The Adjudication of Disputed Claims Under the IBC: A Lacuna Left Unattended?

[Preksha Mehndiratta and Anchit Jasuja are 2nd year law students at Gujarat National Law University]

The development of the clean slate approach in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. has the effect of discharging the corporate debtor of all undecided claims including those claims which are disputed. Thus, it becomes important for the Corporate Insolvency Resolution Process (‘CIRP’) framework to have a mechanism to ascertain the value of the claim before the approval of the resolution plan in order to ensure that the disputed claims could be recovered by the creditors.

The Insolvency and Bankruptcy Code, 2016 (‘IBC’) is silent on the appropriate authority which would exercise adjudicatory functions to adjudicate the disputed claims. The Supreme Court in Essar Steel allowed a resolution plan to admit disputed claims at the notional value of INR 1, which would have to be paid contingent to the outcome of proceedings after the value of the claim has been determined by the appropriate forum. However, for resolution applicants who do not wish to take the risk of admitting claims whose value is yet to be decided, the silence of the IBC in providing for an adjudicatory mechanism to settle disputed claims becomes problematic. 

In light of this silence, the authors highlight the lacunae created in the IBC with regard to deciding disputed claims by analysing the authority of the resolution professional and adjudicating authority in deciding such claims. Further, the authors also look at the resolution framework in foreign jurisdictions to propose methods to fill the adjudicatory lacunae.

Resolution Professional as the Adjudicator

The Supreme Court in  Swiss Ribbons Pvt. Ltd. v. Union Of India held that the resolution professional has the duty to receive and collate all the claims submitted by the creditors. However, the court observed that the resolution professional does not have quasi-judicial powers, but only administrative powers. Even when she exercises her discretion in verifying claims, it is only in her administrative capacity. This means that she cannot decide to reject the submitted claims.

In Prasad Gempex v. Star Agro Marine Exports Pvt. Ltd., the resolution professional had reduced the value of a disputed claim submitted by the creditor. Relying on Swiss Ribbons, the Tribunal held that since the resolution professional does not have any quasi-judicial power, she would not have the jurisdiction to decide or adjudicate upon the claim submitted by an operational creditor. Since the resolution plan had been approved, the Tribunal allowed the creditor to continue the proceedings in other fora to determine the value of the claim by relying on section 60(6) of the IBC. Such an approach has also been adopted in cases such as Mr. S. Rajendran, Resolution Professional v. Jonathan Mouralidarane.

In this context, it is important to take note of regulation 14 of the Indian Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (‘CIRP Regulations’) which grants the resolution professional the power to “make the best estimate” of the claim if the amount claimed by a creditor is imprecise due to contingencies. Thus, it appears that a resolution professional would have the jurisdiction to estimate the value of a disputed claim which could be reviewed by the adjudicating authority but in practice, the existence of such jurisdiction has been consistently denied by the courts.

Adjudicating Authority as the Adjudicator

Section 60(5) of the IBC grants the adjudicating authority with the power to entertain claims made by or against the corporate debtor. However, the Tribunal in Sri Krishna Constructions v. Vasudevan, R.P. of Tiffins Barytes Asbestos & Paints Ltd. has held that the adjudicating authority cannot be turned into a forum to settle disputed claims which are ongoing in court proceedings. Further, it has also been held in Roma Enterprises v. Mr. Martin S.K. Golla, Resolution Professional that when the adjudication of a disputed claim requires the adjudicating authority to determine issues of fact, then the adjudicating authority would not be inclined to decide the disputed claim. Thus, while section 60(5) grants wide jurisdiction to the adjudicating authority, such jurisdiction has not been interpreted to include the jurisdiction to decide disputed claims.

The role of the adjudicating authority in deciding disputed claims has also been reduced by the Supreme Court’s judgement inM/s. Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Ors. where it held that while section 60(5) of the IBC confers wide jurisdiction on the adjudicating authority, such a power cannot be stretched to include questions of public law. In the obiter dicta of the decision, the Supreme Court while explaining the scope of ‘questions of public law’ stated that a case pending before the Income Tax Appellate Tribunal would fall outside the jurisdiction of the adjudicating authority. Thus, the obiter dicta suggests that certain proceedings which may determine the value of a disputed claim would fall outside the jurisdiction of the adjudicating authority.

