B.B.A. LL.B. Fourth Year (Hons.)
VIT School of Law, Chennai
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Admissibility of claims during CIRP
The Insolvency and Bankruptcy Code of 2016 has proven to be a strong piece of legislation in terms of governing the insolvency and liquidation of corporate organisations. Yet, there are many components of the Corporate Insolvency Resolution Process (CIRP) that have frequently been called into question before the courts and tribunals. The admission of claims by a Resolution Professional during the CIRP is one such issue. This article will help to trace the rules relating to admission of claims during a CIRP and the time limit with reference to judicial pronouncements.
The notion of Claim is introduced in the Insolvency and Bankruptcy Code 2016 when the Corporate Insolvency Resolution Process begins on the day of the Interim Insolvency Professional's appointment. The claim is a crucial aspect to be decided in the Resolution Plan for the Corporate Debtor in the Corporate Insolvency Resolution Process commenced under the Code. The provisions aim to protect the interests of creditors of a company which is under CIRP while also completing the insolvency resolution process in a timely way.
Before getting into the admissibility of claims, a clear understanding of what claims is has to be present.The term "claim" is defined under section 3(6) of the code. A claim, according to this clause, is a right to payment as well as a right to redress. So basically, a claim only exists if there is a right to payment, and if there is no right to payment, there is no claim at all. Thus, the right to payment will emphasize the concept of a claim if whether or not the right is fixed, disputed, undisputed, legal, equitable, secured, or unsecured and similarly, the right to redress falls within the claim category.
To give an overview, according to the provisions of sections 18 and 25 of the Code, the Interim resolution professional or the resolution professional is responsible for compiling all claims made by creditors in response to the public announcement. However, it should be made of note here that neither Section 18 nor Section 25 require the interim resolution professional or the resolution professional to verify, admit, or reject allegations. Regulation 13 of the CIRP Regulations gives them the responsibility to verify the claims which will be explained subsequently.
The power of an Interim Resolution Professional or a Resolution Professional to reject time-barred claims of various creditors whose debt is owed by the Corporate Debtor continues to be a fascinating subject. The issue keeps resurfacing as a result of the Supreme Court's finding in the Swiss Ribbons case that the Resolution Professional is given administrative rather than quasi-judicial authority. This leaves the Interim Resolution Professionals or Resolution Professionals undecided as to whether they must accept claims from various creditors, even if they are completely time-barred. To understand the same firstly we must see what the code and the CIRP regulations says about it.
When a Corporate Debtor becomes insolvent and the Corporate Insolvency Resolution Process (CIRP) is started, the Adjudicating Authority appoints an Interim Resolution Professional. The Adjudicating Authority, under Section 13 of the Insolvency and Bankruptcy Code makes a public statement of the CRIPs beginning and invites claim submissions under Section 15 of the Code. The Interim Resolution Professional thereafter makes a public announcement under section 15 read with regulation 6 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations).
Regulation 6(2)(c) of the CIRP Regulations when seen says that it requires proofs of claim to be submitted within 14 days after the IRP's appointment and in Chapter IV of the CIRP regulations, the various types of proofs of claims have been discussed. If need be, under regulation 10 of the CIRP regulations gives the Interim Resolution Professional or the Resolution Professional the authority to request more proof or explanation from a creditor in order to substantiate all or part of the creditor's claim.
The Interim Resolution Professional or the Resolution Professional has an obligation to verify every claim within seven days of the last date of receipt of the claims as of the insolvency commencement date, according to Regulation 13 of the CIRP regulations. It also requires the Interim Resolution Professional or Resolution Professional to keep and update a list of creditors that includes the names of creditors, the amount claimed by them, the amount of their claims admitted, and any security interests in respect of such claims.
To have an in-depth understanding on the subject, it’s essential to have a look at a few case laws as to what the courts have observed with regards to the admissibility of claims during CIRP. In the case of Grasim Industries Limited and Edelweiss Asset Reconstruction Company Limited v. Tecpro Systems Limited, Civil Appeal No. 8129 of 2019, Supreme Court of India, the Apex Court has observed that "a perusal of aforesaid Regulation (i.e., Regulation 13 of the CIRP Regulation) makes it clear that he is under mandatory duty to verify every claim and maintain the list of creditors containing their names along with the amount claimed by them and the amount of their claim admitted." The applicant's claim here was denied by the Interim Resolution Professional (IRP) on the grounds that the claim amount was the subject of arbitration before the Arbitral Tribunal, and the NCLT upheld the IRP's judgement.
