Failure of a Creditor to Submit a Claim in an Insolvency Process

[Bhavin Gada is a Partner at Economic Laws Practice, Advocates and Solicitors (“ELP”), and Manendra Singh an Associate Manager at ELP. The authors would like to thank Akshata Limaye, Associate at ELP, for her inputs]

The corporate insolvency resolution process (CIRP) for corporate persons under the Insolvency and Bankruptcy Code, 2016 (Code) was introduced with the primary objective of providing for a time-bound, viable resolution mechanism whereby a corporate entity could be maintained as a going concern while protecting the interests of the creditors.

While striking a balance between the time-bound nature of resolution process and ensuring that the interests of all the creditors are addressed, an interesting question arises in relation to the status of a claim which may be raised by a creditor beyond the timelines which are prescribed under the Code for inviting claims by the interim resolution professional (IRP).

In accordance with section 15(1)(c) of the Code read with regulation 6(2)(c) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ( CIRP Regulations), once the application for initiation of the CIRP is admitted by the National Company Law Tribunal (NCLT), a public announcement is required to be released by the IRP for inviting claims. The public announcement is required to provide for the last date (being 14 days) for submission of such claims from the date of the appointment of the IRP. Further, regulations 7, 8, 9 and 9A of the CIRP Regulations provide for the form and manner in which claims have to be submitted by various creditors.

In the above context, it is important to note regulation 12(2) of the CIRP Regulations, which states that:

“..A creditor, who failed to submit proof of claim within the time stipulated in the public announcement, may submit such proof to the interim resolution professional or the resolution professional, as the case may be, till the approval of a resolution plan by the committee..”

In view of the above, a creditor may file its claim before the IRP or the resolution professional (RP), as the case may be, even after the prescribed period, but until the approval of a resolution plan by the committee of creditors (COC). Notably, under section 31(1) of the Code, if the NCLT is satisfied that the resolution plan as approved by the COC meets the requirements of the Code, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. Therefore, it appears that once the resolution plan is approved by the NCLT, it becomes binding on all the creditors, including a creditor who may not have filed a claim in accordance with the provisions of the Code.

The above position seems to receive further support from section 238 of the Code, which states as follows:

“..The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law..”

In view of the above, it is not clear if such creditors who have not filed a claim (inadvertently or otherwise) during the CIRP will lose their legal right for their unpaid debt once the resolution plan is finalised and approved by the NCLT due to non-obstante nature of the Code. On another note, the language used in section 31(1) becomes critical, which states that:

“31(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, guarantors and other stakeholders involved in the resolution plan.”

Since section 31(1) seems to offer a hint that the resolution plan will be binding on those who are involved in the resolution plan, hence an inference could be drawn that a creditor who has failed to submit its claim (inadvertently or otherwise) during the permissible period was not involved, and thus not bound by the resolution plan.

Further, in addition to filing an appeal before appellate authorities as per the provisions of the Code (the grounds for appeal does not seem to suggest clearly if a case of non-submission of claims is covered as a ground), a creditor may choose to resort to article 300A of the Constitution of India (since non-obstante nature of the Code cannot override the constitutional provisions), which states as follows:

“..No person shall be deprived of his property save by authority of law..”

One may view that the above phrase “authority of law” to include the Code as well, however, such reading would isolate creditors (who have not filed their claims as per the CIRP Regulations) with no remedy for their bona fide claims.

In light of the aforementioned relevant statutory provisions and discussion, there seems to be a lack of clarity with respect to the status of claims of creditors who have not filed their claims as per the CIRP Regulations, and the statutory remedy available to them.

– Bhavin Gada & Manendra Singh