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Case analysis : Sirpur Paper Mills Limited v I.K. Merchants Pvt. Ltd. 

August 10, 2021
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Insolvency of parties

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This article is written by Priyal Pingle pursuing Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

Introduction

This article discusses the judgment given in the case of Sirpur Paper Mills Limited v. I.K. Merchants Pvt. Ltd which was delivered by the Calcutta High Court on May 7, 2021. Under the Insolvency Bankruptcy Code of India (“IBC”), the corporate insolvency resolution process is the process of resolving the corporate insolvency of a corporate debtor in accordance with the provisions of the Code. Corporate insolvency is a state where a corporate person is unable to pay its debt, whether whole or any part or installment, when due and payable.  In such cases, a financial creditor, an operational creditor, or the Corporate Debtor itself can submit an application to the National Company Law Tribunal (NCLT) to start the Corporate Insolvency Resolution Process (CRIP). After NCLT gives its approval to the application, the board of directors is suspended and the management is placed under the control of an Interim Resolution Professional (IRP) and a moratorium is applied on the company. Section 14 of the Insolvency Bankruptcy Code of India discusses the concept of ‘Moratorium’. According to the Oxford dictionary moratorium is “a legal authorization to debtors to postpone payment”. The moratorium is a period wherein the enforcement of existing or new legal proceedings against the company, sale or transfer of assets of the corporate debtor, the collection of any security interest, the recovery of any property from it by an owner or lessor, or termination of essential contracts is prohibited. The moratorium continues till the corporate debtor is in the Corporate Insolvency Resolution Process.

The Calcutta High Court in this judgment answered the question as to what if, the award debtor goes into insolvency before paying the amount awarded to the award-holder in an arbitration proceeding. Does the award-holder still have any rights to claim the amount as decided under the arbitration proceeding? Whether the claim of an award holder is extinguished if a resolution plan is accepted by the NCLT and the award debtor does not file his claim before the Resolution Professional?  

A Single Judge Bench comprising Justice Moushumi Bhattacharya in Sirpur Paper Mills Limited v. I.K. Merchants Pvt. Ltd of Calcutta High Court held that the claim of the award holder would be extinguished once the resolution plan under the Insolvency Bankruptcy Code of India in relation to a corporate debtor was accepted by the National Company Law Tribunal. 

Brief facts of the case

On 7th July 2008, the arbitral award for a sum of Rs.3,21,927.70/- at 9% per annum was passed in favour of the I.K. Merchants Pvt. Ltd (Respondent). Sirpur Paper Mills Limited is a Petitioner in this case. Petitioner is also an award debtor in an arbitration proceeding with the Respondent. On October 31, 2008, the Petitioner challenged the Award dated 7th July 2008 before the Calcutta High Court under Section 34 of the Arbitration & Conciliation Act, 1996. He filed an application seeking annulment of the award under Section 34 of the Arbitration & Conciliation Act, 1996.

In the year 2017, during the pendency of Section 34 application, the Operational Creditors initiated proceedings under the Insolvency Bankruptcy Code of India against the Petitioner before the jurisdictional National Company Law Tribunal. On 18th September 2017, Corporate Insolvency Resolution Process was admitted and an Interim Resolution Professional was also appointed on the same day. On 25th September 2017, Interim Resolution Professional made the public announcement inviting claims from the creditors of the petitioner company.  The respondent did not submit its claim with Resolution Professional within the time granted under the public announcement. On 19th July 2018, National Company Law Tribunal approved the resolution plans from eligible resolution applicants who were invited by the Resolution Professional. On the same day, the Adjudicating Authority also issued a moratorium under Section 14 of the Insolvency Bankruptcy Code of India. This order was challenged before the appellate tribunal in multiple proceedings. Later the National Company Law Appellate Tribunal, Delhi confirmed it.

During this process, the petitioner prayed before the Calcutta High Court for setting aside the impugned award dated 7th July 2008. The Petitioner also argued that the application under Section 34 of The Arbitration and Conciliation Act, 1996 cannot proceed any further as under the Insolvency Bankruptcy Code of India the Corporate Insolvency Resolution Process has been initiated against the Petitioner and is in the process of completion. 

