Sirpur Paper Mills Limited Vs. I.K. Merchants Pvt. Ltd. - An operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus for chasing the fruits of an Award even where a challenge to the Award is pending in a Civil Court.

HC Calcutta (07.05.2021) in Sirpur Paper Mills Limited Vs. I.K. Merchants Pvt. Ltd. [A.P. 550 of 2008] held that,

• Section 36(2)# marks a significant departure from the erstwhile provision in clarifying that filing of an application for setting aside of an Award under Section 34 shall not by itself make the Award unenforceable unless the Award is stayed by an order of Court in an application made in the manner provided under Section 36(3) of the Act

• The most significant clarification of the Supreme Court in Kochi Cricket was expressed in the following words:-

• “Since it is clear that execution of a decree pertains the realm of procedure, and that there is no substantive vested right in a judgment debtor to resist execution, Section 36, as substituted, would apply even to pending Section 34 applications on the date of commencement of the amendment Act.”

• This can be seen as a necessary and an inevitable fallout of the IBC in order to prevent, in the words of the Supreme Court, a “hydra head popping up” and rendering uncertain the running of the business of a corporate debtor by a successful resolution applicant. In essence, an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus for chasing the fruits of an Award even where a challenge to the Award is pending in a Civil Court.

 

# The Arbitration and Conciliation Act., 1996

 

Excerpts of the order;

# 1. This is an application for setting aside of an Award dated 7th July, 2008 passed by a learned Sole Arbitrator in arbitration proceedings between the respondent (claimant in the arbitration) and the petitioner herein. The petitioner before this court is the Award-debtor and the respondent before the learned Arbitrator.

# 2. According to the petitioner, the present proceeding under Section 34 of The Arbitration and Conciliation Act, 1996, has become infructuous by reason of the management of the petitioner company (the Award-debtor) being taken over by a new entity following the approval of a Resolution Plan of the petitioner company by the National Company Law Tribunal (NCLT) under The Insolvency and Bankruptcy Code, 2016 (IBC). The petitioner’s case is that by reason of the subsequent developments after the impugned Award, the application for setting aside of the Award is not maintainable any more.

# 6. Counsel relies on Swiss Ribbons Pvt. Ltd. vs Union of India; (2019) 4 SCC 17 for the proposition that a default would occur only when a debt, arising from a claim becomes due and payable and is not paid by the debtor. Counsel submits that in the present case, the respondent being the operational creditor does not have any claim since nothing is due from the petitioner (corporate debtor) in view of the pendency of the Section 34 application.

# 7. Upon hearing learned counsel appearing for the parties, the question which has to be answered in the present proceeding is whether the claim of an Award-holder can be frustrated on the approval of a Resolution Plan under Section 31 of The Insolvency and Bankruptcy Code, 2016. The related issue is whether a court sitting in a Section 34 (of the 1996 Act) jurisdiction can recognize and accept the futility of the Section 34 proceedings on the claim of the Award-holder being extinguished upon approval of the Resolution Plan and a resolution applicant taking over the management of the Award-debtor.

# 8. This court must however travel the road to the adjudication of the above issues by first dealing with the roadblock of the two earlier orders by which the contentions of the Award-debtor on the relevance of the IBC were rejected. 

The Orders:

# 9. By a judgment dated 10th January, 2020 on the question whether the present application under Section 34 of the Act should be kept in abeyance following invocation of the provisions of the IBC against the petitioner/Award-debtor, this Court held that corporate insolvency resolution proceedings (CIRP) cannot be used to defeat a dispute which existed prior to initiation of the insolvency proceedings. It was further held that the respondent Award-holder could not have filed a claim before the National Company Law Tribunal since there was no final or adjudicated claim on the date of initiation of the CIRP against the Award-debtor.

# 10. The Award-debtor applied for recalling of the judgment which was rejected by this court by an order dated 3rd February, 2020. In rejecting the application, it was clarified that the question on which the judgment was pronounced was whether the Section 34 application can be proceeded with in view of the Award-holder not having filed a claim in the resolution proceedings before the NCLT. The court also held that the apprehension of the Award-debtor that it may risk the effect of the observations made by the Court at the time of enforcement of the Award was misplaced since the Court had not gone into the merits of the application.