While the jurisdiction of the adjudicating authority has been interpreted to exclude the determination of the value of a disputed claim, this role has been given to courts outside the CIRP framework. For instance, in SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd. the Tribunal found that the adjudication of a counter claim in arbitration requires proper pleadings, consideration of parties’ position and recording of evidence, which could not be done before the adjudicating authority. The Tribunal held that since the proceedings before the adjudicating authority are summary in nature, the adjudication of the disputed claim for the determination of the value of the claim must continue in arbitration. This has been reiterated in Encote Energy (India) Pvt. Ltd. v. V. Venkatachalam where it was held that it was not possible for the adjudicating authority to decide a claim on the basis of disputed facts, which have to be decided by “a court of competent jurisdiction.”

Thus, the jurisdiction of the adjudicating authority has been interpreted to exclude the jurisdiction to decide a disputed claim especially when the determination of the adjudicating authority would require it to decide a question of evidence or fact.

Other Fora as Adjudicators

Since the adjudicating authority has shown a reluctance to decide disputed claims, adjudicatory fora outside the CIRP framework are tasked with determining the value of disputed claims. These adjudicatory fora can include courts, arbitral tribunals, specialized tribunals and other quasi-judicial authorities. The reliance on other fora to adjudicate disputed claims may cause some claims to not be adjudicated in time for them to be acknowledged in the resolution plan which has been seen in cases such as Sirpur Paper Mills Ltd. v. I.K. Merchants Pvt. Ltd where a proceeding that was set aside was not decided in time for the claim to be acknowledged in the resolution plan.

To tackle this problem, an interesting approach seems to have been adopted in SBL Construction Pvt. Ltd. v. IVRCL Limited where even though an arbitral award had been challenged under section 34 of the Arbitration and Conciliation Act, 1996, the Tribunal directed the resolution professional to admit the claim based on that award, subject to an irrevocable undertaking through an affidavit submitted by the creditor, to return the amount paid under the resolution plan if the proceeding is decided against the creditor. However, such an approach forces a resolution applicant to bear the risk of a disputed claim being decided against him and also undermines the goal of the IBC to provide a clean slate for the corporate debtor after the approval of the resolution plan.

Filling the Gap

Under section 1141 and section 502(e) of the United States Bankruptcy Code, undetermined disputed debts are discharged upon the approval of the reorganization plan similar to the discharge of disputed debts under Essar Steel. However, in the United States, section 502(c) grants bankruptcy courts the power to estimate the value of a disputed claim or a contingent claim through a summary procedure. In estimating the value of a disputed claim, bankruptcy courts have been held to have broad discretion so as to enable the adjudication of claims within the insolvency framework. This is in contrast to the approach adopted in India where the adjudicating authority has pointed to the inadequacy of a summary procedure in deciding disputed claims.

Another method to address the adjudicatory lacunae is to empower the resolution professional to make an estimation of a disputed claim. This is prevalent in jurisdictions such as Australia, where it has been held in Adelaide Brighton Cement Ltd. that the administrator (the equivalent of resolution professional) would have to consider the evidence and the opinions of experts to calculate an estimated value of the disputed claim. In case an administrator is unable to estimate the value of the claim, she may refer the question to the bankruptcy court. As we have noted, such a power exists with the resolution professional even in India under regulation 14 of the CIRP Regulations. However, the absence of quasi-judicial powers of a resolution professional has led to a reluctance by the adjudicating authority in accepting the estimation of disputed claims by the resolution professional.

Conclusion

The silence of the IBC in determining a mechanism for adjudication of disputed claims has led to fora outside the CIRP framework becoming the primary adjudicatory forum. The narrow interpretation of section 60(5) of the IBC and the clog of the National Company Law Tribunals due to insolvency petitions makes it impracticable for the adjudicating authority to make an estimation of all disputed claims. At the same time, adjudication of disputed claims outside the CIRP framework is ill-equipped to adjudicate upon disputed claims which is also inconsistent with the objective of the IBC which is to enable resolution in a “time-bound manner”. 

Thus, it has become important that a mechanism of adjudication of disputed claims be evolved within the CIRP framework. Until that happens, the CIRP framework under the IBC lacks preparedness to safeguard the interests of creditors submitting disputed claims.

Preksha Mehndiratta & Anchit Jasuja

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