NCLAT Delhi: Claims Cannot Be Automatically Treated As CIRP Costs Unless Directly Related To CIRP And Approved By CoC

It held that:

“Unless the Committee of Creditors ('CoC') has approved the dues and they directly relate to the CIRP, the dues cannot be classified as CIRP cost.”

Background Facts:

On 18.11.2014, National Thermal Power Corporation Limited (NTPC) awarded a contract to Sunil Hitech Engineering Ltd. (Corporate Debtor) for constructing CW and MUW Systems Civil Works at the Darlipali Super Thermal Power Project in Odisha. In February 2018, the Corporate Debtor subcontracted M/s RBM Enterprises (Respondent No. 1) to fabricate and erect CW ducts at the project site, under a work order tied to the main contract with NTPC.

In September 2018, NCLT Mumbai admitted the Corporate Debtor into CIRP, which failed, leading to liquidation in June 2019. Mr. Avil Menezes (Appellant) was appointed as the liquidator. Respondent No. 1 submitted a claim for Rs. 1.36 crores for work at the Darlipali site. The Appellant, after consulting with Respondent No. 1 and other secured creditors, decided the claimed amount did not qualify as CIRP cost. This was confirmed by the former RP noting that only running costs during the CIRP period were considered CIRP costs. The Appellant reiterated that the claim did not meet CIRP cost criteria and would be processed under Section 53 of IBC.

Respondent No. 1 then filed an interlocutory application, seeking to have its claim treated as CIRP cost. Following NCLT Mumbai's directive to process the claim on its merits, the Appellant reviewed but maintained it did not qualify as CIRP cost, citing the CoC decision and relevant IBC provisions.

Respondent No. 1 filed another interlocutory Application seeking the classification of its claim as CIRP cost. NCLT Mumbai via its decision dated 27.11.2023 directed the Appellant to admit Respondent No. 1's dues as CIRP cost.

The Liquidator has filed the appeal against NCLT Mumbai's Order dated 27.11.2023 classifying the claimed amount of Rs. 1.36 crores CIRP cost which does not align with CoC decisions, regulatory provisions, and contractual terms.

NCLAT Verdict:

The NCLAT Delhi dismissed the appeal and laid down the criteria to determine whether a cost incurred by a Resolution Professional during the CIRP qualifies as CIRP cost under Section 5(13)(c) of IBC read with CIRP Regulation 31.

The Appellate Tribunal noted that, under CIRP Regulation 31, costs are considered CIRP costs only if they are directly related to the CIRP and approved by the CoC. Presently, the CoC has not approved the costs to be treated as CIRP costs. Following the guidance from IBBI Circular No. IBBI/IP013/2018 dated 12.06.2018, the NCLAT supported the actions of both the Resolution Professional and the liquidator in handling the subcontractor's claims in the present case.

The NCLAT agreed that simply incurring costs during the CIRP period does not automatically classify them as CIRP costs. Interpreting Section 5(13)(c) of the Code to classify all costs incurred during CIRP as CIRP costs would negate the requirement that these costs must be related to "running the business of the corporate debtor as a going concern."

Further, as per CIRP Regulation 31 and IBBI's guidance, dues cannot be classified as CIRP costs unless they are directly related to the CIRP and approved by the CoC. In this case, the CoC decided to exclude costs from terminated projects as they did not contribute to maintaining the Corporate Debtor as a going concern.

On the question of criteria to determine whether a cost incurred by the Resolution Professional during CIRP qualifies as CIRP cost, NCLAT noted that the following criteria determine that to qualify as CIRP cost, the incurred cost must be:

(a). To maintain the Corporate Debtor as a going concern,

(b). To pay suppliers of essential goods and services,

(c). Directly related to the CIRP with due approval of the CoC.

NCLAT highlighted the role of CoC while deciding the question of CIRP cost via its decision in Bharat Hotels Ltd. vs Tapan Chakraborty wherein it was established that the CoC holds the authority to approve, modify, or reject costs claimed during the CIRP. The Adjudicating Authority should not intervene in these decisions before the CoC takes a decision. Further, the decision in Mehul Parekh and Ors. v. Unimark Remedies and Ors. reaffirmed that directing the CoC to re-determine CIRP costs after approving the Resolution Plan is unsustainable.

The Appellate Tribunal set aside the NCLT Mumbai decision dated 27.11.2023 and observed that it erred in its decision by overstepping into the domain of the CoC's commercial decision-making. It noted that Respondent No. 1's claim currently lacks the necessary approvals from both the RP and the CoC, which are essential for classification as CIRP costs. Additionally, the work performed by Respondent No. 1 on the terminated Darlipali project did not help in maintaining the Debtor as a “going concern,” which is a key requirement for CIRP costs.

It observed that the contract between the Debtor and Respondent No. 1 was contingent on receiving funds from NTPC, which did not occur. As a result, the Liquidator could not have incurred this cost without NTPC fulfilling its payment obligations.

In conclusion, the NCLAT classified Respondent No. 1's claim as a non-CIRP cost to be addressed under Section 53 of the IBC during liquidation observing that the claim lacked CoC approval, did not support the “going concern” objective, and was dependent on unrealized payments from NTPC.

Case Title: Avil Menezes Liquidator of Sunil Hitech and Engineers Ltd. vs. Abdul Qudduskhan and Anr.

Case No.: Company Appeal (AT) (Insolvency) No. 263 of 2024

Counsel for Appellant: Mr. Dhrupad Vaghani, Mr. J. Rajesh, Mr. J.S. Khurana, and Mr. Aniket Mookerjee, Advocates.

Counsel for Respondent: Mr. Anukul Raj, Ms. Nikita Raj, Mr. Amit Tungare, Mr. Shashwat Anand, Mr. Prabhat Ranjan, Mr. Tushar Bhalla, Mr. Prateek Sharma, and Mr. Shashwat Parihar Advocates.

Date of Judgment: 14^th May, 2024

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