2024 (7) TMI 1361 - HC - Insolvency and Bankruptcy

Company cleared to participate in coal auctions after insolvency resolution plan approval under Section 31(1) IBC

OCL Iron And Steel Limited Versus Union Of India

The Delhi HC set aside a government decision barring a company from coal mine auctions due to outstanding dues from its previous management. The court ... Disqualification from participating in coal mine auctions - debarment is premised on certain outstanding unsettled dues attributable to the Petitioner’s erstwhile management - whether the Petitioner is liable for the alleged dues, thereby ascertaining their eligibility to participate in the coal mine auctions? - HELD THAT:- With the approval of the resolution plan by the NCLT on 20th March, 2023, the claims that were not submitted in the required manner or were rejected by the Resolution Professional, are deemed extinguished. This extinguishment includes all dues, including statutory dues owed to the Central Government that were not incorporated in the resolution plan. The Respondent’s inaction in contesting the categorization of their claims by the Resolution Professional, or challenging the resolution plan signifies their acceptance of the resolution process. Moreover, even if we were to hypothetically consider the financial impact of the PBG claim, had it been recognized as valid operational debt, the actual financial benefit to the Respondent would have been minimal - there exists no legal basis for the Respondent to obstruct the Successful Resolution Applicant’s participation in the auction process. The finality and decisiveness of an approved resolution plan is recognized under the IBC’s framework. The resolution process, as endorsed by the NCLT, aims to free the corporate debtor from past liabilities and enable a fresh operational start, unhampered by unresolved and extinguished debts - The mandate of Section 31 (1) of the IBC underscores that once a resolution plan is approved by the Adjudicating Authority, it is binding not only on the corporate debtor, but also on all stakeholders, including Central and State Governments, as well as any local authorities to whom debts are due under any current laws. This binding nature extends to all statutory dues owed to these authorities. In COMMITTEE OF CREDITORS OF ESSAR STEEL INDIA LIMITED THROUGH AUTHORISED SIGNATORY VERSUS SATISH KUMAR GUPTA & OTHERS [2019 (11) TMI 731 - SUPREME COURT] the Supreme Court has elaborated on the treatment of claims post-approval of a resolution plan. The Apex Court emphasized that a Resolution Applicant should not be encumbered by sudden and unforeseen claims. Such occurrences would not only disrupt the financial calculations and expectations that underpinned the resolution plan, but also undermine the very purpose of the IBC, which aims to streamline and stabilize the process of corporate revival - the introducing claims that were not part of the list of assessed and finalized claims in CIRP post the approval of resolution plan, contravenes the established legal framework and the Supreme Court’s holding. This ruling importantly guards against the ‘hydra head phenomenon,’ where unexpected financial liabilities emerge post the CIRP, potentially destabilizing the newly revived corporate debtor and deterring future investment and participation in the insolvency resolution processes. The IBC facilitates economic rehabilitation of the corporate debtor, enabling it to service its debts, thereby enhancing the reliability of the credit market. Importantly, the Code prioritizes the interests of all stakeholders, including the corporate debtor, by shielding it from its past management and potential liquidation threats. This focus on revitalization over mere credit recovery segregates the debtor’s interests from those of its previous promoters or managers, underscoring the IBC’s object as a protective, not adversarial, mechanism in the resolution process. This legislative framework is designed to return the corporate debtor to viability, benefiting the broader economic ecosystem - the Court remains unconvinced with the Respondent’s construal of the observations of the NCLT in deciding concessions to the corporate debtor in respect of their obligations to the Respondent. The resolution framework intends to balance the interests of all stakeholders, including creditors, by ensuring that they are bound by the finalized resolution plan. As such, the Respondent, who is a creditor within its context, is obligated to adhere to the stipulations of the resolution plan as approved on 20th March, 2023, which mandates an interpretation and application of the IBC as per its intent and statutory mandate. By holding the Petitioner accountable for liabilities that have been legally extinguished, the Respondent has failed to adhere to the statutory mandate of the IBC and the broader