In one of the recent judgments, the ever- contentious issue of whether the National Company Law Tribunal (“NCLT”) has the power and jurisdiction to decide third party claims may finally have been put to rest. Ever since the introduction of the Insolvency and Bankruptcy Code, 2016 (“IBC”), the resolution applicants under the IBC have in the resolution plans dealt with various issues governing the revival of the corporate debtor. Towards this end, it is not uncommon for resolution plans to propose dealing with claims of various third parties including government dues, landlord / tenancy agreements, employees’ dues. Third party claims can take many forms.
It is therefore pertinent to consider the intent of the legislature in defining ‘claim’ and ‘debt’. Under the IBC, a creditor is entitled to file a claim for the debts due to it. Sub-section (10) of Section 3 of the IBC define creditor to means any person to whom a debt1 is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decreeholder.
The definition makes it clear that a decreeholder would constitute a creditor who is entitled to make a claim in the insolvency of the corporate debtor. However, this doesn’t clarify the position of a litigant / disputing party prior to the proceedings being decreed. Would such a litigant constitute a ‘creditor’ for the purposes of the IBC has eluded the tribunals in India for a while.
The National Company Law Appellate Tribunal (“NCLAT”) in Dynepro Private Limited v. Mr. V. Nagarajan2 (“Dynepro“) as also in ‘Binani Industries Limited Vs Bank of Baroda & Anr.3 was called upon to answer whether NCLT can adjudicate to determine the question of title or ownership of assets held by the corporate debtor. In the case of Dynepro, several parties claimed ownership of assets which were the assets of the corporate debtor. The order of NCLAT explicitly provided that ‘as the claim is not directed against the corporate debtor’ the adjudicating authority does not have jurisdiction to entertain such claims under the provisions of Section 60 of the IBC.
Let us consider the provisions of sub-section (5) of Section 60 of the IBC, reproduced as under:
(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of—
(a) any application or proceeding by or against the corporate debtor or corporate person;
(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and
© any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.
Adjudication under Section 60(5) though does not explicitly seem to determine the questions of ownership but it has included determining claims including relating to transfer of assets in possession of the corporate debtor. Sub-section (6) of Section 3 of the IBC defines ‘claims’ as under:
“claim” means— (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;
From a bare reading of the above, it is clear that ‘claims’ would naturally include any money claims (where the claimant has the right to receive certain payments). Operational and financial creditors would fall well within this bucket as persons who are entitled to receive payments from the corporate debtor. Interestingly however the legislature has also included within its scope claims which arise from the breach of a contract. It would therefore appear that disputing third parties are entitled (or perhaps indeed obligated) to make ‘claims’ against the corporate debtor in its insolvency.
The Supreme Court of India, in the matter of Committee of Creditors of Essar Steel India Through its Authorised Signatory4 (“Essar Case”), has stated clearly that the successful resolution applicant who is proposing to take over and revive the business of the corporate debtor must have a clear indication of the assets as well as liabilities of the corporate debtor. It has been laid down that:
‘A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove.”
In light of the above, the Supreme Court of India set aside the judgement of the NCLAT in the Essar Case where NCLAT had found that claims continued to be subject to arbitration and that it was open for the said claimant to pursue the matter in terms of Section 60(6) of the Code. Taking the above forward, the Supreme Court of India (Three Judge Bench) in the matter of Ghanshyam Mishra and Sons Pvt. Ltd Through Authorised Signatory5 has held as under:
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;
In line with the statement of objects and reasons of the IBC which provides for the revival of the business of a corporate debtor, it is therefore clear that NCLT would have the power and jurisdiction to adjudicate all matters concerning the ‘claims’ of a corporate debtor so that the successful resolution applicant may suitably bid for the assets of the corporate debtor as also provide suitably for the extinguishment and the satisfaction of all claims/ liabilities governing the corporate debtor. Furthermore, it appears that where the ‘claims’ have been suitably considered and provided for by the successful resolution applicant in a resolution plan, the same would be binding on all creditors, employees and other stakeholders in line with the provisions of Section 31 of the IBC thus putting an end to protracted litigation and/or forum shopping.
Needless to add, where the dispute does not constitute a ‘claim’, no such power or authority would be vested in the NCLT under the provisions of Section 60 (5) of the IBC or in the resolution applicant to provide in respect thereof in a proposed resolution plan.
Footnotes
1 “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;
2 Order dated 30th January 2019 in Company Appeal (AT) (Insolvency) No. 229 of 2018
3 Order dated ___________ in Company Appeal (AT) (Insolvency) No. 82 of 2018
4 Order dated November 15, 2019
5 Order dated April 13, 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
