By: Anant Pratap Singh Rathore and Monika Saxena
The NCLAT has recently recommended the Insolvency & Bankruptcy Board of India (“IBBI”) consider amending the IBBI (Insolvency Process for Corporate Persons) Regulations to include claims in the information memorandum that, while not submitted with the Resolution Professional (“RP”)are reflected in the Corporate Debtor’s (“CD”) books/records. It was then held in the case of Puneet Kaur v. KV Developers Pvt. Ltd. that all of the CD’s liabilities be included in the information memorandum, regardless of any delay by the financial creditors in filing their claims.
In the instant case, the NCLAT directed the RP to submit to the Resolution Applicant (“RA”) the claims of homebuyers whose details are reflected in the CD’s records, based on which the RA shall prepare an addendum to the resolution plan, which may be submitted before the Committee of Creditors (“CoC”) for consideration. However, the NCLAT gave open-ended reasoning that the claims, though not submitted, shall be acknowledged, for appropriate resolution of the CD.
The article analyzes this decision of the NCLAT as a step forward or a step backward, keeping in mind the objective of the Insolvency & Bankruptcy Code (“Code”)the effect of these decisions on RAs, and the powers of the Adjudicating Authority (“A A”). Based on this analysis, the article will highlight the pertinent questions that need to be addressed to settle the law while not making the entire process of submitting the claims within a nugatory timeline.
BONUS POINT FOR HOMEBUYERS: A STEP-FORWARD
The ruling rightly acknowledges that the homebuyers are often ordinary people who have little or no opportunity to learn about the ongoing proceedings against the CD within the fourteen-day time to register their claim, or even with the maximum extension of 90 days. Although the Code requires public announcements, such announcements in the newspaper are often made in the area where CD maintains its registered office or corporate office. It is very likely that the homebuyers, usually being large in numbers, do not generally reside in such areas only. Nevertheless, all documentation referring to homebuyers is on the CD’s record, and RP does assume responsibility for all such records.
As a result, there is no reason to exclude the claims of such homebuyers, whose claims are reflected in the CD’s records, including their payments and allocations. The ruling also clarifies that to further the objective of complete resolution of the CD’s debt, it is significant to account for all the liabilities irrespective of whether they have been submitted in the form of claims or not. Thus, the Tribunal’s decision to include all the homebuyers’ claims, albeit delayed but reflected in the CD’s books/records, in the information memorandum is unquestionably a step forward in upholding the objective of the Code and protecting the interests of homebuyers considering their nature.
IMPLICATIONS OF THE DECISION:
- Objectives of the Code: While it is indeed necessary to balance the interests of all stakeholders, however, the ultimate objective of the Code is the resolution of the CD, and all the other objectives shall align to promote this objective. To further this intent, a strict timeline is set at every stage which is reflected throughout the Code to maximize asset value. If such a request of creditors is approved for submission of claims at any time during the insolvency proceedings, the purpose of the Code would be thwarted.
Further, it is persistent to note that insolvency is not a recovery proceeding, and the Code already prescribes procedure and timeline for submission of claims, along with an extension. Once the window is opened, it would lead to an inundation of petitions by other creditors who would demand similar accommodations. The Code was enacted for the expeditious resolution of the CD, especially considering that procedural delays under the previous statutes such as SICA, SARFAESI, and RDDBFI: resolving in abject failures in its stressed assets. A real hazard in such an event could be liquidation, and corporate death, of an otherwise functional CD, which with the resolution plan approved, is set to come out of the red.
Further, NCLAT also ruled that new claims cannot be entertained and financial creditors who do not submit their claims within the stipulated time cannot be included in the list of creditors and that too after approval of the resolution plan by CoC. In contrast, NCLAT, in the instant case, allowed the claim when the plan had already been approved by the CoC and was pending before the AA for approval.
It is baffling that at this stage, the NCLAT resolved to conduct almost the entire process for the second time, beginning from admitting the delayed claims to the approval stage. It would be trite to emphasize the fact that this would mean complete disruption of the proceedings and the timelines stipulated therein, as previously held. With the foregoing in mind, the author believes that such interruption would mean setting the clock back and rendering the resolution more difficult. In essence, this would result in CIRP and approval of a successful resolution plan to continue for an indefinite period, which is certainly not the intention of the Code.
- Burden on the Resolution Applicant: An RA weighs all the liabilities of the CD based on the information provided by the information utilities and information memorandum prepared by the RP to prepare a viable resolution plan. The RA needs to know beforehand what has to be paid so that it may take over and run the business of the CD. Once a plan is approved by the CoC and AA, a successful RA cannot suddenly be faced with “undecided” claims. Additionally, an RA is rarely allowed to renegotiate, modify, or withdraw the resolution plan once it has been duly approved that too on reasonable grounds and to a very limited extent.
Directing the RA to accommodate new claims would be an unwanted burden and detrimental to their interest, as they might not be in a position to pay more than they had already mentioned in their previous resolution plan. This would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective RA who successfully takes over the business of the CD.
- Power of AA to make such an order: The evaluation and verification of the claims fall under the exclusive domain of the duties of the RP/IRP and therefore, cannot be interfered with by the courts or tribunals but for some limited grounds. The powers of the AA are confined by the provisions of section 31(1) of the Code in determining whether the requirements of section 30(2) have been fulfilled in the plan as approved by the CoC. It is given an extremely limited power of judicial review into the resolution plan duly approved by the CoC, which cannot be exercised to create procedural remedies that have substantive outcomes in the process of insolvency.
The AA, under the guise of this power, cannot complete CoC to negotiate further with a successful RA. Although, AA is also empowered to use its inherent powers this special power is to be used in very specific matters causing grave injustice or miscarriage of justice. Wherein, the statute provides enough time to the creditors, admitting a claim at such a later stage by prejudicing the entire insolvency proceeding does not warrant the use of such powers.
UNANSWERED LEFT QUESTIONS:
The AA has exceeded its powers in allowing the claim, moreover, the AA has not created an exception in this matter in the interest of justice or considering a particular case of homebuyers but has generalized the admission of delayed claims. This judicial activism fails the entire purpose of the Code by meddling with the sacrosanct timeline set in it and undermining its objective. Furthermore, the AA failed to realize the interest of other creditors who had filed their claims for a timely conclusion of the proceedings, and the RA had to assess the viability of the CD before submitting the resolution plan. All in all, such an open-ended ruling sets a wrong precedent for the future course of proceedings.
While the ruling is not only inconsistent with the previous decisions of the NCLAT, it also leaves a lot of unanswered questions that need to be addressed. Would a generalized extension, without considering the genuineness of the reasons, not be detrimental to the resolution? Would this step render the procedure for submissions of redundant claims if delayed claims reflected in the records are anyways to be included? Should AA not prescribe a stage until which delayed claims can be admitted in the interest of justice, to avoid reopening the entire process of negotiation and approval of the resolution plan? In light of these concerns, the author hopes that the IBBI or the legislature, or the judiciary soon lays down some guidelines to address this conundrum.
Cite as: Anant Pratap Singh Rathore and Monika Saxena, ‘The Fate of Delayed Claims Reflected in Records of the Corporate Debtor’ (The RMLNLU Law Review Blog, 11 July 2022)