Adjudication of Third Party “Claims” by NCLT – Insolvency/Bankruptcy/Restructuring

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In one of the recent judgments, the still controversial question of whether the National Company Law Tribunal (“NCLT”) has the power and jurisdiction to decide whether third party claims have ultimately been appeased. Since the introduction of the Insolvency and Bankruptcy Code, 2016 (“IBC”), candidates for resolution under the IBC have, in resolution plans, addressed various issues governing the reconstitution of the debtor company. To this end, it is not uncommon for resolution plans to offer to address claims from various third parties, including government assessments, landlord/lease agreements, employee assessments. Third-party claims can take many forms.

It is therefore relevant to take into account the intention of the legislator when defining “claim” and “debt”. Under the IBC, a creditor has the right to file a claim for debts owed to them. Subsection (10) of Section 3 of the IBC defines a creditor as any person to whom a debt1 is due and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder.

The definition clarifies that a decree holder would constitute a creditor who has the right to enforce a claim in the insolvency of the debtor company. However, this does not clarify the position of a litigant/disputing party before the proceeding is decreed. Whether such a litigant would constitute a “creditor” for the purposes of the IBC eluded the Indian courts for some time.

The National Company Law Appeal Tribunal (“NCLAT”) in Dynepro Private Limited v. MV Nagarajan2 (“Dynepro“) as well as in ‘Binani Industries Limited Vs Bank of Baroda & Anr.3 was asked to respond whether NCLT can rule on the question of title or ownership of the assets held by the debtor company. In the case of Dynepro, several parties claimed ownership of assets which were the assets of the debtor company. The NCLAT order explicitly provided that “since the claim is not against the debtor company”, the contracting authority has no jurisdiction to entertain such claims under the provisions of section 60 of the IBC.

Consider the provisions of paragraph (5) of Article 60 of the IPC, reproduced as follows:

(5) Notwithstanding anything to the contrary contained in any other law currently in force, the National Company Law Tribunal has jurisdiction to hear or dispose of:

(a) any claim or proceeding by or against the debtor body corporate or body corporate;

(b) any claim formed by or against the debtor legal entity or body corporate, including claims by or against any of its subsidiaries located in India; and

© any question of priority or any question of law or fact, arising out of or in connection with the resolution of the insolvency or the proceedings for the winding up of the debtor company or body corporate under this Code.

Arbitration under Article 60(5) does not appear to explicitly determine ownership issues, but has included the determination of claims, including relating to the transfer of assets in the possession of the debtor company. Subsection (6) of Section 3 of the IBC defines “complaints” as follows:

“claim” means— (a) a right to payment, whether or not such right is judgmental, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right of recourse in the event of breach of contract under any law then in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, due, not due, disputed, undisputed, guaranteed or not;

From a simple reading of the above, it is clear that “claims” would naturally include all cash claims (where the claimant is entitled to receive certain payments). Operational and financial creditors would fall into this category as persons entitled to receive payments from the debtor company. It is, however, interesting to note that the legislator has also included in its scope claims arising from breach of contract. It would therefore seem that disputing third parties have the right (or even the obligation) to exercise “claims” against the debtor company in its insolvency.

The Supreme Court of India, in the Essar Steel India Creditors Committee Case through its authorized signatory4 (“Esar Affair”), made it clear that the successful resolution candidate who proposes to take over and relaunch the debtor company’s business must have a clear indication of the debtor company’s assets as well as liabilities. It was stipulated that:

“A successful resolution candidate cannot suddenly be faced with ‘undecided’ claims after the resolution plan he has submitted, that would be tantamount to an appearance of a hydra head that would throw the amounts into uncertainty. owed by a potential resolution seeker who successfully takes over the debtor company’s business All claims must be submitted and decided by the resolution professional so that a potential resolution seeker knows exactly what needs to be paid in order to that he can then take over and manage the business of the debtor company. This is what the successful resolution candidate does on a fresh slate, as we have outlined above.”

In light of the foregoing, the Supreme Court of India overturned the judgment of NCLAT in the Essar case in which NCLAT found that the claims continued to be arbitrated and that it was open said claimant to pursue the case in terms of Article 60(6) of the Code. Taking the above into consideration, the Supreme Court of India (three judges) in Ghanshyam Mishra and Sons Pvt. Ltd through an authorized signatory5 held as under:

That once a resolution plan is duly approved by the contracting authority under subsection (1) of Article 31, the claims provided for in the resolution plan will be frozen and binding on the debtor company 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 the resolution plan by the adjudicating authority, all such claims, which are not part of the resolution plan, will remain extinct and no one will have the right to initiate or continue proceedings at the respect of a claim, which is not part of the resolution plan;

In accordance with the statement of the objects and reasons of the IBC which provides for the relaunch of the activity of a debtor company, it is therefore clear that NCLT would have the power and the competence to rule on all questions concerning “claims of a corporate debtor so that the successful resolution candidate can appropriately bid on the assets of the corporate debtor and also provide appropriately for the extinguishment and satisfaction of all claims/liabilities governing the corporate debtor . Further, it appears that where “claims” have been duly considered and provided for by the successful resolution candidate in a resolution plan, these would be binding on all creditors, employees and other stakeholders, in accordance with the provisions of Section 31 of the IBC thereby ending protracted litigation and/or forum shopping.

Needless to add, where the dispute does not constitute a “claim”, no such power or authority would be conferred on the NCLT under the provisions of IBC Section 60(5) or on the claimant for resolution. to provide in respect thereof in a proposed resolution plan.

Footnotes

1 “debt” means a liability or obligation in respect of a claim owed by any person and includes financial debt and operating debt;

2 Order of 30and January 2019 in Company Appeal (AT) (Insolvency) No. 229 of 2018

3 Order of ___________ in Company Appeal (AT) (Insolvency) No. 82 of 2018

4 Order of November 15, 2019

5 Order of April 13, 2021

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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