Late Claims In Liquidation: Analysing The Judicial Divergence

Mostly, as an antithesis to “speed is the essence of the Code”, the NCLTs condone such late claims in a routine manner and direct liquidators to verify them – at times, deep into the progression of the liquidation process of the corporate debtor. Usually, the grounds of 'unawareness of the commencement of insolvency process', pandemic, bureaucratic / administrative delays, health of concerned official, are considered 'sufficient cause' for such condonation. Sometimes with costs to the claimant, often times without– but that is not the point.

At the same time, there are decisions of the NCLT and the appellate tribunal (NCLAT), albeit a few, which are at the opposite spectrum – giving credence to the strict timelines of process enshrined in the Code. On balance, the judicial approach to late claims in liquidation is conflicting – regrettably.

Aside from the primacy of adherence of timelines in the Code, even generally in law, delay and laches ideally ought not to be given indulgence. It is said – 'law assists those who are vigilant and not those who sleep over their rights'^[2]. But, most often what triumphs is the long standing judicial notion that, 'if there is some merit in the case, the period of delay is to be given a go-by'^[3]. That apart, the NCLT condones the delay in submitting the claims in the 'interest of justice', or for that “no prejudice” will be caused to the liquidation process. But the question is – what about the sanctity of the timelines of the Code which are fundamentally instrumental to achieving the objective of the Code?

Under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations), a liquidator is required to complete the process of liquidation of a corporate debtor within a period of one (1) year from the date of commencement of the liquidation process.^[4] Otherwise, the liquidator is mandated to report to the relevant NCLT explaining the reasons for not completing the liquidation process within the stipulated period. Thus, a liquidator is solely accountable for such delay.

With respect to the claims of creditors, the Code stipulates timelines for submission, verification, and admission / rejection thereof by the liquidator. The liquidator is mandated to receive or collect the claims of the creditors within a period of thirty (30) days from the date of the commencement of the liquidation process,^[5] whereas he shall verify them within thirty (30) days therefrom.^[6] Accordingly, the liquidator is mandated to prepare and file the list of stakeholders of the corporate debtor with the relevant NCLT within a period of forty-five (45) days from the last date of receipt of the claims.^[7]

At the same time, the legislature has been conscious about not trampling over the rights of an aggrieved creditor against any arbitrary rejection of its claim by the liquidator. In this regard, section 42 of the Code comes to the aid of such a creditor. However, even there, the creditor is required to challenge the decision of the liquidator before the relevant NCLT in a time bound manner, i.e., within fourteen (14) days of receipt of such a decision.

Viewed holistically, the foregoing timelines are in consonance with the desired cut-off period for the conclusion of the liquidation process as envisaged by the legislature in the Code and the Liquidation Regulations.

Per contra, the NCLT has been liberal in condoning the delay on the part of the creditors in submitting their claims with the liquidators. To corroborate, very recently, in an appeal filed by the Securities and Exchange Board of India under Section 42 of the Code, challenging the decision of the liquidator to reject the former's claim, the NCLT, Bengaluru Bench, summarily and in a routine manner condoned the delay of 1191 days.^[8] Similarly, the NCLT, Mumbai Bench, in October last year, condoned a delay of 451 days in submission of claim by the Department of State Tax with the liquidator, finding the 'personal medical difficulty' of an officer to be a 'sufficient cause' for the said condonation.^[9] However, the Bench also observed that the liquidation process was still underway and the condonation for the delay in filing of 'statutory claims' would be in the 'interest of justice'.

In the same vein, the reason of 'not being aware' of the commencement of the insolvency of the corporate debtor was found to be a sufficient ground for condoning the delay by observing that 'no prejudice' would be caused as the liquidation process was not yet concluded.^[10] Of course, the 'difficulties / obstructions' caused by the pandemic has been held to be a sufficient ground, while it has been held that the Code doesn't abridge the rights of creditors till distribution of assets is completed under the liquidation process.^[11]

Such indulgence and latitude granted by the NCLTs not only go against the time-bound nature of the liquidation process and the spirit of the Code, but also are the creditors encouraged to believe that any and all delays on their part, shall be summarily condoned in a routine manner. The question that arises for consideration is whether the provision of an appeal under section 42 was fundamentally envisaged to address any grievance in relation to rejection of claims by a liquidator on their merits; or could it also empower the NCLT to condone delays in submission of claims leading up to their rejection on account thereof?

