2021 (5) TMI 494 - HC - Insolvency and Bankruptcy

Arbitral Award Challenge Dismissed Due to Insolvency Resolution, Res Judicata Not Applicable

The court held that the application to set aside the arbitral award became infructuous following the approval of the Resolution Plan under Section 31 of ... Extinguishment of claims on approval of a Resolution Plan - binding effect of an approved Resolution Plan under Section 31 of the IBC - survival of pre-existing disputes during CIRP - maintainability of Section 34 proceedings after approval of a Resolution Plan - obligation to submit claims in CIRP and inclusion in Information Memorandum - effect of amended Section 36 on pending Section 34 applicationsBinding effect of an approved Resolution Plan under Section 31 of the IBC - extinguishment of claims on approval of a Resolution Plan - Whether an award-holder's claim which does not form part of an approved Resolution Plan survives after approval of the Resolution Plan. - HELD THAT: - The Court applied the Supreme Court rulings in Committee of Creditors of Essar Steel and Ghanshyam Mishra v. Edelweiss to hold that once a Resolution Plan is approved under Section 31 of the IBC, the plan is binding on the corporate debtor and its stakeholders and claims not forming part of the approved plan stand extinguished. The Court reasoned that the IBC regime contemplates collation and freezing of claims through the Resolution Professional and Committee of Creditors so that a successful resolution applicant takes over the corporate debtor on a 'fresh slate'; allowing undecided claims to survive would frustrate this scheme and create uncertainty for the resolution applicant. Accordingly, pre-existing and undecided claims that were not collated and included in the Resolution Plan cannot later be pursued. [Paras 15, 16, 17, 23]Claims not included in the approved Resolution Plan stand extinguished and cannot be pursued after approval under Section 31 of the IBC.Maintainability of Section 34 proceedings after approval of a Resolution Plan - survival of pre-existing disputes during CIRP - Whether the Section 34 application for setting aside the arbitral award remains maintainable or becomes infructuous following approval of the Resolution Plan. - HELD THAT: - The Court held that a determination on maintainability must precede merits where the legal effect would render the proceedings futile. Having found that a Resolution Plan approved under Section 31 extinguishes claims not included in the plan, the Court concluded that further adjudication on the merits of the Section 34 application would be a waste of judicial and party resources and would not lead to any effective relief. The Court therefore considered the Section 34 proceedings rendered infructuous in the facts of this case and disposed of the application on that basis. [Paras 11, 24, 25]The Section 34 proceeding is rendered infructuous and therefore not to be proceeded with in the present case.Effect of amended Section 36 on pending Section 34 applications - obligation to submit claims in CIRP and inclusion in Information Memorandum - Whether the award-holder was precluded from lodging its claim in the CIRP by reason of the filing of a Section 34 application and whether the award-holder had an opportunity and obligation to submit its claim during the CIRP. - HELD THAT: - The Court analysed the amendment to Section 36 and the Supreme Court's decision in Board of Control for Cricket in India v. Kochi Cricket to conclude that filing a Section 34 application does not automatically render an award unenforceable; the award is not automatically stayed unless a separate stay is granted under the amended Section 36. In light of the statutory CIRP procedure (public announcement, collation of claims, Information Memorandum, Form B and Regulation 7), the Court found that the award-holder had procedural opportunities during the CIRP (public announcement was on 25 September 2017 and the plan approved on 16 May 2018) to submit its claim to the Resolution Professional and to be included in the claims collation. The court therefore rejected the contention that the pendency of Section 34 precluded the award-holder from participating in the CIRP. [Paras 20, 21, 23]Filing of a Section 34 application did not automatically prevent the award-holder from lodging its claim in the CIRP; the award-holder had procedural avenues and obligations to submit its claim during the CIRP.Obligation to submit claims in CIRP and inclusion in Information Memorandum - Whether the fact that the amount claimed by the respondent appeared in the Information Memorandum affects the survival of the respondent's claim. - HELD THAT: - The Court noted that the Information Memorandum's reference to the amount claimed by the respondent as on 31 March 2014 was a fact that warranted further exploration. The Court observed that mere mention in the Information Memorandum does not supplant the specific procedural requirements under the IBC and CIRP Regulations (including submission in prescribed Form B and adherence to Regulation 7 timelines) and, therefore, the significance of the Information Memorandum entry must be examined. [Paras 18, 20]The relevance of the respondent's claim appearing in the Information Memorandum requires further exploration and cannot be finally determined on the present record.Final Conclusion: The application under Section 34 is disposed of as rendered infructuous: in the facts of this case, claims not included in an approved Resolution Plan stand extinguished under Section 31 of the IBC, the award-holder had procedural opportunity to submit its claim during CIRP, and the continuation of the Section 34 proceedings would serve no purpose; one factual matter (the significance of the Information Memorandum entry) is directed to be explored further before any different conclusion may be reached. Issues Involved:1. Whether the application for setting aside an arbitral award is maintainable after the approval of a Resolution Plan under Section 31 of the Insolvency and Bankruptcy Code (IBC), 2016.2. The applicability of res judicata to the maintainability of the Section 34 application.3. The impact of the Supreme Court's decisions in Essar Steel and Ghanshyam Mishra on pending claims during and after corporate insolvency resolution proceedings.Issue-wise Detailed Analysis:1. Maintainability of the Application for Setting Aside the Arbitral Award:The petitioner argued that the application under Section 34 of The Arbitration and Conciliation Act, 1996, to set aside an arbitral award, has become infructuous due to the approval of a Resolution Plan by the National Company Law Tribunal (NCLT) under the IBC. The petitioner relied on Section 31 of the IBC, which states that an approved Resolution Plan is binding on the corporate debtor and its stakeholders, and cited the Supreme Court decision in Essar Steel to argue that the debts of the corporate debtor stand extinguished except for those taken over by the resolution applicant.The court acknowledged that the Supreme Court in Essar Steel and Ghanshyam Mishra held that once a Resolution Plan is approved, all claims not included in the plan are extinguished. The court emphasized that the law evolves and must be applied dynamically. It was concluded that the application for setting aside the arbitral award is rendered infructuous due to the approval of the Resolution Plan, which extinguished the respondent's claim.2. Applicability of Res Judicata:The respondent contended that the principles of res judicata should apply, as the issues raised by the petitioner had been decided in previous orders. The court, however, clarified that res judicata does not apply when new facts or significant legal developments emerge. The court held that the principles of res judicata must be read down in cases where orders can be altered due to new legal developments, such as the Supreme Court's decision in Essar Steel.3. Impact of Supreme Court's Decisions in Essar Steel and Ghanshyam Mishra:The court discussed the Supreme Court's rulings in Essar Steel and Ghanshyam Mishra, which emphasized that a Resolution Plan, once approved, binds all stakeholders and extinguishes all claims not included in the plan. The court noted that the respondent's claim did not survive as it was not part of the approved Resolution Plan. The court also highlighted that the IBC provides a structured process for creditors to submit their claims during the corporate insolvency resolution process, and the respondent had sufficient opportunity to do so but failed to take active steps.The court further noted that the Supreme Court in Kochi Cricket clarified that Section 36 of the Arbitration Act, as amended, applies to pending Section 34 applications, meaning that the arbitral award is not automatically stayed upon filing of the application. Therefore, the respondent could have pursued its claim before the NCLT.Conclusion:The court concluded that the application for setting aside the arbitral award is rendered infructuous due to the approval of the Resolution Plan under Section 31 of the IBC, which extinguished the respondent's claim. The court disposed of the application and emphasized the importance of adapting to the evolving legal landscape shaped by legislative changes and judicial pronouncements.