Supreme Court’s Judgment in Bhushan Power and Steel Ltd.: a wake up call for the Resolution Professionals and Committee of Creditors

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Team Resolution | resolution@vinodkothari.com

The Supreme Court judgement in the matter of Kalyani Transco v. Bhushan Power and Steel Ltd., set aside the resolution plan for Bhushan Power and Steel Ltd., and directed liquidation, after almost 6 years the resolution plan was approved by National Company Law Tribunal, citing  significant gaps in the conduct of corporate insolvency resolution processes – for instance,  lapses in meeting statutory timelines, deficiencies in eligibility verification under section 29A,  irregularities in plan implementation, judicial overreach by National Company Law Appellate Tribunal, among others. 

In this write up, we have made an attempt to discuss significant points of law as discussed by SC in this ruling and also provide our humble comments on the same. Needless to say, many of the concerns highlighted by the SC in this judgment would act as a binding code of conduct for all resolution professionals, CoCs, and even judicial institutions. 

  1. Strict adherence to the timeline u/s 12 of the Code

The time-bound nature of the CIRP is a foundational pillar of the Code. Section 12 of the Code stipulates a strict limit of 330 days for the completion of CIRP, including any extensions and time taken in legal proceedings. Any resolution plan received beyond this statutory limit, without a valid extension granted under the Code, is legally unsustainable. RPs and CoC must ensure that the process is conducted strictly within the timelines so prescribed, or extension is sought as per the provisions of the Code, failing which the CD will be pushed into the liquidation process.

  1. Verification of Eligibility Under Section 29A – A Mandatory Duty of the RP

Section 29A of the Code lays down the ineligibility criteria for resolution applicants. Section 30 (1) requires the resolution applicants to submit an affidavit confirming their eligibility and Section 30 (4) casts an obligation on the resolution professional to verify the eligibility of the RA and to confirm that the plan does not contravene any of the provisions of the law, before placing it before the CoC for their approval. Also, at the time of submission of approved plan before the Hon’ble Adjudicating authority, to provide a compliance certificate thereby certifying that the plan complies with all the provisions of the Code and IRPCP Regulations.

SC observed that “. . . the eligibility/ineligibility of the Resolution Applicant to submit the Resolution Plan goes to the root of the matter, it was incumbent on the part of the Resolution Professional to verify and certify that the contents of the mandatory affidavit, filed by the Resolution Applicant . . .”

Thus, it is the  duty of the RP to undertake a thorough scrutiny of the eligibility of resolution applicants prior to presenting the resolution plan before the CoC. Failure to discharge this duty may result in the risk of an ineligible applicant being granted access to the CIRP, thereby hampering the sanctity of the process and violating the law. The RP must not simply rely on the affidavit submitted by the resolution applicant  but he must exercise due diligence in verifying   the compliance with the statutory mandate.

  1. Compliance with Section 30(2) is obligatory to safeguard the rights of Operational Creditors

Section 30(2) of the Code mandates that a resolution plan must provide for the payment of debts of operational creditors in a manner no less than the amount they would receive in liquidation, and such payment must be made in priority to financial creditors. The non-compliance with this requirement renders the resolution plan illegal and unfit for approval. Both RP and CoC must ensure that the resolution plan submitted strictly complies with the stipulations of Section 30(2), and any deviation must be adequately justified within the parameters permitted by law.

  1. Resolution Plan must be unconditional and enforceable

SC has also held that once a resolution plan is submitted and approved, it must be unconditional, legally binding, and ready to be enforced without delay. A resolution plan that depends on approvals, changes in law, or future exemptions should be considered as defective. In fact, SC has criticized the submission of such conditional plans, stating that – “it is quite clear that merely because the Code is silent with regard to the phase of implementation of the Resolution Plan by the Successful Resolution Applicant, neither the Tribunal nor the Courts should give excessive leeway to the Successful Resolution Applicant to act in flagrant violation of the terms of the Resolution Plan or in a lackadaisical manner.”

  1. Maintaining sanctity and integrity of the CIRP – a shared responsibility of RP, COC and Courts

The Hon’ble Supreme Court emphasized that the CIRP must be conducted with utmost fairness, transparency, and adherence to statutory provisions. The RP is a fiduciary and custodian of the CIRP, and not a mere facilitator. Any deviation, negligence, or omission by the RP may result in severe legal consequences, including personal liability and disqualification.

