Legal Action not initiatable over any claims that are not included in resolution plan: Bombay HC [Read Order]

The Bombay High Court dismissed an Interim Application filed by the Appellant seeking the release of the bank guarantees, holding that all claims which are not part of the Resolution Plan shall stand extinguishe, and no person will be entitled to initiate or continue any proceedings in respect of any such claim.

The appellant, Garden Silk Mills Limited, Gayatri Industries, and additional responders. The controversy started with a monetary decree against the appellant that was issued on January 20, 2003. Garden Silk Mills Limited challenged this ruling in a first appeal submitted to the Bombay High Court in May 2003. The High Court subsequently issued a stay on the decision on June 17, 2003, provided that the appellant provided a bank guarantee that was periodically renewed and remained in effect until August 16, 2025.

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In accordance with the IBC Code, 2016 (IBC), Garden Silk Mills Limited was the target of the Corporate Insolvency Resolution Process (CIRP) while the appeal was pending. The insolvency application was accepted by the Ahmedabad-based National Company Law Tribunal (NCLT), and a Resolution Professional (RP) was designated to manage claims. The Resolution Plan was approved by the NCLT on January 1, 2021, in accordance with Section 31 of the IBC. Nevertheless, Gayatri Industries' allegations were not included in the Resolution Plan since they did not present them to RP.

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The Respondent contended that the funds that were placed in the court as a requirement for a stay of the decree's execution were no longer Garden Silk Mills Limited's property and had instead become custodia legis. The Bombay High Court's decision in Rajendra Prasad Bansal v. Reliance Communication Ltd. further bolstered the claim.

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The respondent also contended that the bank guarantee furnished by Garden Silk Mills Limited should not be released because they were given as a condition for the stay of execution of the decree. They relied on Supreme court precedent including P.S.L Ramanathan Chettiar v. O. Rm. Ramanathan Chettiar.

After reviewing both parties' arguments, the High Court provided its reasoning on whether the appellant was entitled to the bank guarantee and whether a debt may be claimed once a resolution plan was authorized. The court cited an Apex Court ruling in Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co., which addressed whether a creditor, such as the Central Government, State Government, or any local authority, could start legal action to recover any debts owed by the corporate debtor that weren't covered by the resolution plan that the Adjudicating Authority had approved.

The Supreme Court ruled that any claims that were not included in the Resolution Plan would be deemed extinguished, and that no one would have the right to start or pursue legal action against them. The court acknowledged that the Respondent's claim was not included in the Resolution Plan and that it was annihilated when the Resolution Plan was approved.

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After the claim is not included in the Resolution Plan, the single bench of Justice Sharmila U. Deshmukh believed that allowing Respondent No. 1 to lodge a claim to the bank guarantees would equate to paying off Respondent No. 1's debt, which is specifically forbidden.

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While dismissing the petition, the court held  that the debt of respondent stand extinguished and no right vests in the Respondent in respect of the bank guarantees or to oppose the release of bank guarantees.

To Read the full text of the Order CLICK HERE

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