# 11. This is the second round in the recourse against the Arbitral Award dated 7th July, 2008 where the petitioner/Award-debtor has urged that the application for setting aside of the Award cannot be proceeded with after approval of the Resolution Plan in relation to the petitioner (corporate debtor before the NCLT). The petitioner has relied upon Essar in respect of its renewed plea before the court. This court is of the view that the three member Bench decision of the Supreme Court in Essar constitutes a significant -and subsequent- development of the law in relation to the fate of existing claims during and after corporate insolvency resolution proceedings which, in turn, would constitute a sufficient reason for this court to re-visit the judgment dated 10th January, 2020. It should be stated that the order dated 3rd February, 2020 rejecting the application for recalling of the judgment made it clear that the court had refrained from expressing any  views on the maintainability of the Section 34 application since the matter under consideration was wholly on a different aspect. The reason for having a re-look at the judgment at this stage is the pronouncement of the law by the Supreme Court in Essar and more recently in a judgment delivered on 13th April, 2021 in Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited; 2021 SCC OnLine SC 313, wherein it was held that once a Resolution Plan is approved, a creditor cannot initiate proceedings for recovery of claims which are not part of the Resolution Plan.

# 12. A decision-making process must be attuned to a dynamic legal landscape shaped by legislative intervention and judicial pronouncements.The most predictable aspect of law is its constant evolution. It would hence be judicial short-sightedness, even stubbornness, to hold on to a view when the law, in the meantime, has transformed into a different avatar.

# 15. In Essar, the Supreme Court held that a Resolution Plan, once approved under Section 31 of the IBC, is binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders, as emphasized in paragraph 107 of the report which is reproduced below;

• “107. For the same reason, the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the Resolution Professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with “undecided” claims after the Resolution Plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the Resolution Professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, NCLAT judgment must also be set aside on this count.”

# 16. . . . . In answer to the issue of undecided claims, the Supreme Court expressed its view in paragraph 107 of the Report which has been set out above. The view of the Court was that the successful resolution applicant who takes over the business of the corporate debtor must start running the business of the corporate debtor on a “fresh slate”. This view has been reiterated in the recent three-member decision of the Supreme Court in Ghanshyam Mishra vs Edelweiss Asset Reconstruction Company Limited. This decision considered Section 31 of the IBC and held that once the Resolution Plan is approved by the Adjudicating Authority, it shall be binding on the corporate debtor and its employees, members etc. since revival of the corporate debtor is one of the dominant purposes of the IBC. The Court was of the view that any debt which does not form a part of the approved Resolution Plan shall stand extinguished.The conclusions of the Supreme Court in paragraph 95 of the Report reiterates that once the Resolution Plan is duly approved by the Adjudicating Authority, claims which form part of the Resolution Plan shall stand frozen and would be binding on the corporate debtor. More significantly, the Court opined that claims which are not part of the Resolution Plan shall stand extinguished and no person will be entitled to initiate or continue any proceeding in respect to a claim which is not a part of the Resolution Plan.

# 17.  . . . . The aforesaid provisions of the IBC read with Essar and Edelweiss makes it evident that for a claim to be considered by the Resolution Professional and later by the Committee of Creditors for approval of the Resolution Plan, the said claim must feature in the Information Memorandum prepared by the Resolution Professional and provided to the resolution applicant which will ultimately take over the business of the corporate debtor.

# 21. The next issue which would naturally fall for consideration is whether the respondent could have lodged and pursued its claim before the NCLT when the impugned Award was challenged by the Award-debtor/petitioner in this Court on 31st October, 2008. The respondent/ Award-holder contends that there was no scope for the respondent to approach any other forum since the impugned Award was automatically stayed upon filing of the Section 34 application. The respondent has relied on Section 34 of the 199 Act as it stood prior to amendment of 2016 which came into effect from 23rd October, 2015. The merit of the stand taken must be seen in the light of Section 36 which has been modified and added by the 2016 amendment.The new Section 36 and sub-section (2) thereunder requires the Court to grant an order of stay of the operation of the Arbitral Award in accordance with Section 36(3) on a separate application for stay taken out by the Award-debtor. Section 36(2) marks a significant departure from the erstwhile provision in clarifying that filing of an application for setting aside of an Award under Section 34 shall not by itself make the Award unenforceable unless the Award is stayed by an order of Court in an application made in the manner provided under Section 36(3) of the Act. In Board of Control for Cricket in India vs Kochi Cricket Pvt. Ltd.; (2018) 6 SCC 287 the Supreme Court held that Section 36, prior to the amendment, can only be seen as a “clog” on the right of a decree-holder who is unable to execute the Award in his favour in the absence of the conditions set forth in Section 36. The Supreme Court further clarified that the aforesaid does not translate to a corresponding right in the judgment debtor to stay the execution of the Award. The most significant clarification of the Supreme Court in Kochi Cricket was expressed in the following words:-

• “Since it is clear that execution of a decree pertains the realm of procedure, and that there is no substantive vested right in a judgment debtor to resist execution, Section 36, as substituted, would apply even to pending Section 34 applications on the date of commencement of the amendment Act.”

