Navigating the Complexity of ‘Contingent Claims’ in IBC: a call for clarity

– Barsha Dikshit & Archana Kejriwal (resolution@vinodkothari.com)

The Insolvency and Bankruptcy Code, 2016 (‘Code’) provides a unified and collective resolution mechanism aimed at resolving the claims of multiple creditors against a corporate debtor. In this process, creditors who may have varying claims based on the nature of their financial or operational relationship with the debtor, submit their claims, which are collated either by the resolution professional (in the case of a resolution process) or the liquidator (in the event of liquidation) and ultimately these claims are satisfied from the recoveries made through either an approved resolution plan or by way of realization during the liquidation process in terms of section 53 of the Code.

At the core of this framework lies a critical question- What constitutes a legitimate “claim” as per the Code, and how does one qualify as a “creditor” eligible for repayment? 

While claims that are clearly defined or crystallized are relatively easy to account for, the matter becomes complex when dealing with contingent or unascertainable claims. Although there have been judicial interpretations addressing this concern, the law is still evolving and lacks clarity on certain aspects. 

In this write up, the author seeks to analyze the validity of ‘contingent claims’ under the Code in light of the recent judgement passed by Hon’ble NCLAT in the matter of SBS Holdings v Mohan Lal Jain, whereby NCLAT had held that claims arising from an arbitral award issued after the liquidation commencement date, even if the liquidator has participated in the arbitration process, cannot be entertained during the liquidation process of the corporate debtor.

Validity of contingent claims under the Code

A contingent claim, by its nature, is dependent upon the occurrence or non-occurrence of an uncertain future event. Such claims, although not crystallized at the time of insolvency initiation may have significant implications for creditors and the corporate debtor. While the term ‘contingent claim’ is not explicitly defined in the Code, Section 3(6) of the Code defines a “claim” as:

“(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured.

(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;”

While the definition does not explicitly distinguish between crystallized claims and contingent claims. However, the inclusive nature of the definition has led to the interpretation that contingent claims fall within the ambit of ‘claims’ that can be admitted during the CIRP or liquidation process, as the case may be. 

Status of ‘Contingent claim’ during CIRP

In CIRP, Regulation 13 of the Insolvency and Bankruptcy Board of India (IBBI) (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter, ‘CIRP Regulations’), provides that the Resolution Professional (RP) shall verify every claim submitted under the CIRP and may either admit or reject such claims based on the available evidence and records, and Regulation 14 acknowledges the possibility of contingent claims by allowing the RP to “estimate” claims that are not fully crystallized. This estimation is critical as it permits contingent claims to be included within the broader claim pool, ensuring that such claims are not ignored merely because they have not yet matured.

Status of ‘Contingent claim’ during Liquidation

In case of liquidation, Section 38 of the Code read with Regulation 16 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (hereinafter, ‘Liquidation Regulations’) provides for submission of claims by creditors in the liquidation process. Further, Reg. 25 of the Liquidation Regulations empowers the liquidator to “make an estimate of the value of the claim” when a claim cannot be ascertained precisely, thereby allowing the liquidator to admit contingent claims in estimated value for distribution purpose. 

Thus, CIRP Regulations and Liquidation Regulations both recognize the existence of contingent claims, thereby imposing a duty on the IRP/RP or the Liquidator, as the case may be, to exercise due diligence and make reasonable estimates regarding such claims, admitting them accordingly. Notwithstanding the common duty to estimate and admit contingent claims, the roles, responsibilities, and rights of the RP and the Liquidator are distinct and operate within the separate frameworks of the CIRP and liquidation proceedings, respectively.

Judicial precedents relating to treatment of ‘contingent claims’ under the Code

The judicial precedents relating to ‘contingent claims’ under the Code emphasize an inclusive approach to recognise claims that could become liabilities in the future. While recognizing contingent claims, courts have upheld the need for fair and equitable treatment, balancing creditor interests with the efficiency of the insolvency process. Moreover, some of the judgments have underscored the importance of valuation methods that reflect the realistic likelihood of contingent events, ensuring that contingent claims do not unduly burden the resolution process or impair creditor interests. The treatment of contingent claims, while still evolving, is guided by the principles of fairness.

