[Shubham Jain and Vishvesh Vikram are BA.LLB (Hons.) students at National Law University Delhi]
The limits of the discretion which can be exercised by a resolution professional with regard to adjudication of claims of creditors under the Insolvency Code remain to be tested. The National Company Law Appellate Tribunal (‘NCLAT’) in Saraogi Udyog v Vedanta Ltd (20 August 2018) refused to interfere with the Resolution Professional’s discretion to determine the quantum of debt owed to a creditor.
The Insolvency and Bankruptcy Code, 2016 (‘Code’) allows for a dispute between an operational creditor and a corporate debtor to be resolved before an insolvency application is admitted, if the operational creditor in question is the creditor that files the insolvency application under section 9. However, if other creditors have pending disputes with the corporate debtor, they are barred from recovering through any suit or arbitration on account of the moratorium placed under section 14, and the amount that can be claimed by them is determined by the resolution professional.
Once the Corporate Insolvency Resolution Process (‘CIRP’) commences, the only way a creditor can recover is by filing a claim with the resolution professional. Determination of amount of claim is governed by regulation 14 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’) which reads as:
“14. Determination of amount of claim.
(1) Where the amount claimed by a creditor is not precise due to any contingency or other reason, the interim resolution professional or the resolution professional, as the case may be, shall make the best estimateof the amount of the claim based on the information available with him.
(2) The interim resolution professional or the resolution professional, as the case may be, shall revise the amounts of claims admitted, including the estimates of claims made under subregulation (1), as soon as may be practicable, when he comes across additional information warranting such revision.” (emphasis added)
An additional administrative duty is entrusted with the resolution professional under section 20(1) of the Code to manage the affairs of the corporate debtor and protect and preserve the value of its business. Thus, those claims which might have been subjected to a suit otherwise due to the existence of a dispute, now become subject to the resolution professional’s “best estimate”. If, due to any contingency in the amount of claim of any creditor, the resolution professional does not admit the claimed amount, the creditor has no recourse but to submit additional information to her and hope for a revision of claim. If the resolution professional disagrees with the creditor over the quantum of debt owed by the corporate debtor, then the determination of the resolution professional shall prevail. The judicial remedies in such a case, as we discuss later, are ambiguous and limited.
Interestingly, the Committee of Creditors, which can exercise oversight over the conduct of the resolution professional (by way of replacement), has an interest in not letting more claims being admitted. The voting rights in the Committee of Creditors (which is normally composed solely of financial creditors) are in proportion to financial debt owed to the creditor. An increase by revision in financial debt of other creditors will lead to dilution of voting rights of the dominant financial creditors. Even in cases where the claims of operational creditors are substantial in relation to those of the financial creditors, the Committee of Creditors will have an interest in not letting the aggregate operational debt increase.
Further, in the absence of any financial creditors, it is possible to have a Committee of Creditors composed of the 18 largest operational creditors.[1] In such a scenario, similar to the first one, the existing creditors on the Committee will have an interest in not letting many claims be revised. In the last case, since only the 18 largest operational creditors get represented in the Committee of Creditors, an increase in one’s claim may lead to replacement of one operational creditor on the Committee with another. The remedies available to an aggrieved creditor in these situations are not clearly defined.
Once a Resolution Plan is approved by the Committee of Creditors, it must receive the approval of the Adjudicating Authority under section 31 of the Code. The Adjudicating Authority (which is the National Company Law Tribunal (‘NCLT’) in matters of insolvency) can reject a Resolution Plan if it does not fulfill the criteria under section 30(2) of the Code. Further, an appeal against the decision of the Adjudicating Authority lies under section 61(3) on various grounds set forth therein.
The challenge against a resolution professional’s mis-adjudication is more likely to be dismissed on the grounds of “material irregularity”, as the Supreme Court has interpreted the term very narrowly in Keshaedeo Chamria v. Radha Kissen Chamria. However, it is possible to read into these provisions a right of creditors to get their disputes resolved by an independent judicial authority under clause (b) of section 30(2) or clause (iii) of section 61(3). But the stage at which such an appeal is concerned only deals with setting aside the Resolution Plan, which the courts might deem to be a drastic measure merely to revise the claims of a few creditors.
For this very reason, the NCLAT did not decide the issue when it was raised in Saraogi. Once the Resolution Plan has been passed by the Committee of Creditors and approved by the Adjudicating Authority, the possibility of it being set aside merely because a few creditors disagreed with the adjudication made by the Resolution Professional. The judgment by NCLAT explicitly states in consequentialist terms “[t]he ‘Resolution Plan’ having already been approved at different levels and already acted upon, we are not inclined to decide individual claim in these appeals.”