The dictum hence is clear with regard to Section 34 applications which were pending at the time of the judgment in Kochi Cricket; namely that such pending applications would also be governed by the new Section 36, as amended. In other words, the petitioner/Award-debtor would not have the benefit of the Award being automatically stayed upon filing of the application and the Award-holder would be free to enforce the Award against the Award-debtor in the absence of an application for stay of the award under the amended Section 36 of the Act. The opinion of the Supreme Court in Kochi Cricket would also militate against the argument that the Award Holder/ Respondent before this Court was rendered immobile in the matter of pursuing its claim in respect of the Award under the 1996 Act or before a forum contemplated under the IBC or otherwise. The decisions cited on behalf of the respondent in Swiss Ribbons Pvt. Ltd. vs Union of India; (2019) 4 SCC 17 has therefore to be seen in the context as discussed above.

# 22. Since this court had placed reliance on K. Kishan in the judgment dated 10th January, 2020, the said decision should be referred to at this stage. The thrust of the decision in K. Kishan was that the provisions of the IBC should not be used “in terrorem” (in the words of the Supreme Court) against a corporate debtor where there was a pre-existing ongoing dispute between the parties. The concern of the Supreme Court was against the use of the IBC by an operational creditor to extract its due despite an adjudication pending for setting aside of an Award under Section 34 of the 1996 Act on the date of initiation of the corporate insolvency resolution process. The Supreme Court relied on paragraphs 38 and 51 of Mobilox Innovations to opine that one of the objects of the IBC is to ensure that the amount of an operational debt does not enable operational creditors to put the corporate debtor prematurely into the insolvency resolution process or initiate the same for extraneous considerations. The Supreme Court sought to create a protective barrier around corporate debtors in cases where the provisions of the IBC were invoked by an operational creditor by jettisoning an ongoing and pending dispute for setting aside of an Arbitral Award under the 1996 Act. The facts of the present case are quite the opposite to that of K. Kishan. The corporate debtor/Award-debtor before this court seeks to take recourse in the culmination of the CIRP and the approval of the Resolution Plan whereas the Award-holder/operational creditor seeks to proceed with the application for setting aside of the Award. As stated above, the view of this court as to a “pre-existing dispute” in the judgment of 10th January, 2020 must be revisited -and revised- in the light of both Essar and Edelweiss.

# 23. The view of the Supreme Court as crystallized in Essar and Edelweiss is that pre-existing and undecided claims which have not featured in the collation of claims and consequent consideration by the Resolution Professional shall be treated as extinguished upon approval of the Resolution Plan under Section 31 of the IBC. This can be seen as a necessary and an inevitable fallout of the IBC in order to prevent, in the words of the Supreme Court, a “hydra head popping up” and rendering uncertain the running of the business of a corporate debtor by a successful resolution applicant. In essence, an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus for chasing the fruits of an Award even where a challenge to the Award is pending in a Civil Court.

# 24. Every litigant has a right to argue that an action commenced in a court of law or a statutory forum is not maintainable by reason of the law existing as on that date. A challenge to maintainability of an action must be considered by the court before the substance of the dispute is adjudicated on merits. A court must also decide whether the argument pertaining to maintainability is such that the entire proceeding is rendered infructuous. The present proceeding is precisely such a case where deciding on the merits of the application, i.e. whether the Award should be set aside or sustained, would be a complete waste not only of judicial time as well as of the parties since the claim of the Award-holder has been extinguished upon approval of the Resolution Plan under Section 31 of the IBC. Further adjudication on the legality of the impugned Award cannot lead to its logical conclusion and would hence be irrelevant. The parties would only be compelled to travel the road to further proceedings (appeal, enforcement etc.) without an end-point in the resolution to the dispute or any consequent relief to either of the parties. This surely cannot be the objective of any proceedings before any court of law.

# 25. In view of the above discussion, A.P. 550 of 2008 is disposed of as being rendered infructuous. There shall be no order as to costs.

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Ghanashyam Mishra and Sons Pvt. Ltd. Vs. Edelweiss Asset Reconstruction Company Ltd. - On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished .

Supreme Court (13.04.2021) in Ghanashyam Mishra and Sons Pvt. Ltd. Vs. Edelweiss Asset Reconstruction Company Ltd.  [CIVIL APPEAL NO.8129 OF 2019] held that,

• # 94.  . . . .We also hold, that even if 2019 amendment was not effected, still in light of the view taken by us, the Central Government, any State Government or any local authority would be bound by the resolution plan, once it is approved by the Adjudicating Authority (i.e. NCLT).

• # 95. In the result, we answer the questions framed by us as under:

• (i) That once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor 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 resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;

• (ii) 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect;

• (iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.

• # 130.  . . . .As such, when the resolution plan is approved by NCLT, the claims, which are not part of the resolution plan, shall stand extinguished and the proceedings related thereto shall stand terminated. . . . .

