2025 (5) TMI 660 - HC - IBC

Locus standi to maintain the writ.Extinguishement of claims or dues on account of electricity consumption which were not submitted or included in the Corporate Insolvency Resolution Plan (CIRP) approved under the Insolvency and Bankruptcy Code 2016 - alternative remedy under Section 60(5) of the Code - HELD THAT - All debts of the corporate debtor undergoing a corporate resolution process are required to be incorporated in a resolution plan which is to be prepared by the resolution professional vetted by the committee and approved by the adjudicating authority NCLT. On approval by the adjudicating authority all debts not submitted to the resolution professional or before the effective date of the plan but not included in the resolution plan stand extinguished . The debts before the effective date mentioned in the resolution plan would be operative against the corporate debtor in such manner as indicated in the resolution plan. Subsequent to approval of the resolution plan fresh debts of the corporate debtor prior to the effective date could not be submitted or introduced or taken cognizance of. In RPS Infrastructure Limited v. Mukul Kumar anr 2023 (9) TMI 516 - SUPREME COURT the Supreme Court reiterated its observations in Essar Steel on entertaining claims after the resolution plan had been accepted by the Committee of Creditors. It took a very strict view of the sanctity of the Corporate Insolvency Resolution Plan. Its finality after undergoing the due process under the Code could not be easily interfered with by the adjudicating authority. The view of the Supreme Court was so strong that even before approval of the plan by the adjudicating authority it would not allow what it conceived to be an unreasonably delayed claim of 287 days by a corporate creditor. Such a resolution plan even if approved by the adjudicating authority would not extinguish the debts of the corporate debtor prior to the effective date in the resolution plan. Locus standi to maintain the writ - HELD THAT - The impugned demand notice was raised on the said group company the third respondent on the footing that it had close connection with the first respondent which had the subject dues toward the appellant. This company individually had no debt towards the appellant. This group company had to clear those dues to save those towers from disconnection of electricity. The appellant cannot change its stand and now say that the said group companies are independent corporate entities. If that be so then the third respondent is deemed to have no connection with the first respondent and for the dues of the first respondent the electricity connection of the third respondent cannot be cut off. Entitlement to seek a declaration whether there is any liability towards any other person - HELD THAT - The first respondent is entitled to establish that it has no due before the effective date of the resolution plan towards the appellant and that on such premises the appellant cannot maintain its demand against its respondent-group companies. The appellant is entitled to seek such a declaration that it is not so liable for the benefit of its group companies. Conclusion - i) The debts of the first respondent towards the appellant not included in the approved CIRP resolution plan before the effective date stand extinguished. ii) The first respondent has locus standi to challenge the demand notice issued to its group company. iii) The CIRP resolution plan remains valid and binding unless set aside by a competent authority under the Code. iv) The High Court will exercise writ jurisdiction sparingly in insolvency matters where alternative remedies exist. This appeal is partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

- Whether the electricity consumption dues of the first respondent towards the appellant, which were not submitted or included in the Corporate Insolvency Resolution Plan (CIRP) approved under the Insolvency and Bankruptcy Code, 2016 (the "Code"), stand extinguished as per the provisions and judicial precedents relating to CIRP.

- Whether the first respondent has locus standi to challenge a demand notice issued by the appellant to a third-party group company, which was not the consumer of electricity but was threatened with disconnection for dues allegedly owed by the first respondent.

- The validity and finality of the CIRP resolution plan approved by the adjudicating authority (NCLT) in light of the Supreme Court's decision in State Tax Officer v. Rainbow Papers Limited, which mandates that all debts must be included in the resolution plan or else the plan may be invalid.

- The scope and exercise of writ jurisdiction by the High Court in matters where alternative remedies exist under the Code, specifically Sections 60, 61, and 62.

- The procedural correctness regarding the cause title in the writ petition and the appellant's preliminary objections concerning locus and alternative remedies.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Extinguishment of Debts Not Included in the CIRP Resolution Plan

Relevant Legal Framework and Precedents: The Insolvency and Bankruptcy Code, 2016 governs the CIRP process. Sections 5, 6, 7, 12, 13, 16-31, 60-62 of the Code outline the initiation, claims submission, resolution plan preparation, approval, and appeal mechanisms. Landmark Supreme Court decisions in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ghanashyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. have established that once a resolution plan is approved by the adjudicating authority, all debts not included in the plan prior to its effective date stand extinguished and no further claims can be entertained.

Court's Interpretation and Reasoning: The Court recognized that the appellant did not submit its claim for electricity dues during the CIRP process, and these dues were not reflected in the resolution plan approved by the NCLT. Following the binding precedents, the Court held that such debts prior to the effective date (22nd December, 2022) of the resolution plan are deemed extinguished. The Court emphasized the finality and sanctity of the resolution plan to ensure certainty for the successful resolution applicant and stakeholders.

Key Evidence and Findings: The resolution plan was approved on 3rd December, 2020, effective from 22nd December, 2022. The appellant's electricity dues were not submitted as claims to the resolution professional and were absent from the plan and accompanying financial statements. The appellant issued a demand notice in June 2023 for dues allegedly outstanding before the effective date.

Application of Law to Facts: Applying the Code and Supreme Court rulings, the Court found that the appellant's claims for dues prior to the effective date were extinguished by operation of law, as they were not included in the approved resolution plan.

Treatment of Competing Arguments: The appellant argued that the demand notice was valid and challenged the extinguishment. The Court rejected this, citing the binding nature of the resolution plan and the Code's provisions. However, the Court acknowledged the Supreme Court's decision in State Tax Officer v. Rainbow Papers Limited, which requires that all debts must be included in the plan or it may be invalid. The Court held that unless a competent authority declares the plan invalid, it remains valid and binding.