objectives of insolvency resolutions. The insistence on clearing past dues contradicts the rehabilitative intent and purpose of the IBC, calls for judicial intervention. The impugned decision dated 22nd May, 2024, issued by the Respondent, stipulating that the Petitioner remains ineligible to participate in coal mine auctions until outstanding dues to the Petitioner are cleared, cannot sustain - the present writ petition is allowed and the impugned decision dated 22nd May, 2024 is set aside. Issues Involved:1. Liability for past dues post-Corporate Insolvency Resolution Process (CIRP).2. Eligibility to participate in coal mine auctions.3. Interpretation of the resolution plan and NCLT's observations.4. Binding nature of approved resolution plans under the Insolvency and Bankruptcy Code (IBC).Issue-wise Detailed Analysis:1. Liability for Past Dues Post-CIRPThe Petitioner, OCL Iron and Steel Ltd., under new management following CIRP, was disqualified from coal mine auctions due to unsettled dues from the erstwhile management. The Petitioner argued that these past dues were addressed in the resolution plan approved by the NCLT, and thus, should not affect their current operations. The Respondent maintained that their claims survived the insolvency proceedings as noted in the resolution plan and that the Petitioner's disqualification was consistent with established policy and tender conditions requiring bidders to clear all past dues.2. Eligibility to Participate in Coal Mine AuctionsThe Petitioner applied for participation in the bidding process for the Lalgarh South coal mine but was excluded from the list of technically qualified bidders due to outstanding dues. The Respondent argued that the Petitioner remained ineligible until these dues were settled, citing tender document clauses and the Coal Mine Development and Production Agreement (CMDPA). The Petitioner contended that the resolution plan extinguished these liabilities, and thus, they should be allowed to participate in the auctions.3. Interpretation of the Resolution Plan and NCLT's ObservationsThe resolution plan approved by the NCLT on 20th March 2023 included a clause seeking waiver of the Respondent's claims. The NCLT's order stated that the concerned parties should consider the letter and spirit of the IBC, which aims to enable a fresh start for the corporate debtor. The Respondent misinterpreted this as a rejection of the waiver request, arguing that their claims still subsisted. The Petitioner argued that the NCLT's observations implied that all claims not accepted by the Resolution Professional were extinguished, and thus, the Respondent's claims should not hinder their participation in the auctions.4. Binding Nature of Approved Resolution Plans Under IBCThe judgment emphasized the finality and binding nature of approved resolution plans under Section 31 (1) of the IBC, which states that such plans are binding on all stakeholders, including the Central Government and other authorities to whom statutory dues are owed. The Supreme Court's rulings in Ghanashyam Mishra and Sons Private Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. and other cases reiterated that once a resolution plan is approved, it extinguishes all prior claims and liabilities, enabling the corporate debtor to start afresh.Analysis and Findings:The court found that the Respondent's claims were not admitted in the final list of creditors prepared by the Resolution Professional. The claim of Rs. 92,25,20,000/- towards the PBG was rejected as a financial debt, and the Respondent did not re-file it as an operational debt. The claim of Rs. 9,21,44,029/- was admitted and settled as per the resolution plan. The court held that the Respondent's inaction in contesting the categorization of their claims or challenging the resolution plan signified their acceptance of the resolution process.The court emphasized that the IBC's framework aims to provide a fresh start to the corporate debtor, free from past liabilities. The NCLT's observations directed the concerned parties to consider the letter and spirit of the IBC, reinforcing the objective of enabling the corporate debtor to operate without the burden of past dues. The court concluded that the Respondent's decision to debar the Petitioner from participating in coal mine auctions based on past liabilities contradicted the IBC's intent and was unreasonable and arbitrary.Conclusion and Directions:The court set aside the impugned decision dated 22nd May 2024, issued by the Respondent, and allowed the Petitioner to participate in the coal mine auctions. The judgment underscored the importance of adhering to the statutory mandate of the IBC and ensuring that the corporate debtor is not hindered by past liabilities post-CIRP. The writ petition was allowed, and the Petitioner was deemed eligible to participate in the coal mine auctions.