 

Excerpts of the order;

# 57. It could thus be seen, that the legislature has given paramount importance to the commercial wisdom of CoC and the scope of judicial review by Adjudicating Authority is limited to the extent provided under Section 31 of I&B Code and of the Appellate Authority is limited to the extent provided under subsection (3) of Section 61 of the I&B Code, is no more res integra. 

# 58. Bare reading of Section 31 of the I&B Code would also make it abundantly clear, that once the resolution plan is approved by the Adjudicating Authority, after it is satisfied, that the resolution plan as approved by CoC meets the requirements as referred to in subsection (2) of Section 30, it shall be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders. Such a provision is necessitated since one of the dominant purposes of the I&B Code is, revival of the Corporate Debtor and to make it a running concern.

# 59. The resolution plan submitted by successful resolution applicant is required to contain various provisions, viz., provision for payment of insolvency resolution process costs, provision for payment of debts of operational creditors, which shall not be less than the amount to be paid to such creditors in the event of liquidation of the Corporate Debtor under section 53; or the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in subsection (1) of section 53, whichever is higher. The  resolution plan is also required to provide for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, which also shall not be less than the amount to be paid to such creditors in accordance with subsection (1) of section 53 in the event of a liquidation of the Corporate Debtor. Explanation 1 to clause (b) of subsection (2) of Section 30 of the I&B Code clarifies for the removal of doubts, that a distribution in accordance with the provisions of the said clause shall be fair and equitable to such creditors. The resolution plan is also required to provide for the management of the affairs of the Corporate Debtor after approval of the resolution plan and also the implementation and supervision of the resolution plan. Clause (e) of subsection (2) of Section 30 of I&B Code also casts a duty on RP to examine  that the resolution plan does not contravene any of the provisions of the law for the time being in force.

# 60. Perusal of Section 29 of the I&B Code read with Regulation 36 of the Regulations would reveal, that it requires RP to prepare an information memorandum containing various details of the Corporate Debtor so that the resolution applicant submitting a plan is aware of the assets and liabilities of the Corporate Debtor, including the details about the creditors and the amounts claimed by them. It is also required to contain the details of guarantees that have been given in relation to the debts of the corporate debtor by other persons. The details with regard to all  material litigation and an ongoing investigation or proceeding initiated by Government and statutory authorities are also required to be contained in the information memorandum. So also the details regarding the number of workers and employees and liabilities of the Corporate Debtor towards them are required to be contained in the information memorandum.

# 61. All these details are required to be contained in the information memorandum so that the resolution applicant is aware, as to what are the liabilities, that he may have to face and provide for a plan, which apart from satisfying a part of such liabilities would also ensure, that the Corporate Debtor is revived and made a running establishment. The legislative intent of making the resolution plan binding on all the stakeholders after it gets the seal of approval from the Adjudicating Authority upon its satisfaction, that the resolution plan approved by CoC meets the requirement as referred to in subsection (2) of Section 30 is, that after the approval of the resolution plan, no surprise claims should be flung on the successful resolution applicant. The dominant purpose is that he should start with fresh slate on the basis of the resolution plan approved.

# 66. Vide Section 7 of Act No.26 of 2019 (vide S.O. 2953(E), dated 16.8.2019 w.e.f. 16.8.2019), the following words have been inserted in Section 31 of the I&B Code. “including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed”

# 67. As such, with respect to the proceedings, which arise after 16.8.2019, there will be no difficulty. After the amendment, any debt in respect of the payment of dues arising under any law for the time being in force including the ones owed to the Central Government, any State

Government or any local authority, which does not form a part of the approved resolution plan, shall stand extinguished.

# 68. The only question, which remains is, what happens to such dues if they pertain to a period wherein Section 7 petitions have been admitted prior to 16.8.2019. 76. It could thus be seen, that the speech made by Hon’ble Finance Minister while explaining the amendment

could be referred to for ascertaining what was the reason for moving the Bill. The speech can be used for finding out: 

• (1) what were the circumstances in which the amendment was carried out;

• (2) what was the mischief for which the unamended section did not provide; and

• (3) what was sought to be remedied by amended enactment.

# 86. As discussed hereinabove, one of the principal objects of I&B Code is, providing for revival of the Corporate Debtor and to make it a going concern. I&B Code is a complete Code in itself. Upon admission of petition under Section 7, there are various important duties and functions entrusted to RP and CoC. RP is required to issue a publication inviting claims from all the stakeholders. He is required to collate the said information and submit necessary details in the information memorandum. The resolution applicants submit their plans on the basis of the details provided in the information memorandum. The resolution plans undergo deep scrutiny by RP as well as CoC. In the negotiations that may be held between CoC and the resolution applicant, various modifications may be made so as to ensure that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders, the Corporate Debtor is revived and is made an ongoing concern. After CoC approves the plan, the Adjudicating Authority is required to arrive at a subjective satisfaction, that the plan conforms to the requirements as are provided in subsection (2) of Section 30 of the I&B Code. Only thereafter, the Adjudicating Authority can grant its approval to the plan. It is at this stage, that the plan becomes binding on Corporate Debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution Plan. The legislative intent behind this is to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any  surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans, would go haywire and the plan would be unworkable.

