Supreme Court Quahses Enforcement of Arbitral Award For Claims Not Included in IBC Resolution Plan [Read Judgement]

The Supreme Court quashed an arbitral award passed by the Micro and Small Enterprises Facilitation Council (MSEFC) against Electrosteel Steels Ltd., holding that the award was non-executable in view of the resolution plan approved under Section 31 of the Insolvency and Bankruptcy Code (IBC), 2016.

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The Appellant,  Electrosteel Steels Ltd had filed petition before the High Court of Jharkhand at Ranchi challenging the order passed by the Presiding Officer, Commercial Court/District Judge-1,  On 02.12.2014 and 20.12.2014, respondent filed claim petitions before the West Bengal Micro, Small and Medium Facilitation Council for a total principal outstanding amount of Rs. 1,59,09,214.00 which were registered as Case No. 330/2014 and Case No. 331/2014. In Case No. 330/2014, the claim amount was Rs. 1,36,69,981.33, whereas in Case No. 331/2014 the claim amount was Rs. 22,39,233.00, thus the total amount being Rs. 1,59,09,214.00. The claims were made under the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 ( ‘the MSME Act’).

As per the requirement of the MSME Act, conciliation proceedings were initiated but attempt for conciliation failed. Thereafter, the arbitration proceedings were commenced on 07.06.2017.  On 27.06.2017, the financial creditors of the appellant invoked Section 7 of the Insolvency and  Bankruptcy Code, 2016 (‘IBC’) before the National Company Law Tribunal, Kolkata Bench (NCLT) which was registered as C.P. No.(IB) 361/KB/2017. On 21.07.2017, NCLT imposed moratorium and an interim resolution professional was appointed.

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On 24.07.2017, the interim resolution professional issued a public announcement calling upon all the creditors to submit their claims before him. In view of the moratorium declared by the NCLT,  arbitral proceedings before the Facilitation Council were kept in abeyance. 

Respondent filed its claim before the resolution professional, who partly admitted the claim of the respondent.

On 29.03.2018, a resolution plan was submitted by Vedanta Limited before the NCLT wherein all the claims of operational creditors were settled at nil value.

However, claim of the respondent was not included in the resolution plan as approved by the committee of creditors. Ultimately, the resolution plan was approved by NCLT on 17.04.2018 under Section 31 of the IBC on and from which date the moratorium period came to an end.

In the order , NCLT declared that the claims of all the operational creditors were settled at nil. No appeal was preferred by the respondent. However, the aforesaid order of the NCLT dated 17.04.2018 was challenged before the National Company Law Appellate Tribunal, New  Delhi (NCLAT) in Company Appeal (AT) (Insolvency) No.175 of 2018 by some of the operational creditors. But the same was dismissed on 10.08.2018. Other creditors also approached NCLAT in Company Appeal (AT) (Insolvency) No.265/2018 and in analogous appeals. Specific ground taken was that in the resolution plan, the resolution applicant had not taken proper care of the operational creditors.

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Appellant did not contest the arbitral proceedings. Ultimately, an award was passed on 06.07.2018. As per the award, the Facilitation Council directed the appellant to pay a sum of Rs.1,59,09,214.00 along with interest to the respondent in terms of Section 16 of the MSME Act. Appellant did not challenge the award under Section 34 of the Arbitration and

Conciliation Act, 1996.

Respondent instituted execution proceeding which was initially registered as Execution Case No.77 of 2018 and thereafter as Commercial Execution Case No.21 of 2022 before the Executing Court. At the stage of execution of the award, appellant filed a petition dated 14.05.2019 contending that the arbitral award was a nullity and hence not executable as the claim of the respondent was already settled at nil as per the resolution plan and, therefore, nothing was payable to the respondent.  

Executing Court by the order dated 03.03.2023 dismissed the petition of the appellant and directed it to comply with the award dated 06.07.2018 within fifteen days. The High Court opined that the plea of nullity qua an arbitral award can be raised in an execution proceeding under Section 47 of the CPC. However, the scope of interference would be very narrow. As regards the second question, High Court rejected the contention of the appellant that since the award suffered from patent or inherent lack of jurisdiction and therefore was a nullity, it can be questioned at the stage of execution without challenging the award under Section 34 of the 1996 Act.

High Court answered the third question by holding that the Facilitation Council did not lose its jurisdiction to procced and pronounce the arbitral award notwithstanding approval of the resolution plan by the NCLT under Section 31 of IBC. Reasoning given by the High Court is that the arbitral proceedings were initiated prior to the insolvency resolution date, kept suspended during the moratorium period and resumed after lifting of the moratorium; the approved resolution plan simply determined the claim of the respondent as nil. Accordingly, vide the impugned judgment and order High Court dismissed the petition filed by the appellant under Article 227 of the Constitution of India.

In Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, it was held that a successful resolution applicant cannot face undecided claims after acceptance of the resolution plan, as it would amount to a “hydra head” popping up and create uncertainty over the amount payable.

The Court pointed out that although though the NCLT, the committee of creditors, and the resolution expert had observed the arbitration processes involving Ispat Carrier, the claim was not one of the top 30 operating creditors whose claims were settled for nothing. Its claim could not, therefore, be elevated. The Court further noted that it was explicitly stated in the settlement plan that all claims pertaining to ongoing arbitrations and litigations would be settled for nothing.

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A bench of Justice Abhay S. Oka and Justice Ujjal Bhuyan reiterated that once a resolution plan is approved by the National Company Law Tribunal (NCLT) under Section 31(1) of the IBC, any claim that is not part of the plan stands extinguished and cannot be pursued further.

The Court ruled that the Facilitation Council's award lacked jurisdiction and may therefore be contested in execution procedures under Section 47 CPC. The Court ruled that the MSEFC had authority to move further after the plan was adopted and that eliminating the moratorium did not bring back claims that had been extinguished.

As a result, the Supreme Court halted the execution proceedings that were still continuing before the Commercial Court in Bokaro and overturned the contested orders of the High Court and the Executing Court.

To Read the full text of the Order CLICK HERE

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