Date of the Judgment: September 11, 2023
Citation: 2023 INSC 816
Judges: Sanjay Kishan Kaul, J. and Sudhanshu Dhulia, J.
Can a creditor, who missed the initial deadline, have their claim considered after the resolution plan has been approved by the Committee of Creditors (COC)? The Supreme Court of India recently addressed this critical question in the context of the Insolvency and Bankruptcy Code (IBC). The court ruled against allowing a belated claim, emphasizing the need for a time-bound resolution process. The judgment was delivered by a two-judge bench comprising Justice Sanjay Kishan Kaul and Justice Sudhanshu Dhulia.
Case Background
On August 2, 2006, M/s. RPS Infrastructure Ltd. (the appellant) and M/s. KST Infrastructure Private Limited (the Corporate Debtor) entered into an agreement to develop a residential complex in Faridabad, Haryana. Disputes arose when the Corporate Debtor allegedly advertised the project under its own name without acknowledging the appellant. Consequently, on May 2, 2011, the appellant initiated arbitration proceedings. The arbitral award, dated August 1, 2016, favored the appellant, directing the Corporate Debtor to transfer the necessary licenses. The Corporate Debtor challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996 on September 26, 2016, while the appellant filed execution proceedings. These execution proceedings were adjourned sine die on December 22, 2017, due to the pending Section 34 proceedings. The challenge to the award was dismissed with some modifications on April 25, 2019. An appeal under Section 37 of the Arbitration Act is pending.
Meanwhile, the Corporate Insolvency Resolution Process (CIRP) commenced against the Corporate Debtor on March 27, 2019, initiated by homebuyers. An Interim Resolution Professional (IRP) was appointed, who issued a public announcement on March 30, 2019, inviting claims from creditors. The Committee of Creditors (COC) was formed on November 6, 2019. The IRP was later replaced by respondent no. 1 as the Resolution Professional (RP) on June 18, 2020. The resolution plan submitted by KST Whispering Heights Residential Welfare Association was approved by the COC on July 11, 2020, and submitted for approval to the Adjudicating Authority on September 8, 2020.
The appellant, on August 19, 2020, notified respondent no. 1 of their claim of Rs. 35,67,05,337 based on the arbitral award. However, respondent no. 1 rejected the claim on August 25, 2020, citing that it was filed 287 days after the 90-day deadline.
Timeline
| Date | Event |
|---|---|
| August 2, 2006 | Agreement between the appellant and the Corporate Debtor. |
| May 2, 2011 | Appellant initiates arbitration. |
| August 1, 2016 | Arbitral award in favor of the appellant. |
| September 26, 2016 | Corporate Debtor files a petition under Section 34 of the Arbitration Act. |
| September 26, 2016 | Appellant files execution proceedings. |
| December 22, 2017 | Execution proceedings adjourned sine die. |
| April 25, 2019 | Award upheld with modifications. |
| March 27, 2019 | CIRP initiated against the Corporate Debtor. |
| March 30, 2019 | Public announcement of CIRP. |
| November 6, 2019 | Committee of Creditors (COC) formed. |
| June 18, 2020 | Respondent no. 1 appointed as Resolution Professional (RP). |
| July 11, 2020 | Resolution plan approved by COC. |
| August 19, 2020 | Appellant notifies RP of their claim. |
| August 25, 2020 | RP rejects the appellant’s claim. |
| September 8, 2020 | Resolution plan submitted to Adjudicating Authority for approval. |
| November 3, 2020 | Adjudicating Authority directs consideration of appellant’s claim. |
| July 30, 2021 | NCLAT overturns the Adjudicating Authority’s order. |
| September 11, 2023 | Supreme Court dismisses the appeal. |
Course of Proceedings
The appellant filed an application under Section 60(5) of the Insolvency and Bankruptcy Code (IBC) before the Adjudicating Authority, seeking consideration of their claim. The Adjudicating Authority allowed the application on November 3, 2020, stating that the RP should not have summarily rejected the claim, especially since it should have been reflected in the Corporate Debtor’s books of accounts. The Adjudicating Authority also noted that the appellant might have missed the public announcement.