# 87. We have no hesitation to say that the word “other stakeholders” would squarely cover the Central Government, any State Government or any local authorities. The legislature, noticing that on account of obvious omission, certain tax authorities were not abiding by the mandate of I&B Code and continuing with the proceedings, has brought out the 2019 amendment so as to cure the said mischief. We therefore hold that the 2019 amendment is declaratory and clarificatory in nature and therefore retrospective in operation.

# 91. It is a cardinal principle of law, that a statute has to be read as a whole. Harmonious construction of subsection (10) of Section 3 of the I&B Code read with subsections (20) and (21) of Section 5 thereof would reveal, that even a claim in respect of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority would come within the ambit of ‘operational debt’. The Central Government, any State Government or any local authority to whom an operational debt is owed would come within the ambit of ‘operational creditor’ as defined under subsection (20) of Section 5 of the I&B Code. Consequently, a person to whom a debt is owed would be covered by the definition of ‘creditor’ as defined under subsection (10) of Section 3 of the I&B Code. As such, even without the 2019 amendment, the Central Government, any State Government or any local authority to whom a debt is owed, including the statutory dues, would be covered by the term ‘creditor’ and in any case, by the term ‘other stakeholders’ as provided in subsection (1) of Section 31 of the I&B Code. 

# 92. The Division Bench of the Rajasthan High Court in D.B. Civil Writ Petition No.9480 of 2019 in the case of Ultra Tech Nathdwara Cement Ltd. vs. Union of India & Ors., by judgment and order dated 7.4.2020 has taken a view that the demand notices, issued by the Central Goods and Service Tax Department, for a period prior to the date on which NCLT has granted its approval to the resolution plan, are not permissible in law. While doing so, the Rajasthan High Court has relied on the judgment of this Court in the case of Committee of Creditors of Essar Steel India Limited through Authorised Signatory (supra).

# 93. The Calcutta High Court in the case of Akshay Jhunjhunwala & Anr. vs. Union of India through the Ministry of Corporate Affairs & Ors. has also taken a view, that the claim of operational creditor will also include a claim of a statutory authority on account of money receivable pursuant to an imposition by a statute. We are in agreement with the views taken by these Courts.

# 94. Therefore, in our considered view, the aforesaid provisions leave no manner of doubt to hold that the 2019 amendment is declaratory and clarificatory in nature. We also hold, that even if 2019 amendment was not effected, still in light of the view taken by us, the Central Government, any State Government or any local authority would be bound by the resolution plan, once it is approved by the Adjudicating Authority (i.e. NCLT).

CONCLUSION

# 95. In the result, we answer the questions framed by us as under:

• (i) That once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor 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 resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;

• (ii) 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect;

• (iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued. 

# 130. In the foregoing paragraphs, we have held that the 2019 amendment to Section 31 of I&B Code is clarificatory and declaratory in nature and therefore will have a retrospective operation. As such, when the resolution plan is approved by NCLT, the claims, which are not part of the resolution plan, shall stand extinguished and the proceedings related thereto shall stand terminated. Since the subject matter of the petition are the proceedings, which relate to the claims of the respondents prior to the approval of the plan, in the light of the view taken by us, the same cannot be continued. Equally the claims, which are not part of the resolution plan, shall stand extinguished.

# 131. In this view of the matter, we find that relegating the appellant to the alternative remedy would serve no purpose. A party cannot be made to run from one forum to another forum in respect of the proceedings and the claims, which are not permissible in law.

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Bank of India & Ors. Vs, Bhuban Madan, Resolution Professional of Ferroy Alloys Corporation Limited - Recovery of credit facilities by Banks during moratorium.

NCLAT (28.05.2021) in Bank of India & Ors. Vs,  Bhuban Madan, Resolution Professional of Ferroy Alloys Corporation Limited [COMPANY APPEAL (AT) (Insolvency) No. 590 of 2020] held that; 

• that the Creditors may chose not to file claim if the NFB Facilities have not matured and decide to submit claim on its maturity after the completion of moratorium period subject to survival of the ‘Corporate Debtor’.

• This Tribunal in a catena of Judgements has held that Banks cannot debit any amounts from the account of the ‘Corporate Debtor Company’ after the Order of moratorium, as it amounts to recovery of amount.

