No Surprise Claims Can Be Flung Or Sprung Upon Corporate Debtor Once Resolution Plan Is Approved: Delhi High Court

The Delhi High Court bench comprising Chief Justice Manmohan and Justice Tushar Rao Gedela has reiterated that once a Resolution Plan is approved by NCLT, all prior claims against the Corporate Debtor are extinguished under the "clean slate" theory. The court stated, “According to the said theory, the successful Resolution Applicant in order to get a fresh breath or new lease of life, is permitted to proceed in resurrecting the “ongoing concern” and no surprise claims are flung or sprung upon it, lest the entire effort of revitalizing and restarting the Corporate Debtor are wasted.”. The court noted that the appellant allowed the claim to be extinguished without protest or demur. It also stated that merely because the waiver was not allowed by the NCLT while approving the Resolution Plan would not, ipso facto, resurrect the right of claim.

Brief Facts:

A Coal Mine Development and Production Agreement was executed on 2.03.2015 between the respondent, OCL Iron and Steel Ltd. and the appellant (Nominated Authority, Ministry of Coal) for the development of the Ardhagram coal mine. The Coal Mine Agreement provided for forfeiture of the Performance Bank Guarantee (“PBG”) in the event of termination of the Agreement by Respondent.

On 31.12.2021, the appellant terminated the agreement because the Respondent did not renew the PBG. The Resolution Professional filed a challenge to this termination with the NCLT, but it was dismissed. However, the NCLAT issued an interim order that reinstated the stay on the termination.

On 20.09.2021, the NCLT's Cuttack Bench initiated a Corporate Insolvency Resolution Process (CIRP) against the respondent. The Resolution Professional denied the appellant's claim as a Financial Creditor for the PBG amount because it did not disclose a "financial debt" as required by Section 3(31) of the Insolvency and Bankruptcy Code, 2016 (IBC).

The NCLT approved the successful Resolution Applicant's Resolution Plan dated 27.05.2022, pursuant to Section 31(1) of the IBC, on 20.03.2023. Following its approval, the respondent applied to bid for the Lalgarh South coal mine. The appellant, in a communication dated 22.05.2024, barred the respondent from participating in prospective coal mine auctions until outstanding dues were paid.

The respondent filed a writ petition to challenge this decision. The basis for this challenge was that the respondent, having undergone the CIRP, should not be held liable for past dues that were addressed in the Resolution Plan. In the impugned judgement dated 26.07.2024, the Single Judge set aside the appellant's decision dated 22.05.2024, disqualifying the respondent from participating in coal mine auctions until outstanding dues were paid. It held that the respondent cannot be held liable for extinguished liabilities and that, under the IBC scheme, the respondent is entitled to proceed on the basis of a 'clean slate'.

The appellant filed the appeal under Clause X of the Letters Patent Act, 1866, challenging the judgment dated 26.07. 2024, which allowed the writ petition in favour of the respondent.

Contentions:

Contentions of the Appellant:

• The claim of the appellant to the extent of Rs.92.25 crore is still a live claim, having never been rejected or adjudicated by any authority.
• Return of the claim on the grounds that the appellant was not a “Financial Creditor” and needed to re-file/re-submit the claim under an appropriate format cannot tantamount to rejection of its claim.
• The NCLT approved the Resolution Plan while denying the respondent's request to waive the appellant's claims. The NCLT's acknowledgement meant that the appellant's claims had not been waived or extinguished under the Resolution Plan.
• Even if considered barred, only the right to enforce the claim might be extinguished, not the claim itself. This could impact the respondent's eligibility for future auctions under the clause in the tender document that requires “past dues to be cleared.”
• Reliance was placed on Swiss Ribbons Pvt. Ltd. v. Union of India, which held that the Resolution Professional has no adjudicatory powers, and Greater Noida Industrial Development Authority v. Prabhjit Singh Soni, where it was held that “once the claim was submitted with proof, it could not have been overlooked merely because it was in a different form. …the form in which a claim is to be submitted is directory. What is necessary is that the claim must have support from proof.”

Contentions of the Respondent:

• The claim of the appellant in the capacity of 'Financial Creditor' already stood rejected vide communication dated 6.01.2022. Despite being given the opportunity to re-submit its claim to the Resolution Professional via communication on 7.01.2022, the appellant did not take advantage of it. Thus, the appellant is no longer permitted to pursue a dead claim.
• After the Resolution plan was approved, the appellant could not argue that the claimed amount was still due and payable.
• The appellant's arguments run counter to the "clean slate" principle. Reliance was placed upon Ghanashyam Mishra & Sons Private Limited vs. Edelweiss Asset Reconstruction Co. Ltd. & Ors. to contend that the approved Resolution Plan entitles the Resolution Applicant to operate the Corporate Debtor as an "ongoing concern" free of the burden of past liabilities that are subsumed in the Resolution Plan. Thus, the appellant cannot impose any impediments on Respondent from participating in prospective coal mine auctions.

Observations:

The Court noted that the appellant had not re-submitted/re-filed the claim or objected to the approval of the Resolution Plan by the NCLT on March 20.03.2023. Relying on Ghanashyam Mishra & Sons Private Limited, the Court observed that “it is trite that once the Resolution Plan is formally approved by the NCLT, any other remaining claims etc. would be deemed to have extinguished.”

The court noted that the appellant let the claim get extinguished without a protest or demur. It held that merely because the waiver was not allowed by the NCLT while approving the Resolution Plan would not, ipso facto, resurrect the right of claim. It further held the right of the appellant to the claim is clearly extinguished post approval of Resolution Plan.

The Court observed that the case of Ghanashyam Mishra has laid down the theory/principle of “clean slate”. “According to the said theory, the successful Resolution Applicant in order to get a fresh breath or new lease of life, is permitted to proceed in resurrecting the “ongoing concern” and no surprise claims are flung or sprung upon it, lest the entire effort of revitalizing and restarting the Corporate Debtor are wasted.”, it stated. In view of the avowed principle, the Court held that there was no reason to interfere with the impugned judgment.

The court held that the ratio of Swiss Ribbons would not be applicable because the appellant did not take any steps to challenge the Resolution Plan at all. The court noted that “once the claim was returned, there was no substantive claim to be included in the Resolution Plan in the absence of resubmission of the said claim.” Thus, the lack of a claim itself also rendered the ratio of Greater Noida Industrial Development Authority inapplicable to the case.

The court stated that the appellant chose not to pursue its remedies respecting the claim. Thus, it dismissed the appeal.

Case Title: Union of India vs. OCL Iron and Steel Limited

Citation: 2024 LiveLaw (Del) 1187

Case Number: LPA 964/2024, CAV 485/2024 & C.M. APPL. 56652-55/2024

For the Appellant: Mr. Kirtiman Singh, CGSC alongwith Mr. Waize Ali Noor, Mr. Maulik Khurana, Mr. Varun Pratap Singh and Mr. Ranjeev Khatani, Advocates.

For the Respondent: Mr. Sandeep Sethi, Senior Advocate alongwith Mr. Divyakant Lohoti, Mr. Kartik Lohoti, Ms. Anushka Awasthi, Ms. Riya Kumari, Ms. Praveena Bisht, Ms. Vindhya Mehra, Mr. Samridhi Bhat and Mr. Adith Menon, Advocates.

Date of Judgment: 22.10.2024

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