Pending civil suits, arbitral claims stand abated after resolution plan approved under IBC: Supreme Court

New Delhi: The Supreme Court on Friday held that pending civil suits and arbitration proceedings relating to pre-insolvency, operational claims cannot continue once a resolution plan has been approved, unless such claims had crystallised and formed part of the approved plan.

In a significant ruling strengthening the "clean slate" doctrine under the Insolvency and Bankruptcy Code (IBC), a bench of Justices Manoj Misra and Manmohan allowed appeals filed by Tata Steel Ltd, the successful resolution applicant for Bhushan Steel Ltd, and set aside judgments of the Bombay High Court that had permitted a recovery suit by an operational creditor to proceed despite approval of the resolution plan.

"Upon a harmonious reading of the Resolution Plan, this court is of the opinion that all legal proceedings, including arbitration and civil suits which had not culminated in determinable, quantifiable claims by the date of approval of the Resolution Plan by the National Company Law Tribunal (NCLT) stand abated, extinguished, waived or withdrawn.


"Only crystallised claims as on the effective date (i.e. 18th May 2018) are payable on a pro-rata basis. Accordingly, no amount beyond Rupee One (Re 1) each was payable to Respondent No.1 -- Varsha and the Intervenor-Masyc, whose pending arbitration and civil proceedings stood abated/ waived/ extinguished/ withdrawn upon approval of the Resolution Plan," Justice Manmohan, writing the judgment for the bench, said.

In an important postscript, the judgment acknowledged the hardships faced by small operational creditors, particularly Micro, Small and Medium Enterprises (MSMEs), under the existing insolvency regime.

While reaffirming the validity of the current legal framework, the bench observed that MSMEs and other small operational creditors often remain at the bottom of the repayment waterfall and may struggle to absorb financial losses arising from insolvency proceedings.

The bench suggested that the Law Commission and Parliament examine whether the IBC requires reforms to provide a fairer repayment mechanism for such creditors without compromising the efficiency of the insolvency resolution process.

"This Court is nevertheless of the view that the Code (IBC) does not adequately account for the position of small operational creditors, including MSMEs and statutory local bodies, who stand significantly disenfranchised under the present framework by being placed at the bottom of the repayment waterfall," it said.

Most such entities are ill-equipped to absorb even a minor financial setback and are, therefore, often compelled to adopt an aggressive and disruptive stance, as the facts of the present matters demonstrate, it said.

"Since this issue lies within the legislative domain, this court observes that the Law Commission and the Legislature may usefully examine the matter to ensure a fair and balanced repayment mechanism alongside an efficient insolvency regime," it said.

Referring to its earlier verdict, Justice Manmohan said the apex court had categorically held that "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".

The bench said the treatment of claims of creditors must be prescribed in the resolution plan approved by the Committee of Creditors, whose commercial wisdom is non-justiciable.

"It is equally admitted that the Code has an overriding effect in the event of inconsistency with any other law for the time being in force and once a Resolution Plan is approved under Section 31(1) of the Code, the claims therein stand frozen and are binding on all stakeholders, including the Corporate Debtor, its Creditors...," it said.

The bench also dismissed arbitration proceedings initiated by another operational creditor, holding that all legal proceedings involving uncrystallised claims stood extinguished upon approval of the resolution plan.

The dispute arose from claims filed by operational creditors Varsha and Masyc Projects Pvt Ltd during the corporate insolvency resolution process of Bhushan Steel.

Their claims, which were already the subject of pending civil and arbitral proceedings, had been admitted by the resolution professional at a notional value of Re 1 each because they remained disputed.

The court noted that the final list of creditors prepared before approval of the resolution plan treated these as quantified claims of Re 1, and no challenge was made to that final list. Consequently, the approved resolution plan attained finality and became binding on all parties.