In the same breath, NCLT and NCLAT have held in contrast, dealing strictly with late claims. One such instance is that of the NCLT, Chennai Bench wherein it refused to condone the delay of 416 days in filing of the claim by rejecting the grounds of 'not being aware' of the commencement of the insolvency of the corporate debtor and 'administrative difficulties'.^[12]

A similar decision was rendered by the NCLT, New Delhi Bench, wherein the Bench refused to condone the delay of 1327 days in filing of the claim by the creditor (though in the context of corporate insolvency resolution process).^[13] In another instance, when one of the creditors, being the husband of a suspended director of the corporate debtor, filed an appeal under Section 42 of the Code on the ground of 'unawareness' of the liquidation process, the NCLT, New Delhi Bench, refused to accede to the claimant's prayer of condonation of the delay in submitting his claims.^[14]

The NCLAT has also delivered a few decisions refusing to condone belated claims in consonance with the scope and objective of the Code, being the timely resolution of insolvencies.^[15] In this regard, it is pertinent to refer to the decision of the NCLAT, Delhi,^[16] holding that “It is an axiomatic principle in law that the Tribunal is required to consider the 'sufficiency of cause', whether the cause ascribed is reasonable looking to all the facts of the matter. However, the aspect of an existence of 'sufficient cause' is to be determined based on the facts and circumstances hovering around particular case. Indeed, there ought not to be an 'inaction' or 'want of bonafide' or no negligence attributable to a litigant/party, as the case may be”. In the context of condonation of delay, the Supreme Court has held that any delay caused due to negligence or lack of vigilance on the part of a party, does not and should not qualify to be a sufficient cause and the concerned party must be able to provide cogent reasons for delay so caused by it.^[17]

The NCLAT has similarly held that a tribunal or a Court of Law ought to be very reluctant to excuse the delay or to lend a helping hand to a litigant who is guilty of inaction, bad faith, latches, or negligence. Moreover, speed is the essence of the Code and time wasted cannot be revisited or regained. The process of liquidation is time-bound, and a time-barred debt cannot be resurrected.^[18]

So, its axiomatic that the NCLT an NCLAT have been taking contrasting views and have adopted varied approach to the issue of condonation of delay in filing of late claims by the creditors during the liquidation process. This, no doubt, creeps in ambiguity in the liquidation process and leads to unnecessary litigations and delays.

Delay has been considered to be one of the major causes of value destruction of a corporate debtor in the report of the Bankruptcy Law Reforms Committee, 2015. Achieving a higher rate of recovery, as the Committee suggests, is primarily about identifying and combating the sources of delay.^[19] The Insolvency and Bankruptcy Board of India (IBBI), in one of its recent discussion papers, notes that the main reason for delay in the liquidation process is litigation by or against the Corporate Debtor.^[20] Therefore, a uniform approach with regard to condonation of delay in submission of claims is imperative.

It is the need of the hour to put the grounds for delayed submission of claims by creditors to strict scrutiny. 'Unawareness' of the initiation or pendency of insolvency proceedings of corporate debtors ought not to be construed as a 'sufficient ground' for condonation of delay in submission of claims by the creditors. In this context, the Supreme Court's recent ruling in the case of RPS Infrastructure^[21] holds relevance wherein it has observed that, “The appellant is a commercial entity. That they were litigating against the corporate debtor is an undoubted fact. We believe that the appellant ought to have been vigilant enough in the circumstances to find out whether the corporate debtor was undergoing CIRP. The appellant has been deficient on this aspect.”

Interestingly, the above ground is customarily cited by the Government departments in addition to 'administrative difficulties' before the NCLT. An analogy in this respect can certainly be drawn from the case of State of M.P v. Bherulal^[22], where a special leave petition was filed with a delay of around 663 days. The Hon'ble Apex Court stringently deprecated such approach of the government authorities and refused to condone the delay in the said case. It was observed that delays cannot be condoned mechanically merely because the Government or a wing of the Government is a party in the case, and that the law of limitation undoubtedly binds everybody including the Government.

