Disputed claim admitted for notional amount of INR 1.
NCLT Ahmedabad (08.03.2019) in IA 49 of 2018 (Essar Power Limited vs. Resolution Professional of ESIL & Anr), directed RP to include this claim (Rs 893,21,52,807 ) as disputed and admit notional amount of INR 1 against this claim subject to final outcome of dispute pending.(Page-52/153 of the order). The said views of the NCLT were upheld by the Hon’ble SCI.
Case reference;
SCI (15.11.2019) in CoC of Essar Steel India Limited Vs Satish Kumar Gupta & Ors.(Civil Appeal No. 8766-67 OF 2019) ruled as under:
# 102. So far as Dakshin Gujarat Vij Co. (Respondent No. 11 in Civil Appeal Diary No. 24417 of 2019), State Tax Officer (Respondent No. 12 in Civil Appeal Diary No. 24417 of 2019), Gujarat Energy Transmission Corporation Ltd. (Respondent No. 17 in Civil Appeal Diary No. 24417 of 2019) and Indian Oil Corporation Ltd. 162 (Respondent No. 18 in Civil Appeal Diary No. 24417 of 2019) are concerned, the resolution professional admitted the claims of the abovementioned respondents notionally at INR 1 on the ground that there were disputes pending before various authorities in respect of the said amounts. However, the NCLT through its judgment dated 08.03.2019 directed the resolution professional to register the entire claim of the said respondents. The NCLAT in paragraphs 43 and 196 of the impugned judgment upheld the order passed by the NCLT as aforesaid and admitted the claim of the abovementioned respondents. We therefore hold that this part of the impugned judgment deserves to be set aside on the ground that the resolution professional was correct in only admitting the claim at a notional value of INR 1 due to the pendency of disputes with regard to these claims.
Now with this ruling of Hon’ble SCI, the matter stands settled that in case of pendency of dispute the claim of a creditor has to be taken at the notional value of INR 1.
When the claim of the creditor has been admitted at the notional value of INR 1, the concerned creditor will be deprived of any share in the distribution of funds in the resolution plan approved by CoC & AA, and adding to the injury, the said resolution plan shall be binding on the creditor in terms of section 31(1) of the code which reads as under.
# Section 31. Approval of resolution plan. -
(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.
Provided that the Adjudicating Authority shall, before passing an order for approval of resolution plan under this sub-section, satisfy that the resolution plan has provisions for its effective implementation.
As far as other recourse available to the creditor of a disputed claim are concerned, the following rulings of Hon’ble SCI are of paramount importance, which have effectively sealed /denied any other recourse available to the creditor of a disputed claim.
Case Law;
i). SCI (15.11.2019) in CoC of Essar Steel India Limited Vs Satish Kumar Gupta & Ors.(Civil Appeal No. 8766-67 OF 2019) ruled as under;
# 67. . . . . . A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this count.
ii). Supreme Court (13.04.2021) in Ghanashyam Mishra and Sons Pvt. Ltd. Vs. Edelweiss Asset Reconstruction Company Ltd. [Civil Appeal No. .8129 of 2019] held that;
# 95. In the result, we answer the questions framed by us as under:
(i) That once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;
(ii) 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect;
(iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.
# 130. . . . .As such, when the resolution plan is approved by NCLT, the claims, which are not part of the resolution plan, shall stand extinguished and the proceedings related thereto shall stand terminated. . . . .
Conclusion
Thus, in the case of a disputed claim, it will be in the interests of the creditor to settle the dispute as early as possible, preferably before the approval of the resolution plan by the CoC. Now the question arises, with whom the creditor can settle the dispute during CIRP. Here following provisions of the Code may be of some help.
