Resolution of disputed claims in insolvency process

One of the key issues in the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (code), is the status and resolution of disputed claims. This has now been set to rest by the Supreme Court in the recent Essar Steel case. The National Company Law Appellate Tribunal (NCLAT), in the Essar Steel case, had held that disputed claims can be decided by the appropriate forums after the expiry of the moratorium period.

The Supreme Court set aside the NCLAT judgment and held that the existence of claims other than those decided on merits by the resolution professional (RP) or the National Company Law Tribunal (NCLT) or NCLAT, goes against the rationale of section 31, which provides that the resolution plan is binding on the corporate debtor (CD) and its employees, members, creditors, guarantors and other stakeholders in the resolution plan. It held that all claims must be submitted to and decided by the RP such that a prospective resolution applicant’s (RA) exposure is certain, and that no “undecided claims” can arise after the resolution plan is accepted. As per section 14, all pending proceedings with respect to disputed claims during the CIRP are stayed and no new proceedings can be initiated for adjudicating disputes. Originally, creditors with disputed claims had to wait for the completion of the CIRP before pursuing their claims, unless their claims were admitted by the RP.

A disputed claim cannot initiate a CIRP under section 9. Most cases of disputed claims are rejected by RPs on the grounds that such claims could not have secured an admission under the code. This was regarded to be consistent with the Supreme Court’s decision in the Swiss Ribbons case, which held that the RP is not vested with any quasi-judicial power and cannot adjudicate disputed claims. The decision of the RP to admit or reject a claim is not appealable. However, in practice, stakeholders have succeeded in applications (under section 60(5)) challenging rejected claims. In such cases, it was held that only claims that can be summarily disposed, may be decided.

Charanya Lakshmikumaran is a partner and Gopal Machiraju is a senior associate at Lakshmikumaran & Sridharan.