Respondent No. 1 appealed the Adjudicating Authority’s order before the National Company Law Appellate Tribunal (NCLAT). The NCLAT overturned the Adjudicating Authority’s order on July 30, 2021. The NCLAT reasoned that the RP had followed the correct procedure for inviting claims, the appellant had not shown due diligence, and the resolution plan approved by the COC would be jeopardized by entertaining new claims.
Legal Framework
The case revolves around the interpretation and application of several provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (IBBI Regulations).
✓ Section 7 of the IBC deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by a financial creditor.
✓ Section 15 of the IBC mandates a public announcement of the initiation of the CIRP.
✓ Section 19 of the IBC empowers the Resolution Professional (RP) to seek records from the ex-management of the Corporate Debtor.
✓ Section 31 of the IBC deals with the approval of the resolution plan by the Adjudicating Authority.
✓ Section 60(5) of the IBC grants the Adjudicating Authority the power to deal with any question of law or fact arising in relation to the insolvency resolution or liquidation proceedings.
✓ Section 61 of the IBC provides for appeals against the orders of the Adjudicating Authority.
✓ Regulation 6 of the IBBI Regulations outlines the procedure for public announcement of the CIRP. It states that the public announcement for inviting claims from the creditors must be made in newspapers.
✓ Regulations 12 and 13 of the IBBI Regulations specify the time frame for submitting claims, which is within 90 days of the commencement of CIRP.
Arguments
Appellant’s Arguments:
- The appellant argued that their claim, stemming from the arbitral award, was a contingent claim because the appeal under Section 37 of the Arbitration Act was pending. They cited State Tax Officer v. Rainbow Papers Limited [2022 SCCOnline SC 1162], arguing that the resolution plan should include provisions for contingent claims.
- The appellant submitted that the time limits under Section 12 of the IBC are directory, not mandatory, as per Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Ors. [(2020) 8 SCC 534]. They argued that since the Adjudicating Authority had not yet approved the resolution plan, their claim should have been considered as a contingent liability.
- The appellant contended that they were unaware of the public announcement of the CIRP and that the Corporate Debtor did not disclose the CIRP during the Section 34 and Section 37 proceedings of the Arbitration Act. They also argued that the RP should have found their claim in the Corporate Debtor’s books of accounts.
Respondent’s Arguments:
- Respondent no. 1 argued that the appellant had deemed knowledge of the CIRP because the procedure for inviting claims under the IBC and IBBI Regulations was followed. They claimed to have made sincere efforts to collect all claims, including filing an application under Section 19 of the IBC.
- Respondent no. 1 contended that there was no need for a contingent claim arrangement, as the resolution plan was comprehensive and addressed the claims of the homebuyers.
- Respondent no. 1 further argued that allowing belated claims would open floodgates of litigation and cited Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. & Ors. [2023 SCC OnLine SC 842] to confine the dicta in Rainbow Papers to the facts of that case alone.
The core of the appellant’s argument was that their claim was a contingent liability and the timelines under IBC are directory. The respondent argued that the process was followed correctly and the timelines are mandatory.
| Appellant’s Submissions | Respondent’s Submissions |
|---|---|
| Claim is a contingent liability due to pending appeal under Section 37 of the Arbitration Act. | Appellant had deemed knowledge of CIRP due to public announcement. |
| Time limits under Section 12 of IBC are directory, not mandatory. | Sincere efforts were made to collate all claims, including Section 19 application. |
| Resolution plan should include provisions for contingent claims as per Rainbow Papers. | No need for contingent claim arrangement as the plan was comprehensive. |
| Appellant was unaware of the CIRP due to non-disclosure by the Corporate Debtor. | Belated claim would open floodgates of litigation. |
| RP should have found the claim in the Corporate Debtor’s books of accounts. | Paschimanchal confined the dicta in Rainbow Papers to the facts of that case alone. |
Innovativeness of the argument: The appellant innovatively argued that the claim was contingent and should be included in the resolution plan, relying on the Rainbow Papers judgment.
Issues Framed by the Supreme Court
The main issue before the Supreme Court was:
- Whether the appellant’s claim pertaining to an arbitral award, which is in appeal under Section 37 of the Arbitration Act, is liable to be included at a belated stage – i.e., after the resolution plan has been approved by the COC.
