Can the liquidator accept a claim after the last date for submission of claims?

Chintan Shah

resolution@vinodkothari.com

Since the enactment of the Insolvency and Bankruptcy Code, 2016, many apparent loops have emerged in the process of its implementation. As is with every law, the evolution continues. In this write –up, we discuss about one such scenario were a liquidator is puzzled with a question as to what is to be done in case of submission of claim by a creditor, after the due date for filling of claim as stated in the Public Announcement has expired.

While Reg. 12(2) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 specifically provides that the creditors may submit their claims (even after expiry of last date fixed in the public announcement) to the resolution professional till the approval of resolution plan by the CoC, apparently there is no such explicit provision in case of liquidation (voluntary or compulsory), in the Insolvency and Bankruptcy Code, 2016, IBBI (Voluntary Liquidation Process) Regulations, 2017 or IBBI (Liquidation Process) Regulations, 2017. This is where the liquidator’s dilemma lies.

One may argue that Reg 31 of IBBI (Liquidation Process) Regulations, 2017 does provide for an option to the Liquidator to apply to the Adjudicating Authority to modify an entry in the list of stakeholders filed with the Adjudicating Authority, when he comes across additional information warranting such modification. However, in our view, this remedy has been provided for modification of an ‘existing’ entry in the list of stakeholders. It cannot apply in a case wherein there is an addition of a new entry resulting from admission of claim after due date. Reg 31 would come handy when there is any discrepancy on the amount of claim admitted or the nature or extent of security interest created.

So, how does the liquidator resolve such a dilemma? For this, first let us examine the provisions of Companies Act and some past court precedents on this subject.

 Winding-up under the Companies Act:

The amended section 271(1)(a) of the Companies Act, 2013, lists five grounds for liquidation of the company. Winding-up on any of these grounds is still governed by the Companies (Court) Rules 1959. Attention is drawn to Rule 177 that provides for relief by the Court to a creditor who fails to file proof within the prescribed time-limit and  Rule 178 which lays down that a creditor who has not proved his debt before the declaration of any dividend shall not be entitled to disturb the distribution of any dividend declared before the proof of his debt by reason of the fact that he did not participate in it. He is however, entitled to be paid out of any money for the time being in the hands of the Liquidator available for distribution of dividend.

A perusal of Rule 177 and 178 thus reveals that the Companies (Court) Rules, 1959 does provide for liquidator to accept claims even after expiry of time fixed for the same, but only after an order of the court.

The underlying Principle and its interpretation by the Courts:

It is a well established principle of Insolvency Laws across the globe that, ‘a creditor who fails to lodge a proof prior to a dividend distribution cannot disturb that distribution, but upon lodging his proof and having it accepted is entitled to the payment of dividend he would have received ahead of other creditors before any subsequent distribution is made.’ This principle had also found its place in Section 474 of the Companies Act, 1956, according to which a creditor, who does not prove his debt or claim within the time fixed by the court, has to be excluded from the benefit of any distribution made before his debt or claim is proved. Further Rule 178 (as discussed supra) of the Companies (Court) Rules, 1959  also lends support to this principle.

A deeper and comprehensive perusal of this principle, right from its genesis, was undertaken by Ld. Justice P.N. Singhal of Rajasthan High Court in the matter of Ganeshilal Gupta Vs. Bharatpur Oil Mills through official Liquidator (04.02.1972 – RAJHC) : MANU/RH/0141/1972 where it was observed:

“3……………………….As has been stated, there has been a long delay in filing the proof, but a the claim is within the period of limitation prescribed by the Limitation Act, the only consequence of the delay will be that prescribed by Section 474 of the Companies Act (1956)…………………..The scheme of the law therefore does not prescribe any other penalty in the case of a belated claim. I am fortified in this view by the decision in In re General Rolling Stock Company 1871 (7) Ch. Appeal 646……………………………A similar point arose for consideration in In re Metcalfe 1879 (13) Ch. D. 236 and it was held that a creditor may come in as long as there are undistributed assets still available. That decision has been followed In re Kit Hill Tunnel 1880 (16) Ch. D. 590. The position of the law on the point is thus quite clear and has been stated as follows in Buckley on the Companies Acts, thirteenth edition, page 544:

A creditor may come in and prove at any time before the company is dissolved; the penalty of not coming in before the day fixed by the Court is not exclusion altogether, but exclusion from the benefit of any distribution made before proof.

4. The same view has been expressed in Palmer’s Company Law, twenty-first edition, at Page 761. Reference may also be made to the decisions in Isack Jesudasen Pillai v. Divan Bahadur Ramsamy Chhetty ILR 1904 Mad. 496 which appears to have been based on the decision in In re General Rolling Stock Company 1871 (7) Ch. Appeal 646, and to T.R. Rajakumari v. Motion Picture Producers Combine Ltd. AIR 1942 Mad. 349. It is thus a well settled proposition of the law, a creditor may come in and prove his debt at any time before the final distribution of the assets, but he cannot disturb any dividend which has already been paid”

So how should the liquidator proceed on receipt of claim from creditor after due date?

As observed from the above analysis that, there is no explicit provision in the present IBC regime, that specifically provides for a remedy to an aggrieved creditor who has failed to lodge his claim in time. However, there is this well settled proposition of the law that, a creditor may come in and prove his debt at any time before the final distribution of the assets.

Thus, we are of the opinion that on receipt of any such claim after last date of submission, the liquidator may reject the claim and advise the creditor to seek directions against the liquidator, from the Adjudicating Authority to admit such a claim. It is pertinent to note that there is a general remedy available to a creditor under Section 42 of the Code, to appeal before the Adjudicating Authority, against the decision of a liquidator rejecting his claim on any grounds which may also include rejection for late submission.