# Section 17. Management of affairs of corporate debtor by interim resolution professional. -
(1) From the date of appointment of the interim resolution professional, -
(a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional;
(b) the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional;
(2) The interim resolution professional vested with the management of the corporate debtor, shall-
(a) act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, if any;
# Section 23. Resolution professional to conduct corporate insolvency resolution process. -
(1) Subject to section 27, the resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period:
Provided that the resolution professional shall, if the resolution plan under sub-section (6) of section 30 has been submitted, continue to manage the operations of the corporate debtor after the expiry of the corporate insolvency resolution process period until an order is passed by the Adjudicating Authority under section 31
(2) The resolution professional shall exercise powers and perform duties as are vested or conferred on the interim resolution professional under this Chapter.
In my view, the IRP /RP while managing the affairs of the Corporate Debtor, as a going concern, has powers to settle the disputes etc. Settlement of disputes with the creditors, in due course of business, is within the powers vested in IRP/RP for management of CD. (Section 17 read with Section 23, quoted supra above). In my opinion, this will not require the prior approval of CoC under the provisions of Section 28.
Now the question arises, which claims, during the insolvency process (CIRP), are / can be taken as “Disputed Claims”. Let’s look the provisions of the Code and some of the case laws’
# Section 5. Definitions;
(6) “dispute” includes a suit or arbitration proceedings relating to–
(a) the existence of the amount of debt;
(b) the quality of goods or service; or
(c) the breach of a representation or warranty;
Case-law on Disputed claims
i). Supreme Court of India (31.08.2017) in Innoventive Industries Ltd. v. ICICI Bank & Anr.(Civil Appeal Nos. 8337 - 8338 of 2017) held that;
# 27. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of “debt”, we have to go to Section 3(11), which in turn tells us that a debt means a liability of obligation in respect of a “claim” and for the meaning of “claim”, we have to go back to Section 3(6) which defines “claim” to mean a right to payment even if it is disputed.
# 29. The scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. Under Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand notice or copy of the invoice mentioned in sub-section (1), bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre existing – i.e. before such notice or invoice was received by the corporate debtor. The moment there is existence of such a dispute, the operational creditor gets out of the clutches of the Code.
ii). Supreme Court of India(01.09.2017) in Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited (Civil Appeal No. 9405 Of 2017) held that;
# 30. It is settled law that the expression “and” [occurring in section 8(2)(a)] may be read as “or” in order to further the object of the statute and/or to avoid an anomalous situation.
# 35. We have already noticed that in the first Insolvency and Bankruptcy Bill, 2015 that was annexed to the Bankruptcy Law Reforms Committee Report, Section 5(4) defined “dispute” as meaning a “bonafide suit or arbitration proceedings…”. In its present avatar, Section 5(6) excludes the expression “bonafide” which is of significance. Therefore, it is difficult to import the expression “bonafide” into Section 8(2)(a) in order to judge whether a dispute exists or not.
# 40. It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. …....The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application
# 43. ………. a “dispute” is said to exist, so long as there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6).
iii). Supreme Court of India (14.08.2018) in K. Kishan Vs. M/S Vijay Nirman Company Pvt. Ltd.(Civil Appeal No. 21824 of 2017 With Civil Appeal No. 21825 of 2017) held that;
# 18. We repeat with emphasis that under our Code, insofar as an operational debt is concerned, all that has to be seen is whether the said debt can be said to be disputed, and we have no doubt in stating that the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 & 37 has taken place.
# 19. There may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may then be put into operation
# 20) We may hasten to add that there may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.
# 23. ……… Even if it is clear that there be a record of an operational debt, it is important that the said debt be not disputed. If disputed within the parameters laid down in Mobilox Innovations, an insolvency petition cannot be proceeded with further.
iv). NCLT Ahmedabad Bench (10.08.2020) Raghuvir Buildcon Private Limited Vs. Ketan Construction Limited.[C.P. (I.B.) No.57/9/NCLT/AHM/2019 With IA 201 of 2020 IA 123 of 2020] held that;
# 18 Thus, the parameter to ascertain as to whether there is a dispute or otherwise can be summarized as under:
i) The dispute should have prima facie bona fide and exists naturally in a given fact;
ii) The grounds for alleging the existence of a dispute should not be spurious, hypothetical, illusory or misconceived;
iii) The existence of a dispute need not require further to be proved;
iv) The dispute should be natural and not a made to believe dispute.