Further, the CoC, while being vested with commercial wisdom, must exercise such discretion within the confines of the Code and the attendant regulations. Procedural irregularities, deliberate or otherwise, cannot be shielded under the guise of commercial wisdom.  

With respect to NCLT, SC clarifies the expectation in para 68 of the judgment, indicating that NCLT should have satisfied itself  regarding the eligibility of the Resolution Applicant under the provisions of the Code, ensure that the Resolution Professional has adhered to the prescribed timelines in the submission of the application, and examine whether the resolution plan contains adequate provisions for its effective implementation in accordance with the statutory framework.

SC, in fact remarked that, “Any action taken or any deal/any settlement entered into by and between the parties in respect of the subject matter of the proceedings, have to pass the test of judicial scrutiny and would always be subject to the final outcome and adjudication of the proceedings.” In the humble view of the authors, this sounds contradictory to the earlier rulings of SC (e.g.. in K. Sashidhar v. Indian Overseas Bank & Ors. [(2019) 12 SCC 150] and Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors. [(2020) 8 SCC 531]), wherein it was held that the role of the Adjudicating Authority and the Appellate Authority under the IBC is limited and does not extend to sitting in appeal over the commercial wisdom of the CoC.

Thus, both RP and CoC bear the collective responsibility of ensuring that the CIRP does not become a mere formality, but a robust, lawful, and value-maximizing process for the benefit of all stakeholders

  1. Filing application for avoidance transactions

Supreme Court, particularly in para 64 of the present judgement, also highlighted the statutory duty of the RP to file Applications for avoidance of transactions in accordance with Chapter-III of the Code.

It is to be noted that in terms of the provisions of section 43, 45 and 50 the RP (and liquidator, if the CD slips into liquidation) is duty-bound to scrutinize transactions that may be preferential, undervalued, fraudulent or extortionate, and to bring such matters to the adjudicating authority by way of avoidance applications.

Lapses in identifying avoidance transactions not only prejudice the interests of creditors but also frustrate the object of maximising value through the CIRP. The RP, as an officer of the process, must act proactively to ensure that the corporate debtor is not stripped of value through questionable transactions prior to insolvency.

  1. Clarification of the meaning of ‘Person Aggrieved’ under IBC

Section 62 of the Code contemplates that ‘Any person aggrieved by an order of the National Company Law Appellate Tribunal may file an appeal to the Supreme Court on a question of law arising out of such order under this Code within forty-five days from the date of receipt of such order.’

In its interpretation of this provision, the Hon’ble Supreme Court, relying on its earlier judgement in the matter of Glas Trust Company LLC v. Byju Raveendran and Others, clarified that the expression “any person aggrieved” is not confined solely to those who were parties to the proceedings before the NCLT/NCLAT, as the case may be. Once the CIRP is initiated, the proceeding becomes a collective proceedings in rem, where all the creditors, ex-promoters, ex- directors of the CD also become stakeholders. Thus, the expression ‘any person’ encompasses anyone who has suffered a direct legal injury or whose legal rights or interests have been adversely affected by the impugned order. The Court has further clarified that to establish locus standi under this provision, the person must demonstrate a tangible prejudice or legal injury arising from the order in question, and not mere dissatisfaction or hypothetical concern. In so far as the same is established, the appeal u/s 62 may be validly invoked by such affected persons, irrespective of the person not being party to the appeal/application.

  1. Limited grounds for filing appeal before NCLAT under section 61 

Section 61(3) of the Code stipulates specific and limited grounds upon which an appeal may be preferred before the NCLAT  against an order of the NCLT. In the context of an appeal against an order approving a resolution plan, the appeal shall lie only if it is demonstrated that the approved resolution plan is in contravention of the provisions of law or has not followed the due process prescribed under the Code and related regulations.

