Stakeholders Can't Impose Penalties, Claim Dues From Corporate Debtor After Approval Of Resolution Plan: Delhi High Court

Brief Facts:

OCL Iron and Steel Limited (“Petitioner”), established in 2006 as a 'coal-based direct reduced iron production' unit in Orissa, executed a Coal Mine Development and Production Agreement with the Ministry of Coal (“Ministry”) on 2nd March 2015 for the allocation and development of Ardhagram coal mine. Clause 6.1 of the agreement mandated the submission of a bank guarantee for Rs. 92,25,20,000/- as performance security, remaining in force until the coal mine achieved annual peak rated capacity. Clause 24.3.3 provided for the forfeiture of the bank guarantee in case of agreement termination by the Ministry.

On 20th September 2021, the National Company Law Tribunal (NCLT), Cuttack Bench initiated CIRP against OCL Iron and Steel Limited at the behest of Indian Bank, triggering a moratorium under Section 14 of the IBC. During this period, on 31st December 2021, the Ministry terminated the Coal Mine Agreement due to the non-renewal of the bank guarantee, which had lapsed on 20th March 2021. The Termination Order required the Petitioner's erstwhile management to deposit Rs. 92,25,20,000 with the Ministry within 15 days.

The Resolution Professional challenged the termination before the NCLT, arguing the bank guarantee could not be renewed due to the COVID-19 pandemic. The NCLT issued ex-parte directions on 24th January 2022, restraining the Ministry from proceeding with the Termination Order. However, the interim order was vacated, and the NCLT dismissed the challenge on 7th February 2023. The Resolution Professional and the Successful Resolution Applicant appealed this decision, and on 8th May 2023, the NCLAT restored the interim order, staying the Termination Order.

The Resolution Professional notified the onset of CIRP and invited claims from the public. The Ministry submitted two claims: Rs. 92,25,20,000/- towards the bank guarantee and Rs. 9,21,44,029/- towards the incremental fixed cost due from the prior allottee of the coal mine. On 6th January 2022, the Authorized Representative of the Resolution Professional informed the Ministry that the claims did not disclose a financial debt as per the IBC, and thus the Ministry was not eligible to be a financial creditor. The Ministry did not submit a subsequent claim. The resolution plan dated 27th May 2022 was approved by the NCLT on 20th March 2023. Clause 13 of the plan sought a waiver of the Ministry's claims. The NCLT's observations emphasized enabling a fresh start for the Corporate Debtor as per the IBC.

The new board of management of the corporate debtor, constituted in March-April 2023, applied to participate in the 9th Tranche of Mine Auctions for the Lalgarh South coal mine on 15th February 2024. Their participation was acknowledged, but their name was omitted from the list of technically qualified bidders on 11th March 2024. The Petitioner submitted representations and challenged their elimination before the High Court of Jharkhand but withdrew the petition on 10th July 2023 after the auction concluded in favour of another bidder.

On 22nd May 2024, the Ministry prohibited the Petitioner from participating in prospective coal mine auctions, citing unpaid dues of Rs. 92,25,20,000/- from the failure to renew the bank guarantee and Rs. 9,21,44,029/- for the incremental fixed cost. The Ministry debarred the Petitioner from future auctions until the outstanding dues were settled. Feeling aggrieved, the Petitioner filed a writ petition before the Delhi High Court (“High Court”) and contended that the corporate debtor should not be held liable for past dues addressed in the resolution plan.

Contentions of the Ministry (Respondent):

The Ministry argued that the Petitioner was ineligible to participate in the coal mine auctions due to outstanding dues. The Mines and Minerals (Development and Regulation) Act and the Standard Tender Document stipulate that entities with unpaid dues from previously allocated mines are ineligible for future auctions. The NCLT's resolution plan did not grant a waiver for the Ministry's claims, which are still owed by the Petitioner. The Ministry maintained that the approved resolution plan entitled them to recover their claims, and the Petitioner cannot seek relief contrary to this plan. The NCLT's language suggested that debts must be considered in the context of the IBC's fresh start principle but did not absolve the Petitioner of their obligations.

Observations by the High Court:

The High Court observed that the Ministry did not challenge the Resolution Plan or the Resolution Professional's categorization which signified that it accepted the resolution process's final outcomes.

The High Court further held that the approval of the resolution plan by the NCLT extinguished claims not submitted or rejected by the Resolution Professional, including statutory dues not incorporated in the resolution plan. The Ministry's inaction in contesting the categorization or challenging the resolution plan precluded it from resurrecting the claim. Even if the PBG claim had been reclassified as an operational credit, it would have been subjected to the same proportional payment structure, resulting in a minimal payment of approximately Rs. 4,70,485.20/-.

The High Court held that the Ministry's reliance on the NCLT's decision to obstruct the Petitioner from participating in the auction process lacked legal basis. The approved resolution plan is binding on all stakeholders, including the government, and ensures that the corporate debtor is free from past liabilities. This finality allows the new management to operate without the burden of unresolved debts. It was noted that the Supreme Court in the past had emphasized the need for all claims to be resolved during the CIRP in order to prevent unforeseen claims post-approval of the resolution plan.

Therefore, the High Court held that the claims of Rs. 92,25,20,000/- and Rs. 9,21,44,029/- could not be considered pending or active against the new management. The Ministry could not impose penalties or claim dues from the Petitioner based on past liabilities. Such actions would contradict the principles of the IBC, which aims to provide a fresh start to the corporate debtor and ensure equality before the law.

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

Case No.: W.P.(C) 8316/2024 & CM APPLS. 34076/2024, 38159/2024

Advocates for the Petitioner: Mr Sandeep Sethi, Senior Advocate with Mr Divyakant Lahoti, Mr Kartik Lahoti, Ms Vindhya Mehra, Ms Praveena Bisht, Ms Riya Kumar and Mr Adith Menon

Advocates of the Respondent: Mr Kirtiman Singh, CGSC with Mr Waize Ali Noor, Mr Ranjeev Khatana, Mr Varun Pratap Singh, Mr Varun Rajawat, Advocates with Mr Prince Kumar and Mr Jaibant Kishore Dev Varma, Ministry of Coal

Date of Pronouncement: 26th July 2024

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