Conclusions: The debts not included in the approved resolution plan stand extinguished, and the appellant cannot enforce claims for such dues prior to the effective date of the plan.

Issue 2: Locus Standi of the First Respondent to Challenge Demand Notice to Third Party

Relevant Legal Framework: The writ petition was filed by the first respondent challenging a demand notice issued to the third respondent (a group company). The appellant contended that the first respondent lacked locus standi as the notice was not addressed to it.

Court's Interpretation and Reasoning: The Court observed that the third respondent was not the consumer of electricity but a group company closely connected to the first respondent. The appellant had threatened disconnection of electricity supply to the third respondent's towers on account of dues owed by the first respondent. The Court held that the appellant cannot take inconsistent positions by claiming the third respondent is independent for some purposes but connected for others (such as liability for dues). Therefore, the first respondent was entitled to seek a declaration regarding its liability and challenge the demand notice to protect its group companies.

Application of Law to Facts: The first respondent's locus was recognized because the demand notice affected its group companies and was connected to its alleged debts.

Treatment of Competing Arguments: The appellant's objection on locus standi was rejected on the basis of the interconnected nature of the respondents and the claim.

Conclusions: The first respondent has locus standi to maintain the writ petition challenging the demand notice addressed to the third respondent.

Issue 3: Validity and Finality of the CIRP Resolution Plan in Light of the Rainbow Papers Decision

Relevant Legal Framework and Precedents: The Supreme Court in State Tax Officer v. Rainbow Papers Limited held that the resolution professional, committee of creditors, and adjudicating authority have a concurrent duty to ensure the resolution plan includes all debts of the corporate debtor. If debts are omitted without justification, the plan is invalid and void ab initio.

Court's Interpretation and Reasoning: The Court acknowledged the Rainbow Papers decision as an important qualification to the earlier rulings. It emphasized that if the plan is invalid for omission of debts, then extinguishment of such debts cannot be upheld. However, the Court held that until a competent authority declares the plan invalid, it must be presumed valid and binding on all stakeholders.

Application of Law to Facts: No competent authority had declared the resolution plan invalid in the instant case. Therefore, the plan's approval by the NCLT stands and the debts not included are deemed extinguished.

Treatment of Competing Arguments: The appellant relied on the finality of the plan, while the respondents invoked Rainbow Papers to argue invalidity. The Court balanced these positions by deferring to the statutory appeal and review mechanisms under the Code.

Conclusions: The resolution plan remains valid and binding unless set aside by a competent authority. The extinguishment of debts not included in the plan is upheld subject to this condition.

Issue 4: Exercise of Writ Jurisdiction Versus Availability of Alternative Remedies

Relevant Legal Framework: Sections 60, 61, and 62 of the Code provide for adjudication of insolvency-related disputes before the NCLT and appellate tribunals, including appeals to the Supreme Court. The appellant contended that the writ jurisdiction of the High Court should not be invoked when adequate alternative remedies exist.

Court's Interpretation and Reasoning: The Court recognized that the Code provides a comprehensive mechanism for dispute resolution and appeals. It held that while the first respondent is entitled to seek declarations, the High Court should ordinarily refrain from exercising writ jurisdiction in matters where the Code prescribes specific forums and procedures.

Application of Law to Facts: The Court restrained the appellant from enforcing the demand notice but declined to grant the declaration sought by the first respondent, advising that such declarations be sought through the Code's statutory remedies.

Treatment of Competing Arguments: The Court balanced the need for judicial intervention against respect for the specialized insolvency framework, emphasizing adherence to the statutory scheme.

Conclusions: The writ jurisdiction is exercised sparingly, and alternative remedies under the Code should be preferred for declarations regarding insolvency resolution plans.

Issue 5: Procedural Errors and Cause Title

Relevant Legal Framework: The writ petition was filed against the State of Meghalaya and the Meghalaya Power Distribution Corporation Limited, but the appellant in the appeal was only the latter. The Court noted this procedural irregularity.

Court's Interpretation and Reasoning: The Court observed that the cause title cannot be changed and that this was a procedural error. However, this did not affect the substantive adjudication of the issues.

Conclusions: The procedural error in cause title was noted but did not impact the outcome.

3. SIGNIFICANT HOLDINGS

"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." (Essar Steel)

"Once a resolution plan is duly approved by the adjudicating authority under sub-section (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." (Ghanashyam Mishra & Sons)

"If the resolution plan does not include all the debts, it is invalid. Furthermore, the resolution professional, the committee of creditors and the adjudicating authority have concurrent duties and responsibilities to check up the plan and satisfy itself that inter alia all the debts of the corporate debtors have been included irrespective of the fact whether a creditor has lodged a claim. If it is so, it would be invalid or void ab initio." (Rainbow Papers)

"Unless any contrary order is brought from a competent jurisdiction declaring invalidity of the resolution plan, the plan as approved by NCLT is valid and binding on all stakeholders." (This Court)

"The appellant cannot change its stand and now say that the said group companies are independent corporate entities. If that be so then the third respondent is deemed to have no connection with the first respondent and for the dues of the first respondent, the electricity connection of the third respondent cannot be cut off." (This Court)

"Any person is entitled to seek a declaration whether it has any liability towards any other person." (This Court)

Final determinations:

- The debts of the first respondent towards the appellant not included in the approved CIRP resolution plan before the effective date stand extinguished.

- The first respondent has locus standi to challenge the demand notice issued to its group company.

- The CIRP resolution plan remains valid and binding unless set aside by a competent authority under the Code.

- The High Court will exercise writ jurisdiction sparingly in insolvency matters where alternative remedies exist.

- The impugned demand notice dated 12th June, 2023 is set aside, and the appellant is restrained from enforcing it.