Placing reliance on its own judgment in K. Shashidhar Vs. Indian Overseas Bank and Others, Hon’ble Supreme Court held that the jurisdiction of the NCLAT in such matters is confined to the grounds explicitly mentioned under Section 61(3) of the Code. The NCLAT is not empowered to entertain or adjudicate upon issues or grant reliefs in respect of matters which were neither raised before the NCLT nor form a part of the order under challenge. 

  1. Jurisdictional  limitation of NCLAT vis-a-vis PMLA

The Hon’ble Supreme Court has clarified the limits of the NCLAT’s jurisdiction in matters concerning statutes such as the Prevention of Money Laundering Act, 2002 (PMLA). 

The Apex Court has clarified that NCLT and NCLAT are constituted under Section 408 and 410 of the Companies Act, 2013 and not under the IBC, and the  jurisdiction and powers of the NCLT and NCLAT are well prescribed under Section 31 and Section 60 so far as NCLT is concerned, and under Section 61 of IBC so far as the NCLAT is concerned. Neither the NCLT nor the NCLAT is vested with the authority to exercise judicial review of the matters falling outside the purview of the IBC, or falling within the purview of public law.

Consequently, the Court cautioned that any such interference would amount to judicial overreach and would be ultra vires the statutory mandate of the NCLAT. Accordingly, both the NCLT and NCLAT are required to act strictly within the limits of their jurisdiction under the IBC and abstain from adjudicating upon issues that lie beyond their conferred competence.

Conclusion

By directing the liquidation of the CD in this unique case, despite the prior approvals granted by the CoC, NCLT, and NCLAT, the Apex Court has underscored that the IBC is not a mere procedural statute but a code of strict compliance. The decision sets a binding precedent that reinforces the need for time-bound, transparent, and law-abiding resolution efforts as the pillars of India’s insolvency jurisprudence. Accordingly, all Resolution Professionals and members of the Committee of Creditors should  treat this judgment as a guiding principle to reassess their roles, responsibilities, and procedural adherence. It is imperative that they implement robust internal checks, maintain procedural sanctity, and act in accordance with the letter and spirit of the Code to ensure equitable, legally sound, and stakeholder-centric outcomes in all resolution processes henceforth.However, at the same time, it is important to note that, while the ruling reaffirms that foundational legal safeguards under the IBC cannot be bypassed, however, it leaves behind quite a significant question – where does the road end? For instance, on one hand, there are cases like in K. Sashidhar (Supra),Essar Steel India Ltd. (Supra),  where Hon’ble SC had held the commercial wisdom of COC to be paramount and and not subject to judicial review, so long as the requirements of Section 30(2) are satisfied, however, in the instant case, the Court critiques extension of time for implementation of resolution plan which was given by COC pursuant to enabling provisions in the resolution plan itself. Understandably, the concerns raised in this judgment are pursuant to the stipulations in the Code, however, the judgment can also be seen as leading to uncertainty, when the implementation of the Code itself is fraught with delays, insufficient institutional infrastructure, etc. Such uncertainty may not go well with the investors who would remain in constant fear that, even if their plans have been upheld and sanctioned by the decision-making body of CoC, and then even by Tribunals, it might still remain open for judicial scrutiny, at any stage whatsoever, and on the appeal of “any person aggrieved”. Further, because of the lapses in the process, the judgment calls for liquidation of the CD. It is a known fact that liquidation can never preserve value – note that, with latest amendments in Liquidation Regulations, a going concern sale in liquidation is no more possible. Therefore, the question still remains, as to whether the outcome as in this case would serve the interest of all stakeholders (including the workmen, employees of CD) and whether it would lead to “maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders”   – which are hailed as the hard core objectives of IBC.

Read more:

Summary of Important Supreme Court Judgements on IBC

Classification of lease transactions under IBC: Financial vs. Operational debt
Comments on the IBBI Discussion Paper on ‘Streamlining Processes under the Code: Reforms for Enhanced Efficiency and Outcomes’

Classification of lease transactions under IBC: Financial vs. Operational debt

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– Barsha Dikshit, Partner | resolution@vinodkothari.com

The Insolvency and Bankruptcy Code, 2016 (‘IBC’) broadly classifies debts into two categories-Financial Debt and Operational Debt. The classification of a debt as either financial or operational plays a pivotal role, particularly in determining the eligibility of the creditor for inclusion in the committee of creditors upon the initiation of the corporate insolvency resolution process 

Section 5(8) of the IBC defines “Financial Debt” as a debt, along with any interest thereon, that is disbursed against the consideration for the time value of money and encompasses a wide range of debts, including any liability or obligation arising from disbursement of funds to a borrower for financing the operations of a debtor., or any similar arrangement. Notably, the definition under Section 5(8) further elaborates that financial debt includes:

“Any liability in respect of any lease or hire purchase contract that is deemed a finance or capital lease under Indian Accounting Standards (IND AS) or other prescribed accounting standards.”