Further, in the combined appeal filed before the Hon'ble NCLAT in the matter of Prasad Gempex v. Star Agro Marine Exports Pvt. Ltd. & Others. and SREI Infrastructure Finance Ltd. v. Kannan Tiruvengandam (R.P.) & Another, Company Appeal (AT) (Insolvency) Nos. 291 & 591 of 2018, the question arose was whether the Resolution Professional has jurisdiction to decide or reject the claim of the financial creditor or operational Creditor and a similar issue even came up before the Hon'ble NCLAT in the case of Dynepro Private Limited v. V. Nagarajan, Company Appeal (AT) (Insolvency) No. 229 of 2018. The Hon'ble NCLAT had observed that a Resolution Professional does not have the authority to decide the claims of one or more creditors, including Financial Creditors, Operational Creditors, Secured Creditors, and Unsecured Creditors.
It is to be noted that the power of Resolution Professional had been of issue before the Hon'ble Supreme Court in the case of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Others, REED 2019 SC 01504. The Hon'ble Supreme Court here held, that the Resolution Professional had no adjudicatory power and the Resolution Professional is responsible for vetting and verifying the claims and determining the value of each claim. And as opposed to this, the Liquidator in the Liquidation proceedings under the IBC has to consolidate and verify the claims and either admit or reject such claims under Sections 38 to 40 of the Code.
And, in the recent judgment passed by the Hon'ble Supreme Court in the matter of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Others, REED 2019 SC 11505,it has been held that the role of the Resolution professional is not adjudicatory but administrative. Further, with respect to the claim, it has been stated that in the CIRP, 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.
According to the aforementioned cases, we understand that an Interim resolution professional or Resolution Professional does not have the express ability to adjudicate the claim during the CIRP, similar to the power conferred to a liquidator to check and either admit or reject a creditor's claim. It is important to however remember, that the IRP or the RP has significant authority over which claims and even as to how many claims of a creditor are admitted or denied during the CIRP.
After having understood the admissibility and denial of claims during CIRP, the question that emerges from the above stated provisions is whether the verification by an Interim Resolution Professional or the Resolution Professional requires him to also check if the claims of the Corporate Debtor's creditors were time-barred as of the insolvency commencement date. If so, who has the authority to reject the time-barred claim whether the Interim Resolution Professional or the Resolution Professional. For this reason, we must see how the Limitation act is applied to the Code.
The limitations provisions of the Limitation Act of 1963 were not initially applied to the Code. With, the Second Amendment Act, 2018, added Section 238A to the Insolvency and Bankruptcy Code, which took effect on June 6, 2018 wherein it was seen as per the report that, it was never intended for the Interim Resolution Professional or the Resolution Professional to admit claims that were time-barred because the creditors of such time-barred claims did not exercise their legal remedies against the Corporate Debtor during the period of limitation and notably, Section 238A makes the Limitation Act provisions applicable to actions or appeals before the NCLT, NCLAT, DRT, or DRAT, as relevant. The provisions of Section 238A of the Code do not particularly encompass claims verification by the Interim Resolution Professional or the Resolution Professional under Regulation 13 of the CIRP regulations. As a result, the statute is silent on whether the Limitation Act applies to the process of claim verification by the Interim Resolution Professional or the Resolution Professional.
Though the Limitation Act's provisions have not been specifically declared relevant to Regulation 13 of the CIRP Regulations, it should not be overlooked. After all, once a claim is time barred, the debtor is safeguarded by the law from any legal action brought against it to recover the claim. And like discussed above on the regulation 13 of CIRP regulations we see that, The CIRP Regulations draw a distinction between the amount sought by creditors and the amount of their claims admitted in regulation 13(1). As a result, the provision presumes that the Interim Resolution Professional or the Resolution Professional will use their best judgement to allow only those claims that are legally permissible. And as of Section 3(6) of the code is concerned, the right to payment or the right to remedy as anticipated in clauses (a) and (b) of Section 3(6) are not available in the case of time-barred claims, hence they are not included in the definition of claim.
The CIRP laws also require the Interim Resolution Professional or Resolution Professional to assess or make a best estimate of the amount of the claim based on the information available to him, and to amend the amounts of claims acknowledged if new information becomes available as per regulation 14 of CIRP Regulations. As a result, the CIRP Regulations require the Interim Resolution Professional or Resolution Professional to either estimate the amount of claim when a creditor's claim is not accurate or even alter the amounts of claim admitted. Therefore, the distinction between the amount sought by creditors and the claims accepted appears self-evident. The claim that will be admitted is one that is backed up by documentation demonstrating the existence of a right to payment or remedy, as defined in Section 3(6) of the Code. As a result, a time-barred claim cannot be considered an acknowledged claim for this reason.
