The Delhi High Court vide its decision in Indian Oil Corporation Ltd v. Arcelor Mittal Nippon Steel India Ltd, has placed another addition to the series of precedents that followed the Corporate Insolvency Resolution Process of Essar Steel India Ltd (ESIL).
In the instant case, The Indian Oil Corporation (IOCL), which was an operational creditor of ESIL had filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (Act) before the Delhi High Court to constitute an Arbitral Tribunal to resolve disputes stemming from a Gas Supply Agreement (GSA) that was first signed with Essar Steel Ltd (now ESIL) and then assigned to Essar Oil Limited (EOL). The GSA dated January 15, 2009, had given rise to a disagreement, mainly on the "Take or Pay" obligation under Article 14 of the same. This provision gave IOCL the authority to demand payment from ESIL for corrective steps in the event that ESIL did not obtain the entire agreed-upon Adjusted Annual Contract Quantity.
The Delhi High Court observed that all outstanding debts of the Corporate Debtor were eliminated upon the approval of the Resolution Plan under the Insolvency and Bankruptcy Code (IBC), with the exception of those that were specifically included in the plan. The Court declared that the dispute sought in the current case could not be reintroduced before the Arbitral Tribunal since it acknowledged the acceptance of the Resolution Plan as an extinguishment of all rights. The High Court opined that allowing the said petition would effectively imply a reopening of the Resolution Plan. Thus, using the “eye of the needle” test, the Court determined that the issues raised in the petition were unsuitable for arbitration and that it was not warranted to refer them to an Arbitral Tribunal.
By way of two Assignment Agreements between IOCL, ESIL, and EOL, together valid up to September 30, 2015, ESIL had assigned all its rights and obligations as flowing from the GSA to EOL. Then, on May 4, 2016, IOCL sent ESIL a notice about its non-compliance with the 2015 contract year's Adjusted Annual Contract Quantity ("AACQ"), and also used Article 14.1 of the GSA to demand payment.
Subsequently, ESIL issued a termination notice to IOCL on March 10, 2017, using the authority afforded by Article 19.1 of the GSA. IOCL challenged the termination, claiming that it had not violated its contractual responsibilities, rendering the termination notification null and void. Following that, IOCL issued a demand notice and, after failing to get payment for the same, issued a notice of dispute on May 8, 2017. After the failure of settlement talks between ESIL and IOCL, the latter invoked arbitration on July 11, 2017, in accordance with the terms of the GSA.
Subsequently, on August 2, 2017, the NCLT, Ahmedabad allowed insolvency petitions filed by the State Bank of India and Standard Chartered Bank against ESIL under Section 7 of the IBC. A Resolution Professional (RP) was appointed, and claims from stakeholders were invited. IOCL submitted a claim for ₹ 3,762 crores. However, the RP notified IOCL that the claim had been admitted for a requisite amount of ₹ 1. Thereafter, on October 25, 2018, the Committee of Creditors (COC) of ESIL accepted the Resolution Plan submitted by Arcelor Mittal, which was later sanctioned by the NCLT on March 8,2019. However, the NCLT differed with the RP in the admission of claims of the operational creditors including that of IOCL at ₹ 1. This led to appeals in NCLAT whereby similar orders were passed.
The Supreme Court overruled the above NCLT and NCLAT orders vide Essar Steel (India) Ltd. Committee of Creditors of v. Satish Kumar Gupta (Essar Case), approving the RP's action of admitting claims at ₹ 1 and the acceptance of the Resolution Plan. On December 16, 2019, Arcelor Mittal, the successful applicant, acquired 100% of ESIL's shares. Following implementation, IOCL claimed monies in accordance with the GSA, but Arcelor Mittal denied the same. IOCL invoked arbitration by way of notice to Arcelor Mittal to appoint an arbitrator, but after receiving no response, filed the instant petition before the Delhi High Court.
While the NCLT and NCLAT previously backed IOCL and partially reinstated its claim, the Court noted that these rulings were overturned in the Essar case. As a result, the Court highlighted that the Resolution Plan's approval effectively eliminated all debts owed by the Corporate Debtor, except those acknowledged in the Plan. Recognizing the extinguishment of the IOCL’s claims following the Plan approval and citing the dictum laid down in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd (Ghanashyam’s Case), the Court ruled that bringing the matter before the Arbitral Tribunal would essentially tamper with the clean slate established by the Resolution Plan. It emphasized that the Resolution Plan's approval formally ceased all claims against the Corporate Debtor. Claims or liabilities examined throughout the CIRP were accounted for, and no new claims may be filed against the successful applicant after the Plan is approved. The applicant was only required to resolve claims that were accepted as part of the Resolution Plan. Allowing it differently would be a violation of the IBC's principles of a clean slate in the resolution process, the Court said.
Further, the Court ruled that referring the disputes as requested by IOCL and allowing the Arbitral Tribunal to resolve these matters would reopen the approved Resolution Plan. The same would also be in contravention of the Supreme Court's definitive verdict in the Essar case and in Ghanshyam’s case. As a result, the Court applied the eye of the needle test, determining that the conflicts addressed in the petition were unsuitable for arbitration and, as a result, no referral to the Arbitral Tribunal was justified.
The key takeaways from the instant case, are (a) the reiteration of the finality of all previous claims once a Resolution Plan has been approved and the establishment of a clean slate provided to the successful applicant; and (b) the power of the Court under Section 11 of the Act to deny the invoking of arbitration proceedings when the dispute referred is not permissible to be resolved through arbitration, even with the existence of an arbitration agreement.
The Court's approach in the instant case protects the integrity of arbitration and insolvency while also recognizing the bounds of its applicability in resolving disputes.
About the authors: Ishwar Ahuja is a Principal Associate and Bhairavi S N is a Senior Associate at Saga Legal.