Will Arbitral Award-Holder's Claim Be Extinguished On Approval Of Award-Debtor's Resolution Plan Under IBC? Yes, Rules Calcutta High Court

Relying on Supreme Court rulings from 2020, Justice Moushumi Bhattacharya ruled that the claim would get extinguished once the Resolution Plan was accepted by the National Company Law Tribunal.

Ruling to this effect, the Court remarked,

"This can be seen as a necessary and an inevitable fallout of the IBC in order to prevent, in the words of the Supreme Court, a "hydra head popping up" and rendering uncertain the running of the business of a corporate debtor by a successful resolution applicant. In essence, an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus for chasing the fruits of an Award even where a challenge to the Award is pending in a Civil Court."

Facts

An Award-debtor moved High Court seeking to withdraw its earlier application to the High Court under Section 34 of the Arbitration and Conciliation Act (Arbitration Act). In 2008, the Award-debtor had moved Court to set aside an arbitral award pronounced on July 7, 2008.

Stating that the Section 34 proceeding was infructuous, the Award-debtor averred that the award-holder's claim is extinguished upon the approval of Resolution Plan that vested control of the Award-debtor with another entity. The CIRP leading up to the Resolution Plan lasted from September 18, 2017 to May 16, 2018.

Senior Advocate Jishnu Saha for Award-debtor/Petitioner relied on Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta to contend that all existing claims against judgment debtor get extinguished upon the approval of Resolution Plan.

Advocate Sudip Dev, who represented for the Award-holder/Respondent stated that the same arguments were made by the award-debtor on two earlier occasions as well in 2020, when they sought to withdraw their application for setting-aside the arbitral award. He argued that res judicata would apply since the facts were the same.

Advocate Dev also contended that as per the law prevailing prior to the 2016 Amendment of the Arbitration Act, once an application under Section 34 was presented, the arbitral award was automatically stayed. Hence, there was no 'claim' in terms of the Insolvency and Bankruptcy Code for the award-holder to press before the Insolvency Resolution professional, he asserted.

How the Court applied Essar Steel and Ghanshyam Mishra

The Court first examined whether the principle of res judicata would apply since the petitioner had moved court with the same prayer at an earlier instance.

Justice Bhattacharya, in her judgment, limits the operation of res judicata stating that the principle was to be "read down in fit cases where orders are capable of being altered or varied on the emergence of new facts or situations."

Pointing to two decisions from the Supreme Court that were pronounced following the petitioner's earlier litigation, Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited.

In Essar, the Supreme Court declared that a Resolution Plan, once approved under Section 31 of the IBC, is binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders, the Court highlighted. Ghanshyam adopted the principle propounded in Essar, the judgment additionally states.

Justice Bhattacharya explained that the view of the Supreme Court in these cases was that the successful resolution applicant who takes over the business of the corporate debtor must start running the business of the corporate debtor on a "fresh slate".

Since there was a significant shift in the law between the petitioner's earlier litigation and the case at hand, the Court ruled that res judicata would not apply.

The judgment elaborates,

"A decision-making process must be attuned to a dynamic legal landscape shaped by legislative intervention and judicial pronouncements. The most predictable aspect of law is its constant evolution. It would hence be judicial short-sightedness, even stubbornness, to hold on to a view when the law, in the meantime, has transformed into a different avatar."

The Court goes on to hold, "The principle essentially is to guard the court from abuse of process where the same matter in issue, which had been heard and finally decided by a court, is urged again between the same parties. This is unlike the present case as the question of maintainability of the application under Section 34 of the 1996 Act can be considered at any point of time on the legal aspect and particularly on the pronouncement of a decision relevant to the matter."

Whether the Award-Holder was precluded from pressing his claim in light of the erstwhile 'automatic stay' on awards after a Section 34 application was presented

On the question of whether an automatic stay on the enforcement of an arbitral award precluded the respondent award-holder from enforcing his claim, the Court relied on Board of Control for Cricket in India v. Kochi Cricket Private Limited & Ors. to hold that it would not. In BCCI, the Supreme Court ruled that pending applications under Section 34 would be governed by the amended Section 36, which did away with the 'automatic stay' existing prior to the amendment.

Since the award-debtor's Section 34 application was pending during this time, and the CIRP was ongoing, the award-holder could have pressed its claim during the CIRP in terms of the CIRP Regulations, the Court concluded.

"These facts would show that from the date of the admission of the application of initiation of the CIRP against the petitioner namely 18th September, 2017 until approval of the resolution plan on 16th May, 2018, the respondent, as an Award-holder had sufficient opportunity to approach the NCLT for appropriate relief… The Award-holder hence was under an obligation to take active steps under the IBC instead of waiting for the adjudication of the application under Section 34 of the 1996 Act."

These are other observations the Court makes in the tail-end of the judgment, on the question of whether or not to consider the Section 34 application -

"Every litigant has a right to argue that an action commenced in a court of law or a statutory forum is not maintainable by reason of the law existing as on that date. A challenge to maintainability of an action must be considered by the court before the substance of the dispute is adjudicated on merits. A court must also decide whether the argument pertaining to maintainability is such that the entire proceeding is rendered infructuous. The present proceeding is precisely such a case where deciding on the merits of the application, i.e. whether the Award should be set aside or sustained, would be a complete waste not only of judicial time as well as of the parties since the claim of the Award-holder has been extinguished upon approval of the Resolution Plan under Section 31 of the IBC. Further adjudication on the legality of the impugned Award cannot lead to its logical conclusion and would hence be irrelevant. The parties would only be compelled to travel the road to further proceedings (appeal, enforcement etc.) without an end-point in the resolution to the dispute or any consequent relief to either of the parties. This surely cannot be the objective of any proceedings before any court of law."

On these terms, the Section 34 application was disposed as infructuous.

CASE: Sirpur Paper Mills Limited v. I.K. Merchants Pvt. Ltd. (Formerly Known as I.K. Merchants)

COUNSEL: Senior Advocate Jishnu Saha, Advocates Sakabda Roy, Trisha Mukherjee for the petitioner. Advocates Mr. Sudip Deb, Deepak Jain and R. Ghosh for respondent.