The Calcutta High Court in its Judgment dated 10th January 2020 rejected the Petitioner’s contention and declared that the Corporate Insolvency Resolution Process cannot be used to defeat a dispute which existed before the initiation of this process. The Court also held that since in 2017 the Section 34 proceedings had not been decided in favour of the respondent the award holder could not have filed a claim before the National Company Law Tribunal. The Court also stated that the Award debtor cannot use the Corporate Insolvency Resolution Process to take refuge under the provisions of the Insolvency Bankruptcy Code of India. 

The Calcutta High Court concluded that those arbitral awards which are pending adjudication under Section 34 should show that a pre-existing dispute exists in such cases. The High Court while coming to this conclusion relied upon the Supreme Court Judgments of K. Kishan vs M/S Vijay Nirman Company Pvt. Ltd and Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.  

The Petitioner again challenged the maintainability of the Section 34 proceedings before the High Court of Calcutta contending that the present proceeding under Section 34 of the Arbitration & Conciliation Act, 1996, has become infructuous as the management of the Petitioner has been taken over by a new entity following the approval of a resolution plan by National Company Law Tribunal under the Insolvency Bankruptcy Code of India.

Issues of law raised

  1. Whether in considering maintainability of Section 34 application earlier orders dated 10 January 2020 and 3 February 2020 passed by the Calcutta High Court would stand in the way?
  2. Whether the Award-holder could have pressed its claim before the National Company Law Tribunal during the pendency of Section 34 proceedings?
  3. Can the claim of an Award-holder in an application under Section 34 of the Act be frustrated upon approval of the Resolution Plan under Section 31 of Insolvency Bankruptcy Code of India and a successful Resolution Applicant taking over management of an award-debtor?

Petitioner’s arguments

Arguments by the senior Counsel Mr. Jishnu Saha, appearing for the petitioner –  

  1. According to Section 31 of the Insolvency Bankruptcy Code of India, an approved Resolution Plan is binding on the corporate debtor and its employees, members, and other stakeholders. Petitioner while arguing this relied upon the Supreme Court decision in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta.
  2. Essar judgment counsel appearing for the Petitioner also cited Gaurav Dalmia vs. Reserve Bank of India & Ors; Axis Bank Limited vs. Gaurav Dalmia; Sumitra Devi Shah & Ors. Vs. Tata Steel BSL Limited; and argued that once the Resolution Plan has been accepted then a successful Resolution applicant cannot be faced with undecided claims and therefore the debts of the petitioner extinguished to the extent of the debts which have been taken over by the resolution applicant under the approved Resolution Plan.
  3. The Counsel also contended that according to Section 3(6)(a) of the IBC  a claim is a right to payment irrespective of whether it is reduced to judgment or not and hence there is no doubt that a claim also includes a disputed claim and a right to payment. 
  4. The counsel argued that the amended Section 36 of the Arbitration and Conciliation Act, 1996 will apply to pending Section 34 applications on the date of commencement of the Amendment Act of 2016. The counsel relied upon the Board of Control for Cricket in India vs. Kochi Cricket Private Limited & Ors to urge the aforesaid point.

Respondent’s arguments

Arguments by Mr. Sudip Deb, counsel appearing for the respondent

  1. As per Satyadhyan Ghosal vs. Deorajin Debi (Smt); and Arjun Singh vs. Mohindra Kumar; res judicata can apply to different stages of the same proceeding. Therefore, in a current case, it is applied as the submissions of the petitioner have been raised and argued on two earlier occasions. 
  2. Amended Section 36 has prospective application and therefore the respondent could not approach the NCLT for lodging its claim as the application under Section 34 of the 1996 Act filed in October 2008 automatically stayed. 
  3. The dispute raised by the party amounts to a pre-existing dispute which takes the respondent outside the purview of the IBC. 
  4. Counsel relied on Swiss Ribbons Pvt. Ltd. vs Union of India; and argued that the respondent who is the operational creditor does not have any claim in the present case, as nothing is due from the petitioner in view of the pendency of the Section 34 application. 

Analysis of the judgment

The High Court while dealing with the first issue explained that the principles of res judicata applying to different stages of the same proceedings must be read down in those cases where on the emergence of new facts or situations orders are capable of being altered or varied. Therefore in the present case, the question of maintainability of the application under Section 34 of the 1996 Act can be considered at any point of time on the legal aspect and particularly on the pronouncement of a decision relevant to the matter.

