WHETHER THE OPERATIONAL CREDITORS MAY ENFORCE CLAIMS FOR PAST DUES BY WAY OF CIVIL SUIT/ARBITRATION, SUBSEQUENT TO APROVAL OF THE RESOLUTION PLAN?

In M/s. Tata Steel Ltd. Versus Varsha & Anr. - 2026 (7) TMI 1134 - Supreme Court, a corporate insolvency resolution process (‘CIRP’ for short) was initiated against the Corporate Debtor Bhushan Steel Limited (‘BSL’ for short). Before the initiation of CIRP, the respondent No. 1 Varsha filed a civil suit against the corporate debtor for the recovery of Rs.38.89 crores together with interest @ 18% till the date of realisation.  One, Maysc, an intervener to this case initiated six separate arbitral references before two independent arbitral tribunals in respect of goods engineered and supplied to BSL.

During the pendency of the aforesaid Civil Suit and Arbitration proceedings, CIRP was initiated against BSL at the instance of State Bank of India. The respondents filed their claims to the Interim Resolution Professional, to the tune of Rs.34.28 crores and Rs.31.60 crores respectively. The Interim Resolution Professional collated the claims received from the creditors of the corporate debtor. The IRP admitted the claims in respect of Varsha and Maysc at a nominal value of Re.1/-. Later Varsha’s claim was modified from Re.1to Rs.1.67 crores. The IRP put a note to these claims as ‘Claims are subject to disputes pending before various authorities, and have been admitted/marked as verified with a notional amount of Rs.1/- and the liability is subject to the outcome. of the ongoing proceedings.

The appellant SRA submitted a resolution plan on 03.02.2028. Since the claims of the Financial Creditors exceeded the liquidation value, the payment to the operational creditor is NIL. However, the IRP provided for an Operational Creditors Settlement Amount of Rs.1200 crores out of which Rs.1,000 crores was earmarked for essential and critical Operational Creditors and the balance Rs. 200 crores were to be distributed pro-rata among other Operational Creditors whose claims had been admitted. The aggregate claims of Operational Creditors stood at approximately Rs.1422 crores.

The Committee of Creditors approved the resolution plan. The Adjudicating Authority also approved the resolution plan on the file of the same before the NCLT. Appeals preferred by aggrieved parties were dismissed by the National Company Law Appellate Tribunal (‘NCLAT’) on 10.08.2018. Intervenor-Masyc’s challenge to the treatment of its claim was dismissed as withdrawn by NCLT on 25.10.2018.

The appellant filed petitions for the dismissal of the suit and also dismissal of the arbitration proceedings. Both were dismissed by the Civil Court and Arbitral Tribunals. Against the order of civil court dismissing his application, the appellant filed an appeal and also a review petition before the High Court. The same was dismissed by the High Court. Likewise, the appellant filed a writ petition before the High Court challenging the dismissal order of the Arbitral Tribunal. The High Court dismissed the writ petition with the directions that the final award is not to be passed by the Arbitral Tribunal without leave of the High Court. The appellants filed appeals against the orders of the High Courts before the Supreme Court.

The appellant submitted the following before the Supreme Court-

• The IRP had collated all claims which were disputed and pending adjudication before various fora.
• The IRP admitted the claim of the appellants at a nominal value of Re.1 subject to the outcome of the decision of the Civil Court and arbitration.
• The appellant submitted the resolution plan which categorically stipulated that since the liquidation value was NIL, there was no obligation to make any payment to Operational Creditors.
• However, the approved Resolution Plan provided for an Operational Creditors Settlement Amount of Rs.1200 crores; out of this, Rs,1000 crores were earmarked for essential and critical Operational Creditors, while the remaining Rs.200 crores was allocated for distribution on a pro-rata basis among other Operational Creditors whose claims had been admitted.
• The Final List of Creditors did not incorporate any note that the liability was contingent upon the outcome of pending proceedings.
• The incorporation of disputed claims was entirely within the discretion of the Appellant-SRA, who had consciously elected not to allocate any payment towards claims that were sub judice.
• The Approved Resolution Plan specifically barred the continuation of any legal proceedings, including those involving sub-judice claims, insofar as they pertained to the period prior to approval of the Resolution Plan.
• The Resolution Plan must be construed as an integrated whole and cannot be read in a piecemeal manner to suit the interpretation advanced by the Respondents.
• The Intervenor-Masyc had earlier challenged the treatment of its claims and the Approved Resolution Plan, but such challenge was dismissed as withdrawn by the NCLT. The said Order was never assailed thereafter.
• In view of the ‘clean slate’ doctrine, a Corporate Debtor cannot be burdened with undecided or unresolved claims once the Resolution Plan has been approved.
• once the Adjudicating Authority approves a Resolution Plan under Section 31(1) of the Code, the claims provided for therein stand frozen and become binding upon the Corporate Debtor as well as all stakeholders.
• Since the claims of Respondent No.1-Varsha and Intervenor-Masyc had been duly addressed under the Resolution Plan, proceedings before various fora could not be permitted to continue thereafter.