• the Banks cannot freeze accounts nor can they prohibit the ‘Corporate Debtor’ from withdrawing the amount as available on the date of moratorium for its day-to-day functioning. Section 14 of the I&B Code overwrites any other provision contrary to the same and any amount due prior to the date of CIRP cannot be appropriated during the moratorium period.

• “… Once Moratorium has been declared, it is not open to any person including ‘Financial Creditor’ and the Appellant Bank to recover any amount from the account of the ‘Corporate Debtor’, nor it can appropriate any amount towards its own dues”…

• We are of the view that merely because the ‘Corporate Debtor’ had enough liquidity to run the Company as a going concern, the act of the Appellant Banks to adjust the credit balance in the Cash Credit Account towards the debit balance after CIRP commenced, cannot be justified.

• We hold that as ‘Claims’ are already preferred by the Appellant Banks and filed before the RP, they are not entitled to recover the amounts otherwise available in the Credit Accounts or Working Capital Accounts of the ‘Corporate Debtor’

Chronology of the events;

1. 13.09.2011 - CD was granted fund based & non fund based credit facilities by applicant banks.

2. 06.07.2017 - NCLT, Kolkata passed an order for commencement of Corporate Insolvency Resolution Process (CIRP) against M/s. Ferro Alloys (Corporate Debtor) under S. 7 of the Code, filed by Rural Electrification Corporation. K.G. Somani was appointed as the Interim Resolution Professional (IRP).

• Appeals preferred before NCLAT were dismissed.

• The Supreme Court dismissed the Appeal on 11.02.2019.

3. 18.07.2017 - Consortium of Appellant Banks, led by Bank of India, submitted their ‘Claims’.

4.  27.07.2017 -  NCLAT vide Orders dated 27.07.2017 and 09.08.2017 and NCLT Kolkata vide Order dated 10.11.2017, had directed all banks having accounts of the Corporate Debtor to ensure that Corporate Debtor remains a ‘going concern’. Erstwhile RP had also sent various emails to the Appellant banks requesting that working capital limits as on Insolvency Commencement Date should be made available to the Corporate Debtor during the whole course of CIR Process.

5. 08.04.2019 - The COC passed a Resolution in its 22nd meeting to replace the Resolution Professional.

6. 08.07.2019 - NCLT, Cuttack allowed the Application and Mr. Bhuvan Madan was appointed as the RP, who requested the Banks to reverse the amounts remitted by the previous RP during the CIRP.

7. 27.08.2019 -  RP filed an Avoidance Application  CA (IB) 92/CTB/2019 under S. 14 r.w. S. 17 & S.60 (5) of the Code seeking reversal of amounts received by the Appellants Banks during the CIRP.

8. 30.01.2020 - NCLT, Cuttack approved the Resolution Plan submitted by Sterlite Power Transmission Limited.

9. 02.03.2020 - NCLT Cuttack allowed the Application filed by the Respondent (RP) and directed the Appellant Banks to reverse the amounts within 5 weeks.

 

Excerpts of the order;

# 1. This Appeal is preferred by M/s. Bank of India, Central Bank of India, Syndicate Bank and State Bank of India, against the Impugned Order dated 02.03.2020 passed by the Learned Adjudicating Authority (National Company Law Tribunal, Cuttack Bench, Cuttack), whereby the Learned Adjudicating Authority has allowed the Application filed by the Resolution Professional under Section 14 read with Section 17 and Section 60(5) of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as the ‘Code’) with the following directions:-

• “11. (i) Central Bank of India (Respondent No. 1) is directed to reverse the due amount i.e. to the tune of Rs. 1,419.89 lakhs.

• (ii) Syndicate Bank (Respondent No. 2) is directed to reverse the due amount i.e. to the tune of Rs. 326.87 lakhs.

• (iii) Bank of India (Respondent No. 3) is directed to reverse the due amount i.e. to the tune of Rs. 1.827.17 lakhs.

• (iv) State Bank of India (Respondent No. 4) is directed to reverse the due amount i.e. to the tune of Rs. 599.78 lakhs.

• (v) This order shall be complied by all the respondents, within five weeks of receipt of this order.”

Facts in brief:

# 2. Vide Order dated 06.07.2017, the Learned Adjudicating Authority has admitted the Section 7 Application. This Order of Admission was challenged vide Company Appeal (AT) (Insolvency) No. 92 of 2017 and this Tribunal has dismissed the Appeal and concurred with the finding of the Adjudicating Authority. Appeals challenging the Admission Order were dismissed by NCLAT on 08.01.2019 and Supreme Court on 11.02.2019. Subsequently, the ‘Resolution Plan’ was approved on 30.01.2020.

