Arbitration In IndiaArbitration Allowed after Approval of Corporate Insolvency Resolution Plan

February 3, 20220

In the case of Fourth Dimension Solutions Ltd. v. Ricoh India Ltd. & Ors. (Civil Appeal No. 5908 of 2021) dated 21.01.2022, the Supreme Court allowed an Operational Creditor, whose claims were unascertained due to pending Arbitration, to proceed with Arbitration proceedings even after the approval of Resolution Plan.

FACTS

The business relations between Ricoh India Ltd. (“the Respondent” or “the Corporate Debtor”) and Fourth Dimension Solutions Ltd. (“the Appellant”) began in 2013, when the Appellant entered into more than 90 contracts for various projects with the Respondent, having total value of more than Rs. 2400 crores.

Disputes arose between the parties with respect to six contracts for different projects. Subsequently, the Appellant invoked the Arbitration Agreement and Arbitration proceedings were commenced before a Sole Arbitrator.

Thereafter, the Respondent filed an application under Section 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) for initiation of Corporate Insolvency Resolution Process (“CIRP”). The CIRP application was admitted by the National Company Law Tribunal (“NCLT”) and a moratorium was imposed under Section 14 of the IBC.

Pursuant to the moratorium, the Arbitration proceedings were adjourned sine-die. The Appellant’s claims were admitted by the Resolution Professional (“RP”) as ‘Nil’, with an appended note stating that the Appellant’s claims were disputed and the liability would be subject to the outcome of the Arbitration proceedings.

During CIRP, the Committee of Creditors (“CoC”) had approved a Resolution Plan of Kalpraj Dharamshi, which was further approved by the NCLT. This Resolution Plan was challenged by another Resolution Applicant, namely Kotak Investment Advisors Ltd. (KIAL), before the National Company Law Appellate Tribunal (“NCLAT”), which was allowed by the NCLAT. Simultaneously, the Appellant also preferred an appeal to the NCLAT aggrieved by the ‘Nil’ claims admitted by the RP.

Kalpraj Dharamshi challenged the decision of the NCLAT before the Supreme Court (“SC”). At this juncture, the Appellant also appealed to the SC specifically to obtain the view from SC. The SC allowed the appeal of Kalpraj Dharamshi, and directed the NCLAT to decide upon the Appellant’s appeal pending before the NCLAT.

Thereafter, the NCLAT held that since the SC had approved and upheld the Resolution Plan of Kalpraj Dharamshi, the claims of the Appellant not forming a part of the Resolution Plan stand extinguished and the proceedings related thereto stand terminated.  Thus, the NCLAT dismissed the appeal due to lack of merits.

Subsequent to the judgment of the NCLAT, the Supreme Court vide this Order proceeded to dispose the Appellant’s appeal pending before it.

CONTENTIONS OF THE PARTIES BEFORE THE NCLAT

The Appellant contended that the entire claim of the Appellant was deliberately avoided by the RP on the basis of the pending Arbitration proceedings, without verifying the claim by corroborating with the available records/documents.

It was submitted that the RP mechanically deferred the entire claim instead of placing the disputed claims under the contingency provisions of the IBC. The RP failed to validate his stand of not admitting the Appellant’s claim, despite the fact that the Arbitration proceedings came to a standstill due to the moratorium imposed under Section 14(1)(a) of the IBC.

The Appellant further asserted that while the Appellant’s claim remained pending adjudication before the Arbitrator and was stayed due to the subsistence of moratorium period, the Appellant’s claim became permanently extinguished under the guise of approval of the Resolution Plan.

The Appellant stated that once the Resolution Plan is approved, Arbitration proceedings after lifting of the moratorium would be futile under Section 14 read with 60(6) of the IBC. The Appellant relied on the SC’s Order in the case of NTPC Limited (Simhadri Project) v. Rajiv Chakraborty (Civil Appeal No. 2798 of 2020) and sought the impugned order to be set aside to protect the claims of the Appellant.

The Respondent contended that as the Appellant failed to challenge the non-admission of its claim before the NCLT, it could not challenge the non-admission of the claim at a later stage before the NCLAT under the guise of challenging the Resolution Plan that was approved by the NCLT and then by the SC.

The Respondent placed reliance on the judgments of the SC in CoC, Essar Steel India Ltd. v. Satish Kumar Gupta & Ors. 2019 SCC Online SC 1478 and JSW Steel Ltd. v. Ashok Kumar Gulla & Ors. 2019 SCC Online NCLAT 854 and submitted that a successful Resolution Applicant cannot suddenly be faced with ‘undecided’ claims after the Resolution Plan submitted has been approved by the CoC, the NCLT and the SC.

DECISION OF THE SC

The SC relied on the factual position highlighted in NCLAT’s decision, that the Appellant’s claims were admitted as ‘Nil’ due to the pending Arbitration proceedings. The SC proceeded to dispose the appeal and restated the fact that the parties were at liberty to pursue all claims entitled to them in the proceedings pending at the relevant time.

The SC noted that the Arbitration proceedings were pending between the Appellant and the Respondent. Thus, the SC directed for the adjudication of all the contentions available to both the parties by the Arbitral Tribunal on merits in accordance with the law.

AMLEGALS REMARKS

Through this decision, the SC bestowed significant importance to Arbitration proceedings for the adjudication of disputed operational claims of the Appellant. The SC observed that although the Appellant’s claims were virtually rejected, the Appellant could still recover its legitimate claims by pursuing the Alternate Dispute Resolution route of Arbitration.

The decisions of the NCLAT and SC indicate the peculiarity of this dispute. It is pertinent to note that, the Appellant’s operational claims, which could have otherwise been recovered through the approved Resolution Plan as per the IBC procedure, were redirected to be settled through Arbitration.

The decision also paves way for the Resolution Professionals to not reject such claims on the face of it and rather, consider it under the contingency provisions which will secure the rights of the Creditor as well as allow the incoming Resolution Applicant to be prepared for such possible liabilities in the future.


For any queries or feedback, feel free to get in touch with rohit.lalwani@amlegals.com or riddhi.dutta@amlegals.com.

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