This provision underscores the significance of the classification of lease agreements. When a lease is structured in such a manner that it aligns with the criteria provided for lease arrangements under applicable accounting standards, it qualifies as a finance lease, and thus, a financial debt; otherwise will be treated as an operational debt (We have earlier discussed in detail the treatment of lease transactions under IBC. The same can be seen here.)

For the same reason, lease transactions often give rise to legal disputes regarding their classification as financial or operational debt, especially in the context of the IBC, because in such transactions, the principle of “substance over form” would prevail. A transaction may prima facie appear to be merely an operational transaction involving renting of properties; however, a holistic assessment might reveal that the transaction is, in fact, a financial lease, that is, a financing transaction. 

Below, we have discussed some key judicial cases under the IBC where the judiciary has addressed such complexities and provided clarity on whether such lease transactions should be classified as Finance lease or operating lease. 

HPFS vs. Nufuture Digital (India) Limited

In this matter, Hon’ble NCLT, Mumbai was also posed with a similar question as to whether the lease in question was a financial lease in terms of accounting standards and thus, a  financial debt under IBC, even though the ownership of the underlying assets remains with the lessor?

The following facts were considered by the Bench (para 31 onwards). We have summarised these points along with our comments –

  • As per the terms of lease agreement, at the inception date, the present value of the lease rentals would cover the entire cost of the underlying leased assets, which is one of the conditions mentioned in clause 63 of IND AS 116 for treating a lease transaction  as ‘finance lease’. 
  • Various clauses in the lease agreement indicated that the risks and rewards in the equipments were transferred to the CD. For example, CD shall continue to be liable to pay the installments and be bound by all obligations and provisions of the agreement notwithstanding any defect, breakdown or destruction of any equipment or any force majeure event. CD shall be responsible for the selection, installation, operation and maintenance of the Equipment, as well as insurance. That is, the lessor was not assuming any asset-based risk.
  • The mere absence of an option to purchase the leased equipments vested in the CD cannot make it operational lease as it is one of the criterion, in alternate, for recognition of a transaction as financial lease. Mere stipulation of return of equipment to the lessor does not make it operating lease (which is usual in case of financial transactions in case of default)
  • Further, the stipulation that, upon equipment return, the lessor was entitled to lease, sell or dispose of the equipment and was to credit the difference between the excess amount and its stipulated loss value, in favour of the lessee, further suggests that any accretion in value or residual vests in the lessee and not the lessor. 
  • Moreover, Hon’ble Bench placed reliance on the audited financial statement of the lessor wherein the dues from lessee were appearing under the head “receivables”. Whereas, in case of operating lease, the assets underlying lease transaction are usually recorded as “plant and machineries” in the books of the lessor. 

On the basis of the above, it was held that the lease in question was, in fact, a financial lease, and thus, a financial debt. 

Similarly, in New Okhla Industrial Development Authority vs. Anand Sonbhadra  the Hon’ble Supreme Court was called upon to determine the nature of the lease transaction, specifically addressing whether a lease of land, wherein substantial risks are transferred to the lessee, with the rewards being enjoyed by the lessor and ownership vested in the lessee, constitutes a financial lease?