# 3. While so, an Application CA(IB) 92/CTB/2019 was filed by the Resolution Professional seeking direction against the Appellant Banks and Financial Institutions to reimburse all the amounts appropriated by them after the Insolvency Commencement Date, together with the amount appropriated towards interest payments and further to resume the working capital limits as available to the ‘Corporate Debtor’ as on the Insolvency Commencement Date.

Submissions on behalf of the Learned Counsel for the Appellant.

- The ‘Corporate Debtor was granted fund based (Cash Credit Hypothecation Facility ‘CCHF’) and non-fund based facilities (Bank guarantee/LC Facility) of credit through a consortium of lenders comprising the Appellant Banks namely Bank of India (the lead Bank), State Bank of India, Central Bank of India and Syndicate Bank since 13.09.2011. The ‘Corporate Debtor’ created the first charge over its Fixed Assets and Current Assets.

-  This Tribunal vide an Order dated 09.08.2017 directed the Resolution Professional to keep the Company as a going concern and also directed the bankers to co-operate with the Resolution Professional in this regard.

-  The Consortium of Banks submitted their claims on 18.07.2017

-  That all the member banks allowed operation in the account as per the direction of the Hon’ble NCLAT’s order dated 09.08.2017. [Minutes of COC meetings, Annexure R-2, R-3 Pg 20-34 of Rejoinder]

-  The Bills under Lender of Credit (LC) facility maturing during the CIRP were also honored by the erstwhile RP from the revenue generated by the ‘Corporate Debtor Company’ which was making good profits and had accumulated enough cash balance. Hence, the erstwhile RP chose to reduce the utilization of the fund based facilities and had squared off the Cash Credit Facilities with all the Banks.

-  Mr. Bhuvan Madan, the Resolution Professional, had requested the Banks to reverse the amounts remitted by the previous IRP while discharging his duties as per the provisions of IBC. The lenders consortium noted that the operation in the accounts was allowed as per the directions of this Tribunal vide an Order dated 09.08.2017 and the credit was received in the normal course of business. It was the commercial decision of the erstwhile RP to reduce the fund based exposure to the minimum and to hold liquidity cash without any earning to reduce the interest expenses. The ‘Corporate Debtor’ made a profit of Rs. 54.92 Crs., as on 31.03.2018 and Rs. 27.43 Crs. as on 31.03.2019, which shows that the ‘Corporate Debtor’ had enough liquidity to maintain the Company as a going concern. 

-  The Respondent filed CA (IB) No. 92/CTB/2019 alleging that the amount received by the Appellants were preferential transactions as defined under Section 43 of the IBC and that the Appellant has violated Section 14 of IBC. Since, amount received by the Appellants were directly remitted by the Respondent and there was a conscious business decision to reduce the interest expenses as a prudent business manager would do, the amount remitted by the erstwhile RP and received by the Appellant during CIRP does not qualify to be treated as preferential transaction and hence, the amount of such credit is not reversible. . . . . .

-  The Adjudicating Authority in the Impugned Order did not make any observation with respect to preferential transactions under Section 43 of IBC.

-   As per the document detailing the implementation of ‘Resolution Plan’, the total liquidation value is Rs. 305.23 Crs. The liquidation value of the WC consortium is Rs. 210.100 Crs. and the cash available for distribution among all creditors is Rs. 44.47 Crs. So, the share and the cash component ought to be 68.85 per cent of Rs. 45.47 Crs. which is Rs. 31.30 Crs. whereas the distribution pattern allocated is Rs. 4.69 Crs. for the Secured Creditors

-  As per the security holding the Bank should have got Rs. 31.30 Crs. but only Rs. 4.69 Crs. was allocated which is against the spirit of IBC. The admitted claim amount of dissenting Secured Creditors is Rs. 27.54 Crs. against the cash component arrived at Rs. 31.30 Crs. and therefore, the total admitted claim of the dissenting Creditors can be met from the available cash components and no amounts need be reversed. The sharing pattern was never made a part of the ‘Resolution Plan’ and the RP put his own interpretation in devising the distribution pattern which is against the spirit of the Code.

Assessment:

# 8. It is the main case of the Appellant Banks that this Tribunal vide an Order dated 09.08.2017 passed an Interim Order directing the Company to be run as a going concern, engaging all Banks where the Company had accounts, to co-operate with the IRP for operation of the accounts. In compliance of that direction, the erstwhile IRP Mr. K. G. Somani, vide a Letter dated 02.09.2017 requested the Banks to make available the limits which were subsisting as on the date of commencement of the process of Resolution. The LC facility was continued on request of the erstwhile RP and the LC Bills negotiated by the beneficiary Banks were retired by the ‘Corporate Debtor’. The amount was paid by the Company into their Cash Credit Account so that fresh LCs could be opened within the sanctioned limits to purchase necessary raw materials to keep the Company a going concern.

