Finality Of Resolution Plans Under IBC And Pending Legal Proceedings

"(i) That once a resolution plan is duly approved by the Adjudicating Authority under sub section (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;

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(iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued." (Emphasis supplied).

The ratio makes it clear that on the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, will stand extinguished. Proceedings filed against the corporate debtor for claims, in respect of which the resolution plan is approved, cannot be continued. This would operate only in relation to a 'claim' as defined under Section 3(6) of the Code i.e., a right to payment or a right to remedy for breach of a contract that gives rise to a right to payment. Hence, the ratio in Ghanashyam Mishra prohibits initiation or continuation of such legal proceedings that is based on such a right.

The ruling would affect pending legal proceedings against the corporate debtor and would impact rights of contingent creditors who are not part of the resolution plan.

Core issues in Ghanashyam Mishra

The two important issues which fell for consideration in the judgment was whether the amendment to Section 31 was clarificatory / declaratory and whether the proceedings initiated for statutory dues prior to the initiation of CIRP could be continued against the corporate debtor after the approval of the resolution plan.

The Supreme Court, after analysing prior pronouncements under the Code, viz., Committee of Creditors of Essar Steel India Limited v. Satish Kumar, and State Bank of India v. V. Ramakrishnan and by referring to the "Statement of Objects and Reasons" of the IBC (Amendment) Act, 2019, held that the amendment was clarificatory and declaratory and that all dues including statutory dues, which were not part of the resolution plan, stood extinguished, and that no proceedings could be initiated or continued in respect of such claims. The Court reasoned as follows: "the legislative intent behind this is to freeze all claims so that the resolution applicant can start with a clean slate and is not flung with any surprise claims".

The net effect is that on the date of approval of the plan by the Adjudicating Authority, all such claims, which are not a part of or considered in the plan stand, extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the plan.

Effect on pending proceedings

The above ratio could affect the rights of parties whose claims have not attained finality in the following situations:

1. A civil suit or an arbitration proceeding which is filed for a monetary claim or a right to such claim that arises as a consequence of breach of contract against the corporate debtor and which is pending when the resolution plan is approved by the adjudicating authority.
2. An arbitral award which is passed against the corporate debtor but is not enforced due to a petition filed by the corporate debtor under Section 34 for setting aside the award, when the resolution plan is approved by the adjudicating authority.
3. Where a foreign arbitral award is passed against the corporate debtor and proceedings under section 47 of the Arbitration & Conciliation Act, 1996 is pending execution.
4. Where foreign arbitral proceedings are pending in which a claim is made against the corporate debtor by a foreign entity or person.

In the first two situations, the person pursuing the matter before the civil courts or arbitral tribunal has a right to pursue these legal remedies and the same cannot be defeated by any statutory provisions in as much as it is a fundamental right guaranteed under the Constitution, namely access to justice under Article 21. As far as the third and fourth situations are concerned, the foreign entity or person seeking enforcement or pursuing the matter before arbitral tribunal like SIAC, would also be entitled to prosecute the same as otherwise, the very purpose of enactment of IBC as a measure of ease of doing business would stand defeated.

In the above situations, if no provision is made for payment to operational creditors in the approved resolution plan of the concerned corporate debtor, then it would not seriously impact their rights since they all would be on par with the other operational creditors, assuming that the pending proceedings initiated had attained finality. However, where a resolution plan is approved making a provision for payment to the operational creditors, then the rights of the persons mentioned in the above circumstances, who are similarly placed, would be seriously prejudiced if their claims are not considered merely due to delay in the judicial process.

A recent judgment of Calcutta High Court in Sirpur Paper Mills Ltd. v. I.K. Merchants Pvt. Ltd, has dealt with facts mentioned situation (ii). The award holder, in that case, had failed to present a claim with the resolution professional of the corporate debtor and had argued that the award in its favour got stayed immediately upon the filing of the application under Section 34 by the corporate debtor. The Calcutta High Court, however, in view of Ghanashyam Mishra, held that the claim of the award-holder has been extinguished upon approval of the resolution plan under Section 31. It further observed:

"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."

Another aspect which compounds the problem is that the proceedings are put on hold with the declaration of moratorium under the Code. Although a claim as per Section 3(6) can include a "right to remedy……whether or not such right is reduced to judgment, fixed, matured, unmatured…" , it may be difficult for the party who initiated the proceedings before the civil court / arbitral tribunal to submit any claim which is not supported by the decree or award. In fact, rejection of such claims is quite common as evidenced by the plight of M/s. Shapoorji Pallonji and Co. Pvt. Ltd. in the CIRP of M/s. Korba West Company Ltd.

After the resolution plan is approved by the Adjudicating Authority, the moratorium ceases and, yet the plaintiff / claimant cannot continue the proceedings, in view of the judgment in Ghanashyam Mishra.

Solution to deal with the situation

The finality which Ghanashyam Mishra and earlier pronouncements of the Supreme Court seek to confer on resolution plans defeats the rights of persons with legitimate claims. The delay in the judicial process or the declaration of moratorium, which puts a brake on the proceedings, cannot extinguish the rights of persons who could be operational creditors of a corporate debtor in respect of which a resolution plan is approved, inter-alia, providing for payment to operational creditors. Access to speedy justice is a fundamental right available to every citizen as part of right to life under Article 21 of the Constitution as held by the Supreme Court in Anita Kushwaha v. Pushap Sudan. The authors believe that this fundamental right cannot be defeated by the finality accorded to resolution plans under Section 31 of the Code in the Ghanshyam ratio. While it is important to ensure that the object of the Code to ensure a speedy revival of debt laden companies is achieved in a time bound manner, the same cannot be at the cost of the fundamental rights available to a citizen.

The situation can be remedied only if the Code ensures that the litigations by or against the corporate debtor are completed within the duration of the CIRP itself. Barring distraint proceedings, which would be covered under the moratorium, the code should enable proceedings before the civil court or the arbitral tribunal to be continued and completed in a time bound manner. An enabling provision in this regard will not only ensure that the rights of a plaintiff / claimant are protected but would also protect the corporate debtor from huge claims, which can be effectively defended by the Resolution Professional before these forums.

Views are personal.

The Authors are Advocates practicing at the Madras High Court.