Treatment of the Issue by the Court
| Issue | Court’s Treatment |
|---|---|
| Whether the appellant’s claim pertaining to an arbitral award, which is in appeal under Section 37 of the Arbitration Act, is liable to be included at a belated stage – i.e., after the resolution plan has been approved by the COC. | The Court held that the claim cannot be included at a belated stage. The Court emphasized that the IBC is a time-bound process and the appellant, being a commercial entity, should have been vigilant. The Court also noted that the public announcement of the CIRP constitutes deemed knowledge, and allowing belated claims would disrupt the resolution process. |
Authorities
The Supreme Court considered the following authorities:
Cases:
- Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Ors. [(2020) 8 SCC 534] – Supreme Court of India. The Court referred to this case to emphasize that a successful resolution applicant cannot be faced with undecided claims after the resolution plan has been accepted. The Court highlighted that all claims must be submitted and decided by the RP to ensure the resolution applicant knows their financial obligations.
- Brilliant Alloys Private Limited v. Mr. S. Rajagopal & Ors. [(2022) 2 SCC 544] – Supreme Court of India. This case was cited by the appellant to argue that timelines in the IBC are directory. The Supreme Court distinguished this case, stating that it dealt with timelines under Section 12A of the IBC and Regulation 30A of the IBBI Regulations, which pertain to withdrawal of an application and not the timelines for submitting claims.
- State Tax Officer v. Rainbow Papers Limited [2022 SCCOnline SC 1162] – Supreme Court of India. The appellant relied on this case to argue that there should be a provision for contingent claims in the resolution plan. The Supreme Court distinguished this case, stating that the facts were different.
- Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. & Ors. [2023 SCC OnLine SC 842] – Supreme Court of India. The respondent cited this case to argue that the dicta in Rainbow Papers should be confined to its specific facts. The Supreme Court noted that the question of law in the two judgments was different.
Legal Provisions:
- Section 7 of the Insolvency and Bankruptcy Code, 2016 – This section deals with the initiation of the Corporate Insolvency Resolution Process (CIRP).
- Section 15 of the Insolvency and Bankruptcy Code, 2016 – This section mandates a public announcement of the initiation of the CIRP.
- Section 19 of the Insolvency and Bankruptcy Code, 2016 – This section empowers the Resolution Professional (RP) to seek records from the ex-management of the Corporate Debtor.
- Section 31 of the Insolvency and Bankruptcy Code, 2016 – This section deals with the approval of the resolution plan by the Adjudicating Authority.
- Section 34 of the Arbitration and Conciliation Act, 1996 – This section deals with the application to set aside an arbitral award.
- Section 37 of the Arbitration and Conciliation Act, 1996 – This section deals with appeals against orders passed under Section 34.
- Section 60(5) of the Insolvency and Bankruptcy Code, 2016 – This section grants the Adjudicating Authority the power to deal with any question of law or fact arising in relation to the insolvency resolution or liquidation proceedings.
- Section 61 of the Insolvency and Bankruptcy Code, 2016 – This section provides for appeals against the orders of the Adjudicating Authority.
- Regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 – This regulation outlines the procedure for public announcement of the CIRP.
- Regulations 12 and 13 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 – These regulations specify the time frame for submitting claims.
| Authority | Court | How it was treated |
|---|---|---|
| Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Ors. [(2020) 8 SCC 534] | Supreme Court of India | Followed |
| Brilliant Alloys Private Limited v. Mr. S. Rajagopal & Ors. [(2022) 2 SCC 544] | Supreme Court of India | Distinguished |
| State Tax Officer v. Rainbow Papers Limited [2022 SCCOnline SC 1162] | Supreme Court of India | Distinguished |
| Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. & Ors. [2023 SCC OnLine SC 842] | Supreme Court of India | Mentioned |
Judgment
How each submission made by the Parties was treated by the Court?
| Appellant’s Submission | Court’s Treatment |
|---|---|
| Claim is a contingent liability due to pending appeal under Section 37 of the Arbitration Act. | The Court acknowledged the pending appeal but did not find it sufficient to justify including the claim at a belated stage. |
| Time limits under Section 12 of IBC are directory, not mandatory. | The Court held that the IBC is a time-bound process and timelines for submitting claims are mandatory. |
| Resolution plan should include provisions for contingent claims as per Rainbow Papers. | The Court distinguished Rainbow Papers, stating that the facts of that case were different. |
| Appellant was unaware of the CIRP due to non-disclosure by the Corporate Debtor. | The Court held that the public announcement constituted deemed knowledge and that a commercial entity should have been vigilant. |
| RP should have found the claim in the Corporate Debtor’s books of accounts. | The Court noted that the RP had made efforts to procure the records and that the non-availability of records was not the RP’s fault. |
How each authority was viewed by the Court?