# 9. The Resolution Professional, Mr. Bhuvan Madan after assuming charge as the RP requested the Banks to resume the working capital limits and to reimburse all the amounts which were appropriated. It is the stand of the Appellants that the ‘Corporate Debtor’ did not maintain any Current Account from the date of commencement of the CIRP and hence, the question of appropriation from the Current Account does not arise. Since the Company was a going concern, and generating Profits it did not have any issue in servicing the bills under LC. Since the Company has not been issued any fresh LCs, the liability under LC became NIL. It was strenuously argued by the Learned Counsel for the Appellant that the ratio of ‘Andhra Bank’ V/s. ‘M/s. F.M. Hammerle Textiles Ltd.’ in Company Appeal (AT) (Insolvency) No. 61 of 2018 is squarely applicable to the facts of this case, as it was held in that Order dated 13.07.2018 that the Creditors may chose not to file claim if the NFB Facilities have not matured and decide to submit claim on its maturity after the completion of moratorium period subject to survival of the ‘Corporate Debtor’.

# 10. It is the Respondent's case that during the CIRP of the ‘Corporate Debtor’, the Appellant recovered an amount of Rs. 41.73 Crs. in preference  over the other Creditors. This issue was discussed in the 25th CoC Meeting and it was brought to the Notice of the Appellant Banks by the Resolution Professional vide emails dated 20.07.2019 and 24.07.2019 that the action of the Banks of recovering the receivables from the Cash Credit Account towards repayment of working capital limits has resulted in preferential payment in their favor. We note that ‘Preferential treatment’ in the instant case is not strictly as per what is provided under Section 43 but in terms of giving preference to the Appellants Banks over and above the dues of other Creditors.

# 12. As per Section 17(1)(d) of the I&B Code, the Financial Institutions maintaining the accounts of the ‘Corporate Debtor’ have to act on the instructions of the Interim Resolution Professional in relation to such accounts and furnish all information relating to the ‘Corporate Debtor’. This Tribunal in a catena of Judgements has held that Banks cannot debit any amounts from the account of the ‘Corporate Debtor Company’ after the Order of moratorium, as it amounts to recovery of amount. 

# 13. It was also held that the Banks cannot freeze accounts nor can they prohibit the ‘Corporate Debtor’ from withdrawing the amount as available on the date of moratorium for its day-to-day functioning. Section 14 of the I&B Code overwrites any other provision contrary to the same and any amount due prior to the date of CIRP cannot be appropriated during the moratorium period. It is seen from the record that payments due under the LCs have been made out of the funds of the ‘Corporate Debtor’ as is established from the reduction of liabilities under non-fund based facilities.

# 14. This Tribunal in Company Appeal (AT) No. 267 of 2017 in ‘Indian Overseas Bank’ V/s. ‘Mr. Dinakar T. Venkatsubramaniam Resolution Professional for Amtek Auto Ltd.’ held as follows:-

• “… Once Moratorium has been declared, it is not open to any person including ‘Financial Creditor’ and the Appellant Bank to recover any amount from the account of the ‘Corporate Debtor’, nor it can appropriate any amount towards its own dues”…

# 15. It is also noted that the amounts were honoured partly by margin held as FDR and partly by funds of the ‘Corporate Debtor’ deposited in its Cash Credit Accounts. We are of the view that merely because the ‘Corporate Debtor’ had enough liquidity to run the Company as a going concern, the act of the Appellant Banks to adjust the credit balance in the Cash Credit Account towards the debit balance after CIRP commenced, cannot be justified. If the Appellant's argument is accepted, then the act of recovering receivables, under the garb of normal course of business will change the status of all the claims which would be in complete violation of Section 14 of the Code.

# 16. The Case of ‘Andhra Bank’ (Supra) has no applicability to the facts of the attendant case as it is seen from the record that the Banks have already included the value of non-fund based in their ‘Claim’ before the IRP. The Code provides that ‘Claims’ filed by the Creditors during the CIRP shall stand crystallized and will not be settled during the CIRP in preference over other Creditors. We hold that as ‘Claims’ are already preferred by the Appellant Banks and filed before the RP, they are not entitled to recover the amounts otherwise available in the Credit Accounts or Working Capital Accounts of the ‘Corporate Debtor’. We are of the considered view that adjusting of the ‘Claims’ by the Appellant Banks during the CIRP out of the funds of the ‘Corporate Debtor’ results in unjust enrichment of the Banks and further, crediting amounts towards non-fund and fund based accounts during the moratorium period is against the provisions of Section 14 of the Code.

# 17. Hence, we are of the view that there is no illegality or infirmity in the Order of the Learned Adjudicating Authority. Therefore, this Appeal fails and is accordingly dismissed. No order as to costs.

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