statutory dues.

The Court held that the Ministry’s attempt to enforce past claims contradicted the principles of the IBC, which aim to give corporate debtors a fresh start. The High Court emphasised that the resolution plan’s approval is binding and ensures that the new management is not burdened by unresolved past debts. The Court also highlighted the Supreme Court's stance on resolving all claims during CIRP to prevent unexpected claims post-approval.

Consequently, the High Court ruled that the Ministry could not impose penalties or claim dues from the petitioner based on past liabilities, aligning with the IBC’s objective of offering a clean slate to corporate debtors and ensuring fairness in the resolution process.