Approach of Foreign Jurisdictions
The UNCITRAL Legislative Guide on Insolvency, which recommends practices and the institutional framework that should be adopted by countries to best handle insolvency resolution, states that the insolvency representative should be required to give the reasons for her decision in writing when the claim of a creditor is denied or only a part of it is admitted. Further the Guide also states that remedies should be made available to creditors in case of disagreement with the insolvency representative by way of allowing them to request review by court of the acts of the insolvency representative which are not subject to approval of the creditors. Recommendation 180 of the Guide goes on to further state that the insolvency law should permit even an interested party to dispute a submitted claim and also the claim to be reviewed by court on request. Even the World Bank Report on Principles for Effective Insolvency and Creditor/ Debtor Regimes clearly states that “there should be procedures for appellate review that support timely, efficient, and impartial resolution of disputed matters. As a general rule, appeals do not stay insolvency proceedings, although the court may have power to do so in specific cases.”
The United Kingdom and Singapore have recently enacted new insolvency laws which came into force in April and May 2017 respectively. The administration proceedings in British insolvency law, governed primarily by the Insolvency Act 1986, are analogous to Indian CIRP. The administrator (appointed to preside over the process of restructuring), similar to the resolution professional in India, has the authority under Rule 15.33 of the Insolvency Rules 2016 (U.K.) (‘Rules’) to decide the quantum of debt owed by the insolvent debtor, and to verify any claim submitted by a creditor in that respect. The voting share of a creditor is also decided on the basis of value of debt owed to the creditor.
Unlike the Indian CIRP, if the administrator has rejected the proof given by a creditor of her own debt, the creditor can apply to the court contesting the same. The administrator can allow votes to be cast by marking it as objected when she is in doubt about the claim. These objected votes can be declared invalid later if the claim is later rejected. The decision of administrator regarding the claim of creditors for the purposes of voting can be appealed in a court and if the court reverses the decision of the administrator or varies it or if the votes are declared invalid, the court can order another decision procedure to be initiated or make any other order which it thinks “just”.[2]
Similarly in Singapore, during the process of judicial management (analogous to Indian CIRP), a creditor can contest the decision of the insolvency representative (judicial manager in case of Singapore) and approach the court, while the insolvency proceedings carry on normally with a separate set of ‘objected’ votes counted for substantive matters. In addition to this, following the UNCITRAL Guide, the judicial manager under Regulation 80 of Companies Regulation (Singapore) is required to submit reasons in writing for rejecting the proof, and the Court, on hearing the appeal against the order, can admit, vary or reject the creditor’s claim.
Moreover, unlike in India, in UK and Singapore the committee of creditors or even the entire body of creditors do not have the power to remove the insolvency representative (i.e the administrator or the judicial manager as the case may be) from office unilaterally. The only recourse available to them if they think that the insolvency representative has been acting unfairly is to go to the court with their grievance and then it is up to the court as to what action needs to be taken, if at all any, against the administrator. Thus, the potential situation where the committee of creditors having an interest in not letting more claims be admitted exercise their oversight over the conduct of resolution professional by way of replacement, as discussed above in case of India, cannot arise in UK or Singapore.
Possible Reconstruction of the Code
Merely because the NCLAT declined to interfere with the Resolution Plan after it received approval from the Adjudicating and Appellate Authorities cannot mean that creditors in general cannot have any remedy against an unfavourable adjudication by the Resolution Professional. One possible way of reading the Code in a manner so as to allow aggrieved creditors to appeal against the determination of quantum of debt by the resolution professional is by restrictively reading the scope of moratorium under section 14. A right of appeal against the adjudication by the resolution professional can be read into section 14(1)(a) by the court to harmonize the process and bring Indian CIRP in line with internationally recognized principles. The application of moratorium has been restricted in the past as well.
While the moratorium may remain effective for institution and continuation of all suits and proceedings against the corporate debtor, it may exclude a suit contesting the adjudication made by the resolution professional. In the meanwhile, the resolution professional can simply mark the balance of what is claimed and what was admitted as “objected”, in a manner similar to the UK procedure.
The court may also allow parties with leave to pursue alternate remedies in cases of a dispute by restrictively reading the scope of moratorium by narrowly interpreting the word “including” in section 14(1)(a) to mean only suits for execution of judgments or decrees, and suits for recovery, but not suits for determination of quantum of debt. Such a reading may also allow international parties to continue with international arbitration, thereby resolving many concerns regarding cross-border insolvency. If the dispute is not resolved within the period of the CIRP, the relevant creditors may be excluded from the purview of the Resolution Plan, and the debts may be carried forward to the new management created from the Resolution Plan, probably by leave of the court. If the matter goes to liquidation, then the disputing creditor may submit their claim directly at time of liquidation, which the courts have allowed and has been discussed elsewhere.
In the view of the authors, the second remedy may have to be disregarded in the interest of efficiency, as an insolvent party will have to bear the additional burden of pursuing multiple legal proceedings. However, creditors’ rights cannot be wholly disregarded for the purposes of efficiency, and an appellate mechanism to review the adjudication made by a resolution professional is strongly needed.
– Shubham Jain & Vishvesh Vikram
[1] IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Reg. 16(2)(a).
[2] Refer to Rule 14.8, Rule 15.33(3) and Rule 15.35(3) of the UK Insolvency Rules 2016.