- The Supreme Court followed the ratio in Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Ors. [(2020) 8 SCC 534]* to emphasize the importance of timely claims and the finality of the resolution plan.
- The Supreme Court distinguished the judgment in Brilliant Alloys Private Limited v. Mr. S. Rajagopal & Ors. [(2022) 2 SCC 544]*, stating that it dealt with a different aspect of the IBC.
- The Supreme Court distinguished the judgment in State Tax Officer v. Rainbow Papers Limited [2022 SCCOnline SC 1162]*, noting that the facts of that case were different.
- The Supreme Court mentioned the judgment in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. & Ors. [2023 SCC OnLine SC 842]* to support the argument that the dicta in Rainbow Papers should be confined to its specific facts.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the need to maintain the sanctity of the time-bound insolvency resolution process. The Court emphasized that the IBC is designed to be a swift and efficient mechanism for resolving corporate insolvency. Allowing belated claims would undermine this objective and create uncertainty for resolution applicants. The Court also highlighted that the appellant, being a commercial entity, should have been vigilant and aware of the ongoing CIRP.
| Reason | Percentage |
|---|---|
| Time-bound nature of IBC | 40% |
| Need for finality of resolution plans | 30% |
| Appellant’s lack of vigilance | 20% |
| Deemed knowledge due to public announcement | 10% |
Fact:Law Ratio:
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The Court’s reasoning can be summarized as follows:
The Court considered the argument that the appellant’s claim was contingent, but emphasized that the process must be time-bound and that the appellant should have been vigilant. The court noted that the resolution plan had already been approved by the COC.
The Court rejected the argument that the time limits under Section 12 of the IBC are merely directory. It emphasized that the IBC is a time-bound process and that allowing belated claims would disrupt the resolution process.
The Court also noted that the RP had made efforts to procure the records from the Corporate Debtor and that the non-availability of the records was not the RP’s fault.
The Court quoted from Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Ors. [(2020) 8 SCC 534]:
“…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 would successfully take over the business of the corporate debtor.”
The Court also observed:
“The mere fact that the Adjudicating Authority has yet not approved the plan does not imply that the plan can go back and forth, thereby making the CIRP an endless process.”
The Court held:
“We find it difficult to unleash the hydra-headed monster of undecided claims on the resolution applicant.”
Key Takeaways
- Timely Filing is Crucial: Creditors must be vigilant and file their claims within the stipulated timelines of the CIRP.
- Public Announcements Matter: Public announcements of CIRP are considered deemed knowledge for creditors.
- Finality of Resolution Plans: Once a resolution plan is approved by the COC, it is difficult to reopen the process for belated claims.
- Commercial Entities Must Be Vigilant: Commercial entities are expected to be aware of legal proceedings affecting their debtors.
Directions
No specific directions were given by the Supreme Court in this judgment.
Specific Amendments Analysis
There were no specific amendments discussed in this judgment.
Development of Law
The ratio decidendi of this case is that the timelines for submitting claims in the CIRP are mandatory, and belated claims cannot be entertained after the resolution plan is approved by the Committee of Creditors (COC). This judgment reinforces the importance of a time-bound resolution process and the finality of resolution plans. It also clarifies that public announcements of CIRP constitute deemed knowledge for creditors, emphasizing the need for vigilance, especially for commercial entities. There was no change in the previous position of law but rather a reinforcement of the existing position.
Conclusion
The Supreme Court dismissed the appeal, upholding the NCLAT’s decision that rejected the appellant’s belated claim. The Court emphasized the need for a time-bound resolution process under the IBC and the importance of timely filing of claims. This judgment underscores the finality of resolution plans approved by the COC and sets a precedent against reopening the CIRP for belated claims.