The extent of ascertainment/ examination of such parameters defines the scope of exercise of jurisdiction by the Adjudicating Authority. It has been pleaded that Adjudicating Authority has limited jurisdiction as compared to a Trial Court and Civil Court. We do not have any quarrel or dispute with this proposition. However, intensity of the examination would depend upon the facts and documentary evidences produced by each of the parties in support of their claims. Having said so, it would also be an endeavor of the Corporate Debtor to prove that there is a pre-existing dispute to avoid its obligation. The Hon’ble Supreme Court has said that such defense should not be feeble legal argument or an assertion of fact unsupported by evidence. Further, such defence should not be spurious or merely bluster, frivolous or vexatious. It should not be a made to believe story. However, merits of the case need not to be a factor to decide the matter. These observations itself define the scope that the Adjudicating Authority has to look into the material produced before it and to analyze the same to reach some conclusion. It can neither be precluded from doing so nor it is precluded by these observations, hence, the Adjudicating Authority is well within its jurisdiction when it analyzes the accounting records, correspondences, contract etc. as produced by the parties to arrive at a conclusion as regard to nature and existence of dispute. This exercise may require some deep analysis in some case or in some cases it may be a very minor examination based upon the facts of each case and material produced by the parties. In cases, in our considered view, where greater analysis is required then in that situation, such analysis would not amount to roving inquires or exercise beyond jurisdiction as it would be the demand of the situation.
# 19. Apart from the above legal position, the question which comes to our mind is that in what circumstances a fact situation can be categorized as dispute i.e. when does a disagreement or difference of opinion become a dispute. As observed earlier that the term ‘dispute’ has been defined inclusively in IBC, 2016, however, basic meaning of the term ‘dispute’ has not defined, hence, we would have to look for the meaning of this term as per law dictionaries/other legal forums.
19.1.The Black’s Law Dictionary defines the term ‘dispute’ as under: A conflict or controversy, esp. one that has given rise to a particular law suit.
19.2. West’s Encyclopedia of American Law, edition 2 describes the term “dispute” as under: A conflict or controversy; a conflict of claims or rights; an assertion of a right, claim, or demand on one side, met by contrary claims or allegations on the other. The subject of litigation; the matter for which a suit is brought and upon which issue is joined, and in relation to which jurors are called and witnesses examined. A labor dispute is any disagreement between an employer and his or her employees concerning anything job-related, such as tenure, hours, wages, fringe benefits, and employment conditions.
19.3. The term ‘dispute’ as per U.S Legal.com is described as under: “Dispute means a controversy. It refers to an allegation of fact by one person denied by another person, both acting with some show of reason.
# 20. Thus, at a glance itself, it can be said that a threshold or stage is to be crossed to convert a difference/disagreement into dispute. In other words, normally commercial / legal differences per se are not dispute unless such differences are ascertained into a claim on which both the parties have opposite /different views and want to settle the same through some legal process or otherwise. Thus, in our view, routine correspondence in commercial relationship cannot automatically or necessarily be considered and admitted as dispute unless such stage is reached.
v). NCLT (PB) New Delhi.(21.03.2018) in Grasim Industries Limited vs. Tecpro Systems Ltd. [CA -19(PB) /2018 in (IB) -197(PB)/2017] held that,
he (IRP) is under mandatory duty to verify every claim and maintain the list of creditors containing their names along with the amount claimed by them and the amount of their claim admitted.
Such a claim is not verifiable from the books of accounts of the Corporate Debtor. Moreover, the same amount is subject matter of arbitration before the Arbitral Tribunal and there is a specific bar created by the admission order in terms of Section 14 of the Code
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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