[Praveen Sharma is a 5th Year Student at MNLU Mumbai]
Earlier this month, in RPS Infrastructure Ltd. v. Mukul Kumar (2023INSC816), the Supreme Court addressed a crucial issue concerning the timing of claims in the corporate insolvency resolution process (CIRP). The Court was deciding on the question of whether a claim relating to an arbitral award, undergoing an appeal process under section 37 of the Arbitration and Conciliation Act 1996 (Arbitration Act), could be accepted subsequent to the committee of creditors (COC) granting its approval to the resolution plan. The Supreme Court held that admitting claims after the COC has already accepted a resolution plan, even though the adjudicating authority has yet to approve the plan, would make the CIRP an endless process.
This post analyses this judgment, offering insights into how it represents a crucial stride towards preventing an interminable CIRP and upholding the fundamental principle of time as an essence of the Insolvency and Bankruptcy Code, 2016 (IBC).
Background of the Case
Over an issue on misconduct in advertising between RPS Infrastructure Pvt. Ltd and KST Infrastructure Private Limited, RPS had sought reference to arbitration. On 2 May 2011, an arbitration award was passed in the favor of RPS. Aggrieved by the award, KST filed a petition under section 34 of the Arbitration Act.
In the meantime, CIRP was initiated against KST Infrastructure, i.e., the corporate debtor, in respect of its three real estate projects. An application under section 7 of the IBC was admitted by the adjudicating authority on 27 March 2019. Following this, on 11 July 2020, the resolution plan submitted by KST Whispering Heights Residential Welfare Association was approved by the COC by a majority vote of 80.74%.
On 19 August 2020, RPS had made a notification about its pending claim arising from the arbitral award against KST Infrastructure. However, the interim resolution professional (IRP) declined the claim, citing that the submission deadline was set at 90 days from the commencement of the CIRP, and the applicant had exceeded this timeframe by 287 days, with the COC having already approved the resolution plan. RPS filed an application before the National Company Law Tribunal (NCLT) seeking consideration of its plan on merits.
The NCLT granted the RPS relief on 3 November 2020. The decision was based on three key reasons: firstly, the claim should have been in the corporate debtor’s records; secondly, if those records were unavailable, KST was obliged to obtain and verify them; and finally, since the claim was announced in public newspapers, RPS might not have been aware of it.
Subsequently, the IRP filed an appeal before the National Company Law Appellate Tribunal (NCLAT) challenging the NCLT’s order. The NCLAT overturned the decision and held that IRP had adhered to regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 and emphasised that RPS had ample opportunity within the mandated timeframe to submit its claim. The NCLAT observed that acceptance of new claims at this stage could potentially jeopardise the resolution plan that had already received the COC’s approval.
Observations of the Supreme Court
The Supreme Court affirmed the NCLAT’s stance that the IRP had followed the due process for determining the liabilities of the corporate debtor, KST. The Court placed the onus on RPS for failing to recognize the ongoing CIRP and admonished that admitting claims following the COC approval could prolong the CIRP indefinitely.
Significance of the Judgement
The Court in this judgement has unequivocally emphasised the crucial principle that the IBC is inherently a ‘time-bound process’. RPS’s contention based State Tax Officer v. Rainbow Papers Ltd. was that there should be a provision within the resolution plan to account for contingent claims. Going by this perspective, if the appeal is ultimately dismissed, and the award is finalised, any claim made by RPS not covered under the contingent claim provision would lose its standing.
Nevertheless, it is imperative to recognise that the incorporation of arrangements for contingent claims was unnecessary in this instance, given that the resolution plan had been meticulously crafted based on the information memorandum. Therefore, the Supreme Court’s reliance on the Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta, which cautioned against admitting claims subsequent to the COC approving the resolution plan, conforms to the statutory intent of the IBC.
It is crucial to emphasize that the Supreme Court did not immediately adopt the stance that claims submitted after approval by the COC ‘must not’ be entertained. Instead, it acknowledged the possibility of extending the timeframe under specific circumstances. The Court emphasised that such extensions should be evaluated on a case-by-case basis, contingent upon the individual merits of each case. In the present context, the Supreme Court aptly deemed the 287-day delay in filing the claim in the present case as significant delay. Furthermore, the Court judiciously employed the term ‘vigilant’ in asserting that RPS should have exercised vigilance in recognising KST’s insolvency proceedings. This rationale stems from the expectation that RPS should have been aware of KST’s involvement in the CIRP and subsequently should have initiated their claim. The overarching concern is that allowing claims following a resolution plan’s approval could potentially open the door for unfounded claims to disrupt the process.
It is worth emphasising that while the COC had approved the plan, it was still pending approval from the adjudicating authority. The Supreme Court adopted the position that the fact that the plan was pending approval of the adjudicating authority should not result in a perpetual oscillation, which would effectively transform the CIRP into an unending ordeal. Implicitly, this underscores the Court’s continued respect for the commercial judgment exercised by the COC, upholding the significance of the COC’s approval in the CIRP Process.
Conclusion
In a resounding verdict, the Supreme Court has taken a decisive stride towards upholding the time-bound nature of the IBC. In doing so, it has reaffirmed the significance of procedural diligence and the vital role of the IRP. The Court rightly observed that the IRP had meticulously followed the due process in claim collection, thereby placing a critical onus on claimants like RPS Infrastructure to exercise vigilance in their submissions. The glaring delay of 287 days in this case serves as a stark reminder of the potential pitfalls of admitting claims after the approval of the COC, which could indeed open the floodgates to an infinite array of claims, plunging the CIRP into an unending abyss.
This judgment represents a pivotal milestone in ensuring the seamless and time-bound execution of the CIRP. It sends a strong signal to corporations and individuals to remain vigilant regarding the ongoing CIRP involving their stakeholders. As a result, this ruling stands as a formidable bulwark against the looming spectre of infinite CIRP.
– Praveen Sharma