Claim of the Award-holder would be extinguished upon approval of the Resolution Plan under Section 31 of the IBC: Calcutta High Court

Claim of the Award-holder would be extinguished upon approval of the Resolution Plan under Section 31 of the IBC: Calcutta High Court

The Calcutta High Court has ruled that the claim of the Award-holder would be extinguished upon approval of the Resolution Plan under Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC). Further, pre-existing and undecided claims which have not featured in the collation of claims and consequent consideration by the Resolution Professional shall be treated as extinguished upon approval of the Resolution Plan under Section 31 of the IBC.

As to the facts of the case, an application was passed before the Calcutta High Court for setting aside of an Arbitral Award dated 7th July, 2008 passed by a learned Sole Arbitrator in arbitration proceedings between the I.K. Merchants Pvt. Ltd. (Respondent – who was the claimant in the arbitration) and Sirpur Paper Mills Limited (Petitioner).

The main arguments before the Calcutta High Court by Sirpur Paper Mills Limited (Sirpur) were:

i) The present proceeding under Section 34 of The Arbitration and Conciliation Act, 1996, has become infructuous by reason of the management of the petitioner company (the Award-debtor) being taken over by a new entity following the approval of a Resolution Plan of the petitioner company by NCLT.

ii) In view of Section 31 thereof, which provides that an approved Resolution Plan is binding on the corporate debtor and its employees, members and other stakeholders and relies on a decision of the Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta; (2020) 8 SCC 531. Counsel contends that a successful Resolution applicant cannot be faced with undecided claims after the Resolution Plan has been accepted.

iii) The provisions of the IBC, particularly Section 31 thereof, which provides that an approved Resolution Plan is binding on the corporate debtor and its employees, members and other stakeholders. The successful Resolution applicant cannot be faced with undecided claims after the Resolution Plan has been accepted. In view of the judgement by Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta; (2020) 8 SCC 531the debts of the corporate debtor (Sirpur) stands extinguished save to the extent of the debts which have been taken over by the resolution applicant under the approved Resolution Plan.

The High Court accepted the arguments and held that the view of the Supreme Court as crystallized in Essar and Edelweiss is that pre-existing and undecided claims which have not featured in the collation of claims and consequent consideration by the Resolution Professional shall be treated as extinguished upon approval of the Resolution Plan under Section 31 of the IBC. This can be seen as a necessary and inevitable fallout of the IBC in order to prevent, in the words of the Supreme Court, a "hydra head popping up" and rendering uncertain the running of the business of a corporate debtor by a successful resolution applicant. In essence, an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus.

Justice Moushumi Bhattacharya of the Calcutta High Court concluded that the present proceeding is precisely such a case where deciding on the merits of the application, i.e. whether the Award should be set aside or sustained, would be a complete waste not only of judicial time as well as of the parties since the claim of the Award-holder has been extinguished upon approval of the Resolution Plan under Section 31 of the IBC.

She went on to hold that further adjudication on the legality of the impugned Award cannot lead to its logical conclusion and would hence be irrelevant. The parties would only be compelled to travel the road to further proceedings (appeal, enforcement etc.) without an end-point in the resolution to the dispute or any consequent relief to either of the parties. According to the Court, this surely cannot be the objective of any proceedings before any court of law.

The application by Sirpur Paper Mills was disposed of as being rendered infructuous.