Having said so, the rationale of condoning the delay in submission of claims on the ground that the liquidation process has not concluded, and distribution of assets is pending, appears to have some force. This is so, for it draws the tribunals to submit to the argument of 'no prejudice would be caused to the stakeholders or the liquidation process'. However, when viewed from a practical standpoint, there are various practical difficulties that have to be borne by a liquidator and the stakeholders, which have the potential of delaying the entire liquidation process if such arguments are accepted. First and foremost, the entire process of claim verification and preparation of the list of stakeholders is required to be undertaken by a liquidator within the strict timelines prescribed under the Code and the Liquidation Regulations. But, the delayed claims, when condoned by the tribunals, obligates the liquidator to revise / modify the list of stakeholders much beyond the stipulated timelines, even if the liquidation process may have reached the fag end. Not only does it bring in uncertainty in the quantum and treatment of debt owed by the corporate debtor (especially when the creditor also seeks reclassification) but also leads to further burdening the liquidator with procedural formalities and filings of mandated reports / intimations / applications with the NCLTs / IBBI. Obviously, the cost to the liquidation estate in defending such litigations cannot also be disregarded.

Authors: Anupm Prakash, Principal Associate & Kirti Talreja, Associate at Saraf and Partners Law Offices. Views are personal.

1. Section 38, Code; Uco Bank v. Nicco Corporation, 2018 SCC OnLine NCLT 10485 ↑

2. vigilantibus non dormientibus jura subveniunt ↑

3. State of Madhya Pradesh & Ors. v. Bherulal, (2020) 10 SCC 654 ↑

4. Regulation 44 ↑

5. Section 38, Code ↑

6. Regulation 30, Liquidation Regulations ↑

7. Regulation 31(2), Liquidation Regulations ↑

8. Edelweiss Assets Reconstruction Co. Ltd. v. Falcon Tyres Ltd., I.A. No. 47 of 2019 in C.P. (IB) No. 14/BB/2017 ↑

9. Department of State Tax v. Essar Project (India) Limited, 2023 SCC OnLine NCLT 831 ↑

10. Geostar Surveys India Private Limited v. Great Unison Contractors India Pvt. Ltd., IA No. 1028 of 2020 in CP (IB) No. 1414/MB/2018 ↑

11. M/s Globe Express Services (Overseas Group) Ltd. v. M M Cargo Container Line Private Limited, (IB) 204(ND) 2017, CA 152/2018; Commissioner of Customs v. Rajendra Prasad Tak, MANU/NC/5692/2022 ↑

12. Employees State Insurance Corporation v. Chinnam Poorna Chandra Rao, MA/27(CHE)/2021 in CP/872/IB/2018 ↑

13. Toyota Financial Services India Ltd. v. Suresh Kumar Jain and Ors., IA No. 3643/2023 in CP IB No. 1731/ND/2019 ↑

14. Virender Singh v. Theme Exports Private Limited, Company Appeal IBC - 01/ND /2021 and Company Petition (IB) - 323/ND/2019 ↑

15. V.K. Abdul Rahim v. Jasin Jose, 2023 SCC OnLine NCLAT 660 ↑

16. Assistant Commissioner of Commercial Taxes v. Right Engineers and Ors, Company Appeal (AT)(CH)(Insolvency) No. 255 of 2021 ↑

17. H. Dohil Constructions Co. (P) Ltd. v. Nahar Exports Ltd., (2015) 1 SCC 680; Deputy Commissioner of Taxes v. Surana Industries Limited, Company Appeal 1525/2019 ↑

18. Provident Fund Commissioner Employees Provident Fund Organisation. v. Vasudevan, 2022 SCC OnLine NCLAT 3661 ↑

19. The Bankruptcy Law Reforms Committee, Report dated 04.11.2015 ↑

20. The Insolvency and Bankruptcy Board of India, Discussion Paper on “Strengthening Regulatory Framework of Liquidation Process” dated 20.10.2023 ↑

21. RPS Infrastructure Limited v. Mukul Kumar & Anr., (2023) 10 SCC 718 ↑

22. State of Madhya Pradesh v. Bherulal, (2020) 10 SCC 654 ↑