Has the dust settled on the status of undecided claims under IBC?

For insolvency law practitioners in India, the “fresh slate” principle propounded by the Supreme Court in the Committee of Creditors of Essar Steel India Limited (through it authorised signatory) v. Satish Kumar Gupta & Ors was a seminal event in respect of the rights of a successful resolution applicant vis a vis “undecided” claims.

Undecided claims are those claims which were contingent due to their being pending before a court or an arbitral tribunal at the time of passing of the resolution plan or claims which were not included in the information memorandum.

For the uninitiated, in Essar Steel, the Supreme Court held,

“…For the same reason the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully takes over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove.”

It can be noted here that by setting out the fresh slate principle, the Supreme Court reversed the position of the National Company Law Tribunal (NCLAT) in Standard Chartered Bank v. Satish Kumar Gupta, RP Essar Steel Ltd & Ors. In this case, the Appellate Tribunal held that claims which were pending before a court or tribunal at the time of passing of the resolution plan can be raised before appropriate forum using the remedy provided under Section 60(6) of the Insolvency and Bankruptcy Code (IBC), 2016 after the resolution plan has been approved by the NCLT.

The fresh slate principle was re-affirmed by the Supreme Court subsequently in Ghanshyam Mishra and Sons Private Limited (through authorised signatory) v. Edelweiss Asset Reconstruction Company (through the Director & Ors).

Treatment provided for undecided claims under resolution plans subsequent to Essar Steel and Ghanshyam Mishra

After Essar Steel and Ghanshyam Mishra, it became a common practice for resolution applicants to provide the same treatment for any potential liability arising from undecided claims as the treatment for operational creditors in the distribution waterfall under Section 53(1) of the IBC and extinguish any potential liability arising from such un-ecided claims in the resolution plan. Thus, the judgments of Essar Steel and Ghanshyam Mishra provided comfort to resolution applicants in the form of providing finality to the acquisition cost and safeguarded a successful resolution applicant from any substantial liability which was not crystalised or was not known at the time of passing of the resolution plan by the NCLT.

Convoluting the fresh slate principle

The settled position on treatment of undecided claims was somewhat convoluted by the observation of the Supreme Court in Fourth Dimensions Solutions Ltd v Ricoh India Ltd & Ors. The Court observed that arbitration proceedings between a corporate debtor and an operational creditor which were pending at the time of passing of the resolution plan can continue in accordance with law after the resolution plan has been approved by NCLT. As per the Supreme Court,

“…It is stated that some arbitration proceedings were pending between the parties. If so, all contentions available to both sides be decided in the said proceedings on its merits in accordance with law…”

This observation of the Supreme Court seemed to have reversed the fresh slate principle as was propounded in Essar and Ghanshyam Mishra. Going by this observation, it seems that any undecided claims which could not be decided by the resolution professional because of such claim being pending before a court or an arbitral tribunal at the time of initiation of insolvency proceedings of the corporate debtor can be re-agitated against the corporate debtor under Section 60(6) of the Insolvency Code. Further, they could not be extinguished under the resolution plan by providing treatment of such claims on par with operational creditors in the resolution plan.

Subsequently, the NCLAT, relying on the aforesaid observation of the Supreme Court, held in Shapoorji Pallonji and Co Pvt Ltd v. Kobra West Power Company Limited the following in the context of a claim pending before an arbitral tribunal: (a) the resolution professional was wrong in rejecting a claim against the corporate debtor because of such claim being pending before an arbitration tribunal; and (b) the arbitration proceedings can continue in accordance with its own merits in as per law, even after the resolution plan for the corporate debtor has been passed by NCLT.

From a commercial standpoint, the reversing of the fresh slate principle raised multiple issues for potential acquirers/resolution applicants, some of which are stated below:

(a) there would be uncertainty on the total additional payout for a resolution applicant as the claims which were pending could be crystallised potentially on a date much later than the date of implementation of the resolution plan;

(b) for acquisitions which are backed by financing obtained by the successful resolution applicant, any delay in the payout or part of the payout due to pending litigation would potentially increase the cost of acquisition in form of additional interest payable on the financing; and

(c) in absence of clarity on whether undecided claims could be treated on par with operational creditors, it would have been difficult for a successful resolution applicant to factor in an alternate structure of payments such as deferred considerations or sharing of upside from operations with the financial creditors through non-convertible debentures.

Course correction by the Supreme Court

The Supreme Court in Adani Power Limited v. Shapoorji Pallonji and Co, on appeal against the previously discussed NCLAT order, seems to have cleared the confusion caused by its observation in Fourth Dimensions. In Adani Power, the Supreme Court has re-affirmed the fresh slate principle as the following:

“In our opinion, there is no ambiguity in the above observations and directions recorded by the NCLAT, as they reflect that the Resolution Plan, as approved, is binding on all and cannot be made subject matter of arbitration or any other proceedings. The claim of respondent no. 1 - Shapoorji Pallonji and Co. Pvt. Ltd. has been categorized by the Resolution Professional as a ‘contingent liability’. Respondent no. 1 - -Shapoorji Pallonji and Co. Pvt. Ltd. may continue with the arbitration proceedings for adjudication of its claim and quantification thereof, if they so wish and choose to do so.

However, the claim even if allowed in favour of M/s. Shapoorji Pallonji and Co. Pvt. Ltd. will have no bearing on the rights and obligations of the appellant - M/s. Adani Power Limited, which are in terms of the Resolution Plan. It has been held by the judgment dated 23.02.2023, that the appellant cannot be saddled with any liability except what is mentioned in the Resolution Plan.”

Relying on the fresh slate principle, a successful resolution applicant can now deny any additional payment for contingent claims which gets crystallised after a resolution plan is passed by NCLT. This will greatly provide comfort to potential resolution applicants as they will now have finality on the total payout proposed to be made for acquisition of a company undergoing insolvency proceedings.

Romit Dey is a Counsel at Trilegal.