CLAIM OF ARBITRAL AWARD, PENDING IN APPEAL - CAN BE INCLUDED AFTER RESOLUTION PLAN HAS BEEN APPROVED BY ‘CoC’?

[Mr. M. GOVINDARAJAN]

In M/S. RPS INFRASTRUCTURE LTD. VERSUS MUKUL KUMAR & ANR. - 2023 (9) TMI 516 - SUPREME COURT , an agreement was entered into on 02.08.2006 between the appellant and KST Infrastructure Private Limited, the Corporate Debtor for development of land licensed with the appellant admeasuring 8 acres into a residential group housing complex.  The Corporate Debtor, without mentioning the name of the appellant advertised the project under its own name sought reference to arbitration on 02.05.2011.

The arbitral award was made in favor of the appellant.  The Arbitrator, in addition to the claim of the appellant directed the Corporate Debtor to apply to the authorities for transfer of the requisite licenses to the appellant.  The Corporate Debtor filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 (‘Act’ for short) on 26.09.2016.  The appellant also filed an execution petition on the same date.  The execution proceedings have not been taken since 22.02.2017 since the petition under section 34 was pending.   The same was decided in favor of the appellant on 25.04.2019 with some modifications.  An appeal was filed against this order by the Corporate Debtor under section 37 of the Act. 

In the meantime the Corporate Insolvency Resolution Process (‘CIRP’ for short) under Section 7 of the Insolvency and Bankruptcy Code, 2016, was initiated against the Corporate Debtor in respect of three real estate projects viz.-

• Sector 114, Gurugram;
• Sector 89, Faridabad; and
• KST Whispering Heights

in Sector 88, Faridabad by certain homebuyers who had invested in these projects. The Adjudicating Authority admitted the application and appointed an Interim Resolution Professional (‘IRP’ for short).  The IRP issued a public announcement inviting claims from creditors.  The IRP constituted the Committee of Creditors (‘CoC’ for short) on 06.11.2019 after collating the claims received from the creditors.  The IRP was replaced and respondent no. 1 was appointed as Resolution Professional (‘RP’ for short) of the Corporate Debtor by the CoC on 18.06.2020. The CoC approved the resolution plan submitted by the resolution applicant KST Whispering Heights Residential Welfare Association was approved by a majority of 80.74% on 11.07.2020.  The RP filed an application before the Adjudicating Authority for the approval of resolution plan.

The appellant sent an email on 19.08.2020 to respondent no.1 highlighting their pending claim of Rs.35,67,05,337 against the Corporate Debtor arising from the arbitral award dated 01.08.2016, confirmed with certain modifications. The RP, the respondent No. 1, rejected the claim of the appellant on the ground that the time period for submitting the claim was within 90 days of initiation of CIRP and the applicant was 287 days late and  Resolution plan had already been passed by the CoC.

The appellant filed an application before the Adjudicating Authority under section 60(5) of the Code with the prayer to admit its claim on merits.  The Adjudicating Authority allowed his application on the following grounds-

• The RP could not have summarily rejected appellant’s claim, as this claim would have appeared in the Corporate Debtor’s books of accounts;
• in case such books of accounts were not available, RP had a duty to obtain them and verify the financial position; and
• as such announcement was made through public newspapers, it was likely that the appellant missed out on the same.

Against this order the RP filed an appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short) against the order of Adjudicating Authority.  The RP contended the following before NCLAT-

• It is a belated claim claimed after the COC had approved the Resolution Plan.
• The appellant made the claim more than a year after the invitation of claims by the public notice dated 30.03.2019.
• Allowing such claims would set the clock back on the CIRP and set a precedent, thereby making CIRP prolonged and inefficacious.

The appellant submitted the following before NCLAT-

• It could not file the claim in time as it was unaware of the public announcement. 
• A belated claim should not be shut out as the time-periods in the Code are merely directory and not mandatory.

The NCLAT decided against the order of the Adjudicating Authority.  The NCLAT held that-

• The RP had effectuated proper service for inviting claims which only mandates a pronouncement through newspapers and not through personal service - an aspect that was not disputed by the appellant.
• The appellant failed to show that it filed its claim as soon as it came to know of the initiation of the CIRP.
• The RP has made sincere efforts  by filing an application under Section 19 of the Code before the Adjudicating Authority seeking that a direction be issued to the ex-management to provide all records. 
• The resolution plan, as approved by the COC, would be jeopardized if new claims were entertained.

The appellant filed appeal before Supreme Court challenging the order of the NCLAT.  The appellant submitted the following before the Supreme Court-

• The claim in terms of the award was a contingent claim as proceedings under Section 37 of the Arbitration Act remain pending before the High Court of Punjab and Haryana against the dismissal of the Corporate Debtor’s challenge. 
•  There ought to be a provision for contingent claims in the resolution plan.
• If the appeal is dismissed and the award becomes crystallized, the appellant’s claim, if not provided for in the contingent claim, will be rendered nugatory.
• The timeline provided under Section 12 of the Code for completion of CIRP was only directory.
•  Since the Adjudicating Authority was yet to approve the resolution plan, RP should have included the same as a contingent liability. 
• The Corporate Debtor did not disclose that the CIRP had been initiated, either during the pendency of the proceedings under Section 34 of the Arbitration Act or in appeal under Section 37 of the Arbitration Act. 
• The RP could have easily found this information from the Corporate Debtor’s books of accounts.

The RP submitted the following before the Supreme Court-

• The appellant had deemed knowledge of the CIRP as the applicable procedure for inviting claims under the Code and the IBBI Regulations was followed.
• The RP made sincere efforts to collate all claims, including filing an application for procuring the Corporate Debtor’s records, although the same were not made available. 
• There was no need to create an arrangement for contingent claims as the resolution plan had been prepared on the basis of the information memorandum. 
• The plan was comprehensive and took care of the claims of the homebuyers.

The Supreme Court examined the submissions of both the parties.  The Supreme Court considered the question to be decided is as to whether the appellant’s claim pertaining to an arbitral award, which is in appeal under Section 37 of the said Act, is liable to be included at a belated stage – i.e. after the resolution plan has been approved by the CoC.

The Supreme Court observed that the process followed by the RP was not flawed in any manner, except to the extent of whether an endeavor should have been made by respondent no. 1 to locate the liabilities pertaining to the said award from the records of the Corporate Debtor.  The Supreme Court held that the RP did what could be done to procure the Corporate Debtor’s records by even moving an application under Section 19 of the Code.

The second question considered by the Supreme Court as to whether the delay in the filing of claim by the appellant ought to have been condoned by RP.  The Supreme Court observed that the delay on the part of the appellant is of 287 days. The appellant is a commercial entity. That they were litigating against the Corporate Debtor is an undoubted fact. The appellant ought to have been vigilant enough in the aforesaid circumstances to find out whether the Corporate Debtor was undergoing CIRP. The appellant has been deficient on this aspect.  A public announcement of the CIRP through newspapers would constitute deemed knowledge on the appellant.  The plea of the appellant not being aware of newspaper pronouncements is not one which should be available to a commercial party.  The mere fact that the Adjudicating Authority has yet not approved the plan does not imply that the plan can go back and forth, thereby making the CIRP an endless process.   This would result in the reopening of the whole issue.  The Supreme Court did not find fault in the order of NCLAT.  The Supreme Court dismissed the appeal.