Rejected Claims By Resolution Professional In Insolvency Proceedings, To Be Decided By The Arbitrator: Delhi High Court

The Court held that extinguishment of claims that arose after the Insolvency Commencement Date (ICD) is a contentious issue that is to be decided by the arbitrator when the parties have an arbitration agreement.

The Court reiterated that the scope under Section 11 of the A&C Act is confined to the examination of the existence of the arbitration agreement. The Court is not to decide any contentious issue while exercising powers under Section 11 of the Act.

The Single Bench of Justice Vibhu Bakhru appointed the arbitrator to decide on the claims of a party that arose after the Insolvency Commencement Date and accordingly not included in the insolvency plan.

Facts

The parties entered into a Production Sharing Contract (PSC) with the Government of India. Subsequently, the members of the consortium entered into an agreement for carrying out activities under PSC and the petitioner was selected as the lead operator to carry out the joint operations.

The activities under the PSC were required to be conducted in conformity with an approved work program and within the approved budget. The finances for the operations were to be provided by the consortium partners including the respondent.

The petitioner raised various Cash Calls on the respondent, however, the respondent failed to comply with the cash calls, therefore, a dispute arose between the parties. The petitioner issued a Default Notice dated 15.07.2016 declaring the respondent as defaulting partner and called upon it to cure the default.

In the meantime, the respondent was admitted to CIRP under the IBC. The petitioner also filed its claim with the Interim Resolution Professional (IRP). The IRP rejected the petitioner's claims qua the defaults that happened after the ICD.

Subsequently, the petitioner raised more cash calls on the respondent. The CoC approved the final resolution plan on 09l04.2018. Subsequently, the plan was approved by the adjudicating authority.

The petitioner filed an appeal against the order of the adjudicating authority which was rejected by the appellate authority.

Accordingly, the petitioner issued a notice under Section 21 of the A&C Act on the respondent to appoint its nominee arbitrator to decide on the claims that were rejected by the IRP and those which arose subsequently.

The respondent replied to the notice and denied its liability to pay the amount claimed by the petitioner. The respondent contended that post the approval of the resolution plan the liability of the respondent stands extinguished.

The Contention Of The Parties

The respondent objected to the maintainability of the application on the following grounds:

• In terms of Clause 1(e)(ii) of the Resolution Plan all the existing and the future claims against the respondent company, which were not included in the resolution plan, stand extinguished.
• The resolution plan is approved by the adjudicating authority, therefore, it is binding on all the parties and no such claims survive.
• The default qua the claims happened before the ICD.
• The appeal preferred by the petitioner against the order of the adjudicating authority has been dismissed.
• The Apex Court has in various judgments held that claims not included in the resolution plan cannot be pursued independently and the court has given explicit recognition to the theory of 'Clean-Slate' that postulates that the that not only all claims but also all causes of action against the company admitted to CIRP would stand extinguished on approval of the Resolution Plan.

The petitioner countered the objections raised by the respondent on the following grounds:

• The issue of extinguishment of claims not made part of the resolution plan is contentious issue, therefore, it is outside the scope of Section 11 of the A&C Act which is confined to the examination of the existence of the arbitration act.
• The order of the adjudicating authority expressly notes that only the claims that arose before the ICD and not made part of the resolution plan stood extinguished, however, it did not preclude the creditor to pursue the claims that became due after the ICD.
• The order of the appellate authority also does not state that the claims of the petitioner that became due after the ICD would stand extinguished, therefore, the reliance on the same is misplaced.
• The forfeiture of the participating right in the consortium did not absolve the respondent of its liability.

Analysis by the Court

The Court proceeded on the premise that the scope of examination under Section 11 is confined to the examination of the existence of the arbitration agreement and the Court is bound to appoint the arbitrator when there is an arbitration agreement between the parties unless it is a case of clear deadwood.

The Court relied on the decision of the NCLAT in Andhra Bank v. F.M. Hammerle Textiles, Company Appeal (AT) (Insolvency) No. 61 of 2018 to observe that the claims arising after the ICD would not be automatically extinguished.

The Court held that extinguishment of claims that arose after the Insolvency Commencement Date (ICD) is a contentious issue that falls outside the standards of examination under Section 11 of the A&C Act, therefore, it is to be decided by the arbitrator when the parties have an arbitration agreement.

Case Title: BHARAT PETRORESOURCES LIMITED v. JSW ISPAT SPECIAL PRODUCTS LIMITED, ARB.P. 1154 of 2021

Citation: 2022 LiveLaw (Del) 469

Date: 11.02.2022

Counsel for the Petitioner: Mr Jayant K. Mehta, Senior Advocate with Mr Varghese Thomas, Mr Divyam Agarwal, Ms Aditi Deshpande and Mr Ashish Joshi, Advocates.

Counsel for the Respondent: Mr Ratnanko Banerji, Senior Advocate with Mr Rishi Agrawala, Mr Karan Luthra, Ms Aarushi Tiku, Ms Urmila Chakrobarty, Advocates.

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