A Division Bench of the Delhi High Court recently reaffirmed that once a debt-ridden company’s resolution plan is approved by the Adjudicating Authority (NCLT), it gets a clean slate for a new beginning [Union of India Vs OCL Iron and Steel Limited].
A Bench led by Chief Justice Manmohan and comprising Justice Tushar Rao Gedela added that surprise claims that were not filed with the resolution professional before the resolution plan's approval cannot be sprung on the new management (successful resolution applicant) of such a company.
“The successful Resolution Applicant in order to get a fresh breath or new lease of life, is permitted to proceed in resurrecting the 'ongoing concern' and no surprise claims are flung or sprung upon it, lest the entire effort of revitalizing and restarting the Corporate Debtor are wasted," the Court said.
A resolution plan is a proposal submitted by a proposed resolution applicant to the company’s creditors aimed at reviving it financially. The National Company Law Tribunal (NCLT), which is the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016, (IBC) approves or denies the plan after hearing all the stakeholders of the company.
The Division Bench judgment was passed in an appeal filed by Union of India challenging a single judge order which had held that all pre-resolution claims against a company that are not raised before the resolution professional become extinguished once a resolution plan is approved by the NCLT.
Genesis of the dispute
In 2015, OCL entered into a Coal Mine Development and Production Agreement with the Union of India for the Ardhagram coal mine. The terms of the agreement entailed OCL to maintain a Performance Bank Guarantee (PBG) of ₹92.2 crore. The agreement was terminated by the Union of India in late 2021 as OCL did not renew the PBG.
In the meanwhile, the company came to be admitted into the Corporate Insolvency Resolution Process (CIRP) and the company’s Resolution Professional (RP) called for the creditors submit claims to ascertain the company’s liabilities.
The Union of India submitted two separate claims one for the PBG claim of ₹92.25 crore and another claim for an incremental fixed cost of ₹9.21 crore. While the latter was included in the resolution plan, the RP did not admit the PBG claim as a ‘financial debt’ and the Union government was not found to be a ‘financial creditor.' However, the RP instructed the Union to file a fresh claim. The government did not do so. Meanwhile, the incremental fixed cost claim was calculated as per the resolution plan and disbursed accordingly.
Once the resolution plan was admitted, OCL came under the management of a company called HI A MMT Pvt. Ltd. The new management of the company expressed its intention to participate in the bidding process for the Lalgarh South coal mine in February 2024. The Union government debarred them from participating in coal auction till the repayment of ₹92.25 crore (from PBG). Thus, OCL filed a writ petition before the Delhi High Court.
Division Bench judgment
The Division Bench agreed with the single judge’s order and held that the Union government failed to demonstrate what steps were taken by it to resurrect its PBG claim once the Resolution Plan was approved. Referring to a host of rulings by the Supreme Court on similar issues, the High Court found that once the Resolution Plan is approved by the NCLT, it binds all creditors and stakeholders, extinguishing any residual or past claims or liabilities, even those which have not been expressly waived. The Court noted that allowing such claims to be raised after the approval of Resolution Plan would undermine the fundamental objectives of the IBC.
Thus, the Court concluded that once a Resolution Plan is approved, a company gets a ‘clean slate’ or a new beginning, free of its past liabilities. A claim that was not filed with the resolution professional cannot come in the way of the company’s future prospects, the Court held.
The Union of India was represented by Central Government Standing Counsel Kirtiman Singh along with advocates Waize Ali Noor, Maulik Khurana, Varun Pratap Singh and Ranjeev Khatani.
OCL was represented by Senior Advocate Sandeep Sethi with advocates Divyakant Lahoti, Kartik Lahoti, Anushka Awasthi, Riya Kumar, Praveena Bisht, Vindhya Mehra, Samridhi Bhat and Adith Menon.
[Read Judgment]