The Respondent No. 1 Varsha submitted the following before the Supreme Court-

• The Resolution Professional alone is entrusted with the duty to collect, collate and verify claims.

• The List of Operational Creditors prepared under Regulation 13 and incorporated into the Information Memorandum constituted the very foundation of the Resolution Plan.
• The Successful Resolution Applicant had no authority to alter, suppress or selectively adopt a verified claim.
• Note 3 of the Interim List of Operational Creditors dated 17th March 2018 expressly recorded that sub-judice claims were admitted subject to adjudication.
• The Appellant-SRA deliberately omitted Note 3, which violated Respondent No.1-Varsha’s legitimate rights and amounted to ‘an egregious breach of the Code’.
• The surplus, he argued, ought to have been placed in escrow for satisfaction of sub-judice claims upon adjudication by the appropriate forum.
• The present Appeals would set a dangerous precedent enabling Corporate Debtors to raise disputes with Operational Creditors during insolvency proceedings and, thereafter, deny their claims on the ground of being sub-judice, thereby resulting in a travesty of justice.

The intervenor Masyc submitted the following before the Supreme Court-

• The Resolution Plan itself contained an express carve-out protecting sub-judice claims from extinguishment.
• The Resolution Plan itself contained an express carve-out protecting sub-judice claims from extinguishment.
• Section 3(6)(a) of the Code defines ‘claim’ broadly to include ‘a right to payment, whether or not such right is reduced to a judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured’. Thus, even uncrystallised rights fall within the ambit of a claim.
• The Appellant-SRA consciously adopted the Resolution Professional’s notional value of Rupee One (₹1), thereby preserving pending litigation from extinguishment.
• He was entitled to payment from Rs. 200 crores earmarked under Clause 8.2.2 for Operational Creditors (excluding related parties and employees/workmen), including those with sub-judice claims.
• This is the clear intent to pay and that the Appellant-SRA voluntarily committed the amount to secure overwhelming approval (99.80%) of the Committee of Creditors and NCLT sanction.
• It was the Appellant-SRA who chose to include sub-judice Creditors without providing any mechanism for interim treatment.

The Supreme Court considered the submissions of the parties to the present appeal. The Supreme Court observed that the Code has an overriding effect in the event of inconsistency with any other law for the time being in force and once a Resolution Plan is approved under Section 31(1) of the Code the claims therein stand frozen and are binding on all stakeholders, including the Corporate Debtor, its Creditors, the Governmental Authorities, Local Authorities, Employees and any other stakeholder. The claims not incorporated in the Resolution Plan stand extinguished, withdrawn or abated, consistent with the legislative intent of enabling the Resolution Applicant to commence on a ‘clean slate’, free from unforeseen liabilities. the jurisdiction of statutory authorities such as the NCLT and NCLAT is circumscribed by the Code and they cannot assume the role of a court of equity or exercise plenary powers. the Final List of Operational Creditors prepared by the Resolution Professional was never challenged by Respondents and the same attained finality.

The Supreme Court was of the view that no Resolution Plan can succeed if uncertain or unquantified claims are permitted to linger and resurface against the Successful Resolution Applicant years after approval. Such a situation would be akin to a hydra-headed recurrence and is antithetical to the ‘clean slate’ principle. The Supreme Court observed that the Resolution Plan read in its entirety did not provide for an express carve-out protecting sub-judice claims from extinguishment. On the contrary, all such claims stood extinguished.

The Supreme Court was of further view that there is no ambiguity in the Resolution Plan prepared by the Appellant-SRA. Consequently, neither the principle of contra proferentem is applicable to the present case nor the Intervenor-Masyc’s ‘face value reservation mechanism’ has any relevance, particularly when the Resolution Plan is not under challenge. it would be illogical and commercially unsound for an approved Resolution Plan to prescribe a twelve (12) months payment timeline for certain Operational Creditors, while simultaneously permitting indeterminate claims to remain pending until crystallisation. Such an interpretation would undermine both the terms of the Resolution Plan and the ‘clean slate’ as well as ‘fresh start’ principles underlying the Code.

The Supreme Court allowed the present appeal and set aside the orders of High Court and also the order passed by the orders of the Arbitral Tribunal.