Hon’ble SC, while addressing the concern, considered the following facts:-

  • In this matter, the Lessor is clothed with absolute power to make alteration/ addition or modification in the term of lease deed including the power to take back the possession of the land/building, the only limitation is that larger public interest must justify such taking back of the possession.
  • As per Ind AS 116, in case of financial lease, substantial risk and rewards incidental to ownership of underlying assets get transferred to the lessee. However, in the present case, the leases granted by NOIDA do not substantially transfer all rewards incidental to ownership since: (a) NOIDA’s lease does not contemplate transfer of ownership of the underlying asset, i.e. the underlying land, at the end of the lease term; (b) the Lessee has no power to cancel the lease deed, however the cancellation under various contingencies, such as misrepresentation or default on the part of lessee are permitted to the lessor only. (c) allottees do not gain any ownership rights over the underlying land. Thus, largely the risks were retained by the lessee, while the rewards remained with the lessor.
  • Furthermore, NOIDA’s contention that the leased land is shown as a sale in its balance sheet was also rejected by the Hon’ble Supreme Court, in light of the ownership rights remaining with NOIDA, by virtue of Sections 5, 7 and 9 of the Uttar Pradesh Apartment (Promotion of Construction, Ownership and Maintenance) Act, 2010. 

Thus, upholding the order passed by NCLT and NCLAT, Hon’ble SC  concluded that the lease deed in the present case was heavily tilted in favor of the lessor as it controlled most aspects of the agreement, an therefore, the lease in question is not a finance lease, but operating lease.

The decision underlined the importance of the specific terms of the lease, which must go beyond mere rental payments to qualify for financial debt status.

Ghaziabad Development Authority vs. Amrit Agarwal 

In this case, the dispute arose from a sale agreement wherein the Ghaziabad Development Authority (GDA) sold land for Rs. 100 Crores, with Rs. 25 Crores paid upfront and the remaining Rs. 75 Crores to be paid in 16 installments, along with interest at 12% for timely payments and 15% in case of default. Upon the default of the CD, the GDA filed a claim during CIRP. The IRP admitted the claim as an operational debt, prompting GDA to challenge this classification.

GDA contended that the outstanding dues, including interest, qualify as financial debt under Section 5(8) of IBC. On the other hand, the IRP, relying on the SC’s judgment in Okhla Industrial Development Authority vs. Anand Sonbhadra (Supra), argued that the agreement should be treated as an operating lease, with the remaining balance being classified as lease rent.

However, the Hon’ble NCLT, Principal Bench held that certain land transactions, although not traditionally categorized as financial leases, may be treated as financial debt if they involve structured payments with a time value of money. 

The key takeaway from this case is that the substance of the transaction, rather than its formal classification, is crucial in determining whether the arrangement constitutes financial debt. Even if the transaction is classified as a land sale, if it involves fixed, structured payments and reflects the risks and rewards of ownership being transferred to the lessee, it may qualify as financial lease and thus financial debt under the IBC.

Conclusion

Understanding the nuances of finance and operating leases and their treatment under the IBC is crucial for stakeholders as it helps in determining the rights of creditors in insolvency proceedings. It is not the form of the lease (whether it involves ownership transfer) that determines its classification, but the substance of the agreement and whether it creates a financial obligation similar to debt.

As evident from the rulings above, Court decisions have consistently focused on the substance of the agreements — whether it involves a financial obligation, rather than just a rental arrangement. This aligns with the broader objectives of the IBC, which seeks to safeguard rights of the creditors during insolvency proceedings. 

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Treatment of Lease Transactions under Insolvency and Bankruptcy proceedings

Inclusion of assets taken on lease in the liquidation estate of the lessee

Inclusion of assets taken on lease in the liquidation estate of the lessee

Presentation on IBBI’s Discussion Paper on ‘Streamlining Processes under the Code: Reforms for Enhanced Efficiency and Outcomes’

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– Team Resolution | resolution@vinodkothari.com

IBBI Discussion paper – 04.02.2025.pptxDownload

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Comments on the IBBI Discussion Paper on ‘Streamlining Processes under the Code: Reforms for Enhanced Efficiency and Outcomes’

Discussion on IBBI Discussion Paper dated 4th February, 2025

Comments on the IBBI Discussion Paper on ‘Streamlining Processes under the Code: Reforms for Enhanced Efficiency and Outcomes’

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– Resolution Team, Vinod Kothari and Company | resolution@vinodkothari.com

IBBI DP dated 04.02.2025Download

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Group Insolvency: Relevance of Substantive Consolidation in Indian Context