The High Court while dealing with the second issue stated that the respondent had sufficient opportunity to approach the NCLT for appropriate relief from 18th September 2017 that is the date of the admission of the application of initiation of the Corporate Insolvency Resolution Process against the petitioner until approval of the resolution plan on 16th May 2018. The Respondent was under an obligation to take active steps under the IBC instead of waiting for the adjudication of the application under Section 34 of the 1996 Act.

The High Court while dealing with the third issue referred to the decision of the Supreme Court in Essar Steel and Edelweiss.  In the Essar judgment, the Court had held that Section 31 of the IBC would be binding on the corporate debtor and the proceedings for recovery of claims which are not part of such resolution plan cannot be initiated by the creditor-debtor. Calcutta High Court based on this judgment along with Sections 25, 29, 30, and 31 of the IBC held that after the approval of the resolution plan under Section 31 of the Insolvency Bankruptcy Code of India the claim of the award holder would be extinguished. 

In this case, the High Court upheld the principle imbibed under IBC that the prime objective of the Corporate Insolvency Resolution Process is a revival of the corporate debtor and a successful resolution applicant should not be saddled with legacy claims or debts. In the cases of the challenge to arbitral awards, where the award is not automatically stayed upon the filing of section 34 application, it would be advisable for the award holders to file their claims with RP within a stipulated time. 

The Court overlooked the participation of the award-holder in the Corporate Insolvency Resolution Process and erroneously quashed the Section 34 proceedings thereby leaving no recourse for the award-holder to enforce his decree against the erstwhile management of the corporate debtor. It is undisputed that the status of the debtor-company must be preserved as a ‘going concern’ and its assets must be appropriately handled. At the same time, an award-holder whose execution decree will attain finality once the process under Section 34 or 37 of the Arbitration Act comes to an end, must not be left remedial.

The law relating to challenge to an arbitral award stipulates that the Court may only grant a stay upon the filing of a separate application. In such a case, the award holder would be constrained to file its claim before RP. Accordingly, the claims shall stand extinguished where either the claims have not been submitted to RP or the same have been held to be non-admissible before the resolution plan is approved.

However, the Supreme Court’s lapse in clarifying the status of unquantified claims has operated harshly on such creditors. The lacuna in the law as highlighted above needs to be judicially or legislatively addressed to safeguard the interests of bonafide creditors

Similar judgments on this issue of law

Ghanshyam Mishra and Sons Private Ltd v Edelweiss Asset Reconstruction Company

In this case, despite approval of the resolution plan by the NCLT, proceedings were sought to be initiated in alternative forums for recovery of dues not provided for in the resolution plan.

The Supreme Court held that Section 31 clearly states that the resolution plan becomes binding on the credit debtor, its employees, members, and creditors, etc. after it is approved by the Adjudicating Authority. Thus, if after the approval of the resolution plan, any undecided claims are allowed, it would result in great uncertainty and discourage prospective resolution applicants.

Essar Steel v Satish Gupta & Ors.

The present decision of the Supreme Court stems from a batch of appeals challenging the decision of the NCLAT in the Essar Steel insolvency resolution along with writ petitions challenging the constitutional validity of the Amendment Act, 2019. It was held by the NCLAT that a resolution plan should not differentiate between financial and operational creditors in the manner of payment of dues. It also directed redistribution of proceeds payable under the resolution plan such that all financial creditors were paid an amount of 60.7% of their admitted claims and operational creditors (with an amount of claim equal to or greater than INR 1 crore) were paid 60.26% of their admitted claim, and operational creditors (with an amount of admitted claim under INR 1 crore) were paid in full. The financial creditors amongst others challenged this decision of the NCLAT before the Supreme Court. The Supreme Court held that all “undecided” claims of the corporate debtor would stand extinguished once a resolution plan was accepted. Therefore, no creditor may pursue any claims against the corporate debtor after the completion of the CIRP.

Conclusion

The dispute on an important point of law related to the interaction between the Insolvency and Bankruptcy Code, 2016 and the Arbitration and Conciliation Act, 1996 has been settled by the Calcutta High Court in the Sirpur Paper Mills case. This judgment makes it very clear that after the approval of the resolution plan a successful Resolution Applicant should not be faced with undecided claims and such claims shall extinguish upon approval of the resolution plan. 

According to the High Court, the present case related to the question of whether or not the arbitral award should be set aside would be a complete waste of judicial time and also of the parties as upon approval of the Resolution Plan under Section 31 of the IBC the claim of the award-holder would be extinguished. 


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