Taking the stance that an Interim Resolution Professional or a Resolution Professional has no choice but to acknowledge time-barred claims is a tough notion to justify. When the claimants whose claims are barred by the law of limitations are not allowed to file their time-barred claims with the Interim Resolution Professional or the Resolution Professional pursuant to the public announcement made under Section 15 of the Code read with Regulation 6 of the CIRP regulations. And just because something can't be done directly, it shouldn’t be done indirectly as well. If a creditor with a time-barred claim cannot trigger insolvency by filing an application under Section 7 or Section 9 of the Code, he cannot indirectly participate in the Corporate Debtor's Insolvency Resolution Process by filing time-barred claims with the Interim Resolution Professional or Resolution Professional.
When allowing a time-barred claim to be satisfied, it would place an undue burden on a prospective resolution applicant who wants to bring the Corporate Debtor back to life. The Resolution Professional is required by Section 30(2)(e) of the Code to analyze each resolution plan to ensure that it does not violate any provisions of the law in effect at the time and hence a resolution plan seeking to satisfy time-barred claims would be in contravention of the law of limitation.
The adjudication of a claim under the Code is the legal process by which the right to claim against the corporate debtor is to be decided by the proper authority whether it is the Interim resolution professional or the Resolution professional or Adjudicating Authority (NCLT). However, after reviewing the different aspects under the bankruptcy code and CIRP Regulations, as well as pertinent judgements, it may be determined that, while the IRP or RP has the authority to rule on the admission or denial of a claim, the IRP or RP’s duty is administrative rather than adjudicatory. Therefore, if the Interim resolution professional or the resolution professional does not accept any claim of a creditor during the CIRP, then it is the adjudicating authority which will decide the admission or rejection of claim during the CIRP upon the filing of an application by such creditor whose claim has not been admitted by the IRP or RP. It is seen in the case of Mr. Navneet Kumar Gupta (RP of Monnet Power Company Limited) Vs. Bharat Heavy Electricals Limited, Company Appeal (AT) (Insolvency) No. 743 of 2018, before the Hon'ble NCLAT Mumbai Bench in which Hon'ble NCLAT has considered the issue relating to jurisdiction of the Resolution Professional to reject the claim of Operational Creditors without going into the evidence. Here, when we see the brief facts we see that Bharat Heavy Electricals Ltd. (Operational Creditor) has submitted an application before the Resolution Professional to acknowledge the whole claim of Rs.977,49,97,545/- plus interest, which has been filed by the Resolution Professional in the CIRP against 'Monnet Power Company Limited'. The Resolution Professional on consideration of the same, had not accepted part of the claim. By impugned order dated October 12, 2018, the Mumbai Bench of NCLT held that the RP had incorrectly disallowed the substantial claim in its entirety and directed the RP to re-examine the claim on the basis of BHEL's accounts and evidence, and that if the evidence corroborated the claim, it should be taken into account when determining BHEL's total claim.
The RP, who was aggrieved by the NCLT's decision, filed this appeal with the NCLAT. While deciding the case, the Hon'ble NCLAT cited the Supreme Court's decision in Swiss Ribbons Pvt. Ltd. & Another, which was discussed earlier in this article too, stated that the "Resolution Professional has no adjudicatory powers." Therefore, it was held that the RP is directed to act in accordance with the directions of the Adjudicating Authority.
Recently even in the case of S. Rajendaran, Resolution Professional of PRC International Hotels Private Limited v. Jonathan Mouralidarane, CA (AT)(Ins)1018/2019. The Hon'ble NCLAT observed that "we are of the opinion that the 'Resolution Professional' had no jurisdiction to "determine" the claim as pleaded in the Appeal. He could have only "collated" the claim, based on evidence and the record of the 'Corporate Debtor' or as filed by Jonathan Mouralidarane ('Financial Creditor'). If an aggrieved person thereof moves before the Adjudicating Authority and the Adjudicating Authority after going through all the records, comes to a definite conclusion that certain claimed amount is payable, the 'Resolution Professional' should not have moved in appeal, as in any manner, he will not be affected."
Therefore, after having a comprehensive understanding of the claims, one can come to a conclusion that an Interim Resolution Professional or a Resolution Professional can reject time-barred claims of creditors under Regulation 13 of the CIRP Regulations.