2026 (1) TMI 1355 - AT - IBC

Treatment of creditor claims as contingent liability order set aside and petition restored for fresh adjudication on debt, default and dispute

Treatment of creditor claims as contingent liability versus unsecured creditor is examined, emphasising that the adjudicating forum must determine ... Treatment of creditor claims as contingent liability versus unsecured creditor - obligation of Adjudicating Authority to determine existence of debt, default and pre-existing dispute under the Code - binding effect of a BIFR-sanctioned rehabilitation scheme and options available to unsecured creditors - doctrine of crystallisation of contingent liabilities - estoppel by election / approbate and reprobate - HELD THAT:- We note that the Appellant’s argument is that BIFR order failed w.r.t. his payments as he was not paid on the basis of five equally annual instalments as per clause 11.11 of the BIFR sanctioned scheme dated 04.12.2015. As such, he cannot be compelled to accept the same. When he filed his petition u/s 9 of the code and the Adjudicating Authority has no jurisdiction to order the Appellant to accept BIFR payment as such belated time. The Appellant argued that the Adjudicating Authority is not empowered the equity jurisdiction. The Adjudicating Authority is only to determine existence of debt, default, absence of existence of pre-existing dispute and should have admitted the petition of the Appellant under section 9 of the Code. It is undisputed fact that the Respondent did not make any payment to the Appellant till the Impugned Order was pronounced by the Adjudicating Authority. The argument of the Respondent that in any case the Appellant would have been entitled maximum 25% of his claims does not hold any logic. If, Respondent treated the Appellant as Unsecured Creditor, he should have paid on annual basis which Respondent failed to do so. As such, the Appellant was not bound by the same and he was within his right to file Section 9 petition under the Code. We hold that the Adjudicating Authority was duty bound to adjudicate on existence of debt, default and existence of pre-existing dispute if any, and if debt and default and no pre-existing dispute were confirmed then the Adjudicating Authority ought to have admitted Section 9 petition of the Appellant. Forthwith, on the treatment of Appellant as contingent liability in the books of Corporate Debtor, we put a direct and pointed query to the Respondent as to how and under what circumstances the dues payable towards Appellant was shown under contingent. The Respondent merely answered that the same is reflected in the financial statement. The Respondent could not satisfy us as how the claims of the Appellant was contingent liability. Since debt of the Appellant was contingent, the same was required to be crystallised before debt could have become due and such crystallisation could have been done by competent court of law. The Respondent, however, could not satisfy us, if this is the case, then why the due amount has been paid to the Appellant after the Impugned Order. As such, we do not accept the logic of the Respondent on the same issue. The Respondent has also brought to our notice that the Hon’ble Supreme Court in case of Modi Rubber [2023 (3) TMI 828 - SUPREME COURT] has already settled the principals of law regarding validity of the order passed by BIFR in regard to the option being provided in the sanctioned scheme by it, which makes binding for unsecured creditors to accept the provision in relation of payment of the restructured or and to wait for a period of 7 years, till the scheme works itself out. On this issue we note that the facts of both the cases are different in the case of Modi Rubber (Supra) where Operational Creditor was clearly treated as Unsecured Creditors and there was no issue of contingent liability. In that sense, the Appellant, herein, was not treated as unsecured creditors at all but only as contingent liabilities under clause 11.11 of sanctioned BIFR scheme dated 04.12.2015. Appeal allowed. The impugned NCLT order is set aside and the original petition is restored for fresh adjudication by the Adjudicating Authority on the questions of existence of debt, default and pre-existing dispute; parties directed to appear before the Adjudicating Authority on the date directed. Issues: Whether the Adjudicating Authority erred in rejecting initiation of Corporate Insolvency Resolution Process under Section 9 of the Insolvency and Bankruptcy Code, 2016 by directing payment under a previously sanctioned BIFR revival scheme (treating the creditor's claim as contingent liability) instead of adjudicating existence of debt, default and pre-existing dispute and admitting the Section 9 petition.Analysis: The dispute required determination whether the Appellant's claim constituted a contingent liability (not crystallised) under the BIFR sanctioned scheme or an enforceable debt for purposes of Section 9 of the Code. The sanctioned BIFR scheme and related records showed the Appellant reflected as contingent liability in the scheme annexures and the scheme afforded unsecured creditors two options (25% payment in five instalments or wait seven years). The Adjudicating Authority directed a lump-sum payment under the scheme without independently adjudicating existence of debt, default and the presence or absence of a pre-existing dispute as required for admission under Section 9. The Respondent could not satisfactorily explain why the Appellant's claim remained contingent when payment was directed and subsequently made. The factual classification of the Appellant's claim as contingent in corporate records did not absolve the Adjudicating Authority of its statutory duty to examine debt, default and disputes under Section 9 before refusing CIRP. The Appellate Tribunal found the reasoning in the impugned order confined to applying the scheme and not to performing the threshold statutory enquiry mandated by the Code.Conclusion: The impugned order is set aside as the Adjudicating Authority failed to discharge its statutory duty to examine existence of debt, default and pre-existing dispute under Section 9 of the Code; matter restored for fresh consideration. The conclusion is in favour of the Appellant.