Interim Finance becomes effective and attractive

Presentation on IBBI’s Discussion Paper on ‘Streamlining Processes under the Code: Reforms for Enhanced Efficiency and Outcomes’

Discussion on IBBI Discussion Paper dated 4th February, 2025

Snapshot of amendments in IBBI Regulations

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– Sourish Kundu, Executive | resolution@vinodkothari.com

IBBI Amendments dated 29.01.2025.pptxDownload

Closure and Scaling Down of Business

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Section 53: Liquidation

Supreme Court confirms, sale certificates from confirmed auction sales do not require mandatory registration

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Barsha Dikshit and Neha Malu | resolution@vinodkothari.com

In the context of an auction sale conducted during liquidation or by a secured creditor, the sale certificate serves as a critical document, evidencing the transfer of title to the purchaser upon confirmation of the sale. Its legal nature and the procedural requirements such as registration and the payment of stamp duty have often been a subject of scrutiny and debate. 

The Hon’ble Supreme Court in the matter of State of Punjab & Anr. v Ferrous Alloy Forgings P. Ltd. & Ors. reaffirmed the principle that a sale certificate issued by the authorised officer is not compulsorily registrable under section 17(1) of the Registration Act, 1908. The Court further clarified that compliance with Section 89(4) of the Registration Act, which provides for forwarding of a copy of the sale certificate by the authorised officer to the registering authority, is sufficient to satisfy the statutory requirements. However, in instances where the purchaser voluntarily presents the original sale certificate for registration or uses the same for some other purpose, the document is liable to attract stamp duty as prescribed under the Indian Stamp Act, 1899, or the relevant state enactments governing stamp duty. 

This article examines the legal framework governing sale certificates in auction sales, analyzing the procedural and practical nuances associated with their registration and the evolving interpretations rendered by courts in the context of SARFAESI Act and Insolvency and Bankruptcy Code, 2016. 

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

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– 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.

Supreme Court clarifies the boundaries of “Inherent Powers” of NCLAT

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CIRP Withdrawal in GLAS Trust Company LLC v BYJU Raveendran & Ors

– Barsha Dikshit, Partner | resolution@vinodkothari.com

It is a well-established principle that the exercise of inherent powers is permissible only in the absence of an express provision within the statutory framework. Also, that the Insolvency and Bankruptcy Code, 2016 (IBC) is not to be used as a mechanism for mere debt recovery.

In a recent ruling in GLAS Trust Company LLC vs. BYJU Raveendran & Ors[1]., the Hon’ble Supreme Court set aside the order of the National Company Law Appellate Tribunal (NCLAT) [2]that permitted withdrawal of CIRP post admission by NCLT, by exercising inherent powers under Rule 11 of the NCLAT Rules, 2016, despite existing statutory procedures for CIRP withdrawal. The matter arose from a dispute concerning the validity of a settlement, wherein a financial creditor objected to the source of settlement funds, asserting that it constituted preferential payment or amounted to round-tripping, thereby warranting judicial scrutiny under the insolvency framework.

The article analyses the impact of the ruling on the jurisdiction of NCLAT to deal with various matters related to the corporate debtor under insolvency or liquidation.

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Importance of Filing Timely Claims in IBC: A Guide for Government Departments

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– Neha Malu, Deputy Associate | resolution@vinodkothari.com 

Introduction

In the landscape of corporate insolvency, the timely submission of claims by creditors is of paramount importance. The Insolvency and Bankruptcy Code, 2016 (“IBC”) provides a structured process for dealing with corporate debtors in distress. This article highlights the necessity of adhering to prescribed timelines for claim submission and underscores the repercussions of delays, drawing on pertinent judicial rulings. Additionally, it offers a comprehensive overview for government departments on the process of filing claims under the IBC.

Now, in case of IBC, there are two stages- 

  1. Corporate insolvency resolution process (CIRP) stage, and
  2. Liquidation stage. 

Upon initiation of CIRP, an interim resolution professional is appointed who makes a public announcement in Form A within 3 days of his appointment. The respective creditors of the concerned corporate debtor are required to file their claims within the timeline specified herein below. However, it is to be noted that if the CIRP of the concerned corporate debtor fails, the creditors are also required to submit their claims once again in the liquidation process. 

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