For instance, in the matter of Essar Steels Limited, Committee of Creditors v. Satish Kumar Gupta & Ors (2020), Hon’ble Supreme Court has held that the resolution professional can admit a contingent claim at the notional value of INR1 if there are pending disputes regarding the claims in question.

In the matter of Innoventive Industries Ltd. v. ICICI Bank and Anr. (2018), the Hon’ble Supreme Court has emphasized the inclusive definition of “claim” under the Code. The Court held that the term “claim” includes a right to payment, even if it is disputed i.e. whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured. This broad definition extends to contingent claims, allowing them to be admitted in insolvency proceedings, provided they can be substantiated as potential liabilities.

In Phoenix ARC Private Limited v Spade Financial Services Limited & Ors.(2021), Hon’ble SC has addressed the treatment of certain financial claims that had characteristics similar to contingent claims. The Court held that contingent claims, when verified and valued, must be recognized appropriately in the resolution process. However, their priority in distribution must align with established principles of fairness, prioritizing claims based on certainty and enforceability over those based on speculative or highly conditional events.

Thus it is clear that the existence of ‘contingent claim’ as on the CIRP commencement/ liquidation commencement cannot be denied. Infact, it is the IRP/RP or the Liquidator who are entrusted with the duty to make best estimates for such claims.

[May also read Global scenario on treatment of ‘Contingent claim’ in our related article here].

Views of NCLAT in the matter of SBS Holdings v. Mohanlal  Jain

In the instant case, an appeal was submitted before Hon’ble NCLAT , wherein the appellant contested the decision of the Liquidator. The appellant argued that a claim arising from an arbitration award, issued after the liquidation commencement date in ongoing arbitration proceedings in which the Liquidator participated on behalf of the CD), had not been considered by the Liquidator. The Liquidator had declined to admit the claim on the grounds that it was submitted after the deadline for claim submission as stipulated under Regulation 16 of the Liquidation Regulations.

Upon review, the Hon’ble NCLAT upheld the decisions of both the Liquidator and the National Company Law Tribunal (NCLT), dismissing the appeal. The Hon’ble NCLAT held that claims based on an arbitration award issued after the liquidation commencement date are inadmissible, even where the Liquidator has participated in the arbitration proceedings during the liquidation process. The Hon’ble NCLAT stated- “When a statute provides for liquidation commencement date as a date up to which claims can be filed and proved, no claim thereafter can be entertained by the Liquidator.”

Conclusion

The treatment of contingent claims under the Code remains an evolving and intricate area of law. It is important to understand that contingent claims are not ‘unknown’, but rather ‘uncertain’ at the time of the insolvency proceedings, While the Code includes contingent claims within its broad definition of “claim,” their admission and valuation during the CIRP and liquidation processes necessitate careful assessment and estimation by IRP/RP/Liquidator, as the case may be. While there may be instances of delayed filing by claimants, such procedural delays are typically technical in nature, and the Code  also permits the late submission of claims under certain circumstances.

There are many judicial precedents that have supported the inclusion of contingent claims in insolvency proceedings. However, the recent ruling by NCLAT in SBS Holdings v. Mohanlal Jain, in the humble view of the author, tends to have added complexity by presenting divergent views. 

In the humble view of the author, the Code’s principal objective is to enable the swift revival of distressed companies and ensure equitable repayment to creditors. The exclusion of valid contingent claims would undermine this goal, potentially leaving creditors without recourse. As such, it is imperative that the legal framework surrounding contingent claims be clarified and refined to provide fair treatment to creditors with contingent liabilities, thus strengthening the overall integrity of the insolvency process.