RP's Dilemma - Collate or Verify claims of creditors

One of the  important aspects of an insolvency proceeding is the collection & collation / verification of claims of creditors and formation of the committee of creditors. Let’s look into the provisions of the law and the law laid down by the Hon’ble Supreme Court of India & rulings of NCLT / NCLAT, on this issue. 

The Insolvency and Bankruptcy Code, 2016

# Section 18. Duties of interim resolution professional. -

(b) receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15;

(c)  constitute a committee of creditors;

# Section 21. Committee of creditors. -

(1) The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.

Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

# Regulation 10. Substantiation of claims.

The interim resolution professional or the resolution professional, as the case may be, may call for such other evidence or clarification as he deems fit from a creditor for substantiating the whole or part of its claim.

# Regulation 13. Verification of claims.

(1) The interim resolution professional or the resolution professional, as the case may be, shall verify every claim, as on the insolvency commencement date, within seven days from the last date of the receipt of the claims, and thereupon maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it.

On collation / verification of claims during CIRP, the provisions of Code & Regulations are in variance.

Hon’ble Supreme Court of India (25.01.2019) in Swiss Ribbons Pvt. Ltd. & Anr. V/s Union of India & Ors. [Writ Petition (CIVIL) NO. 99 OF 2018] held that:-

• # 58 ...It is clear from a reading of the Code as well as the Regulations that the resolution professional has no adjudicatory powers.
• # 59…..It is clear from a reading of these Regulations that the resolution professional is given administrative as opposed to quasi-judicial powers.
• # 60.....As opposed to this, the liquidator, in liquidation proceedings under the Code, has to consolidate and verify the claims, and either admit or reject such claims under Sections 38 to 40 of the Code. Sections 41 and 42, by way of contrast between the powers of the liquidator and that of the resolution professional, are set out herein below: Section 41 and 42 It is clear from these Sections that when the liquidator - “determines” the value of claims admitted under Section 40, such determination is a - decision”, which is quasi-judicial in nature, and which can be appealed against to the Adjudicating Authority under Section 42 of the Code.

Thus the ruling of the Hon’ble SCI, made it clear that during CIRP, the IRP / RP does not have the powers to determine / verify  the amount of claims of the creditors, he (IRP / RP) can only receive & collate the claims of the creditors (duly substantiated). IRP / RP does not have any powers to either admit or reject or partially admit / reject the claims of the creditors.

NCLAT in Standard Chartered Bank Vs. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors.[CA (AT) (Ins.) No. 242 of 2019] held that

• # 65. The Adjudicating Authority has noticed that the ‘Resolution Professional’ has no jurisdiction to decide and / or reject the claim, it is only required to collate the claim.

Recently, NCLT (PB) New Delhi (08.08.2019) in  S. A. Consultants & Forwarders Private Ltd. V/s Cargo Planners Limited [ CP No. IB-867(PB) 2019 ] while admitting the application U/s 9 of the Code directed the IRP as under:-

• # 14 There is a general complaint received against the financial creditors, banks, NBFC’s and Asset Reconstruction Companies that the amount claimed by them is far more than what is owed by the corporate debtor to them. Many a times the rate of interest is alleged to be exorbitant and allegations are levelled that a penal interest compounded monthly has been charged. We have no mechanism of rectification of claims made. However, the RP, ordinarily have professionals & experts at their disposal and in case the ex- management raises any such issue then the RP must get it settled in order to avoid any injustice to the corporate debtor.

Thus in the above case, the IRP / RP will have to collate the claims as per the supporting documents, as per the provisions of the Code and law laid down by the Hon’ble SCI, and to comply with the directions of the AA, he will have to move the application for avoidance of transactions, for exorbitant rate of interest & penal interest U/s 25(2) read with section 50. IRP / RP, does not have any powers to either rectify or reject the claim.

Now comes the amendments to the Code, notified on  16.08.2019. Amended section 30(4) of the Code reads as under:-

# Section 30(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six  per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor, and such other requirements as may be specified by the Board:

The above amendments has two dimensions

• distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53. 

• including the priority and value of the security interest of a secured creditor.

The  amended provisions of the Code now mandates that the resolution plan approved by the CoC provides for the distribution of funds as per Section 53(1) of the Code. Prerequisite to the distribution of funds of resolution plan as per Section 53(1) is the preparation of the list of creditors accordingly. In my view the said amendments, indirectly thrust upon RP, the duty to follow the provisions of Section 38 to 42 of the Code in preparing the list of creditors.

An unsecured financial creditor has 4th priority in distribution of funds u/s 53(1) and as such. Inclusion of a portion of unsecured financial credit in 2nd priority will affect the rights of employees who have 3rd priority under the waterfall. Amendments under section 30 of the code has implications to identify and determine the secured and unsecured portion, and as such the function of IRP /RP has widened from simply collecting and collating the claims of creditors in CIRP.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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