With the revival of the Corporate Debtor (CD) through the Insolvency and Bankruptcy Code, 2016 (IBC), creditors having disputed/contingent claims have been facing crimps on their financial strength due to a lack of certainty on the treatment of their claims.

Regulation 14 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulation) facilitates determination of the claim amount, providing that the interim resolution professional or the resolution professional (IRP or RP), as the case may be, shall make the best estimate of the amount of the claim based on the information available with them.

The IRP under Section 18(b) of the IBC has a duty to receive and collate all the claims submitted by creditors, pursuant to a public announcement. By the words promulgated in Regulation 14 of the CIRP Regulation, it is certain that disputed/contingent claims could be admitted. However, there has been an acute silence with respect to the treatment and yardsticks for valuation of such claims.

In the landmark judgment of Committee of Creditors of Essar Steel India Limited (through Authorised Signatory) v. Satish Kumar Gupta & Ors, the Supreme Court upheld the viability of admitting contingent claims notionally at ₹1, on the ground that disputes in respect of the claim amount was pending adjudication. This in turn had set a vicious precedent.

With the said precedent and the current legislative regime being silent about the determination and valuation of contingent claims during the moratorium under the IBC, creditors having such claims have been left in the lurch. The blanket prohibition on adjudication leaves such claims uncrystallised, and the IRP/RP can use the same as a reason to admit such claim at a nominal value and/or nil value with no consonance with the actual quantum of the claims.

This prompts the question: How far can such creditors (especially operational creditors) sustain as going concerns post the admissibility of their claims at a nominal or nil value?

In the case of P Mohanraj & Ors v. M/s Shah Brothers Ispat Pvt Ltd, the Supreme Court, while emphasizing on the sweep of Section 14(1)(a) of the IBC, held that it is wide enough to include adjudication as well as execution of proceedings or award of an arbitral panel. The Court also held that Section 138 proceedings under the Negotiable Instruments Act, 1881 relating to debt of the CD would also be covered under the ambit of Section 14(1) (a) of the Code. However, the Court did provide a breather to creditors to some extent, by holding that “moratorium provision would not extend to persons other that the corporate debtor...”

Another question that arises is whether admission of disputed/contingent claims at a nominal and/or nil value may further push such creditors towards insolvency proceedings?

It wouldn't be wide of the mark to state that admission of contingent claims at notional/nominal/nil value or admission at ₹1 is very unreasonable in nature. Even where undisputed claims have been admitted at full value, time and again. huge hair-cuts in payment of the such claims have been discussed and criticized by experts. However, creditors having huge outstanding monetary claims (contingent) and their claims having been admitted at a notional/nominal and/or nil value has worsened the situation further. Such admissions have left their business operations and financial strength in a state of limbo. At a time when business entities are only just recovering from the economic downturn caused by the COVID-19 pandemic, admission of the contingent claims of such entities at such value would in all possibility drive them towards insolvency.

In the case of Ghanashyam Mishra And Sons Pvt Ltd v. Edelweiss Asset Reconstruction Company Limited and Ors, the Supreme Court, in line with the intent of the IBC, held that the approved Resolution Plan would be binding on all stakeholders, and therefore, all claims that were not included in a Resolution Plan shall stand extinguished. This is also based on the doctrine of clean/fresh slate. Para 61 of the said judgment reads as:

“...The legislative intent of making the resolution plan binding on all the stake­holders …no surprise claims should be flung on the successful resolution applicant. The dominant purpose is, that he should start with fresh slate on the basis of the resolution plan approved.”

Therefore, under the present legislative regime, in case claims are not adjudicated/determined and admitted before the approval of the Resolution Plan, such creditors are left practically in a remediless situation.

While taking a different approach to Section 14(1)(a) of the Code in the case of SSMP Industries Ltd v. Perkan Food Processors Pvt Ltd, the Delhi High Court, while analyzing whether adjudication of counter-claims shall be liable to be stayed in view of Section 14, held that,

“… till the defence is adjudicated, there is no threat to the assets of the corporate debtor and the continuation of the counter claim would not adversely impact the assets of the corporate debtor and the continuation of the counter claim would not adversely impact the assets of the corporate debtor. Once the counter claims are adjudicated and the amount to be paid/recovered is determined, at that stage, or in execution proceedings, depending upon the situation prevalent, Section 14 could be triggered.”

In a progressive decision in Fourth Dimensions Solutions Ltd v. Ricoh India Ltd & Ors, the apex court did not permit the extinguishment of the ongoing arbitration proceedings even after approval of the Resolution Plan, therefore allowing the creditor in question whose claim was admitted at nil value to continue with the pending arbitration.

Thus, it is rationally understandable that adjudication of both claim and counter-claim does not act as a threat or have a tendency to endanger, dissipate or adversely affect the assets of the CD. On similar lines, in the interests of justice and equity, a thought may be given to bar execution proceedings under the purview of Section 14 (1)(a) of the Code rather than barring the adjudication of the disputed claims as a whole.

It is also essential to discuss the recommendation made by the Standing Committee in the Fifth Report of the Insolvency Law Committee dated May 20, 2022, in which it opined,

“The motivation behind the moratorium is that it is value maximizing for the entity to continue operations even as viability is being assessed during the IRP. There should be no additional stress on the business after the public announcement of the IRP.”

Although it is agreed that execution proceedings may create an additional stress, in all practicality, adjudication of contingent/disputed claims would only serve the interests of justice.

Moreover, acknowledging the point that “debt resolution” differs from “debt recovery”, a thought may be given to amend the provision.

The possibility of admitting such claims post an efficacious adjudication and crystallization of claim amount, but before the consideration of Resolution Plan, ought to be explored to balance equities, considering that it is not merely the CD whose interest is required to be protected at the cost of others.

Sandeep Bajaj is Managing Partner and Sakshi Digvijay is an Associate at PSL, Advocates & Solicitors.