The enactment of the Insolvency and Bankruptcy Code, 2016, significantly impacted the Indian Insolvency regime. The main objective behind such codification is to consolidate and amend the existing laws relating to reorganisation and insolvency resolution and to promote entrepreneurship by creating a business environment where the availability of credit is high and where the insolvency resolution mechanism is smooth and time-bound. The IBC endeavors to resolve the corporate debtor as a going concern and liquidation is sought as a final resort.

The Insolvency and Bankruptcy Code 2016 mainly focuses on safeguarding the interests of financial and operational creditors. The financial interest of the holders of a contractual right against the corporate debtor ("CD") was not met, provided that such contractual right is pending adjudication by a court of law or any other authorised forum in order to ascertain, crystalise, or determine the quantum of such contractual claim.

Pursuant to a public announcement made under sections 13 & 15 of the Insolvency and Bankruptcy Code ("IBC"), the resolution professional ("RP") is bound by a duty to receive and collate all the claims submitted by creditors to him as stipulated in section 18(b). The major concern regarding such collection and collation of claims by the RP is whether such claims include contractual claims (including breach of contract and liquidated damages) pending adjudication and whether such creditors include the contractual right holders, whose right is pending to be ascertained by a court of law or other competent authority.

As per sections 7(4), 9(5) & 10(4) of the IBC the Adjudicating Authority (AA) was mandated with a duty to admit the applications made by the financial creditors, operational creditors, and corporate applicant respectively, provided that the adjudicating authority is satisfied towards the existence of a default. The major concern is whether the adjudicating authority is competent enough to admit an application where the claim is unascertained. Another concern is whether the adjudicating authority has the power or the authority to determine, crystallise, or ascertain such unascertained claims.

The agenda of this article is to demystify the powers of the adjudicating authority and the resolution professional in admitting the application or claims, as the case may be, where the quantum of such claim or such application is unascertained and to make it clear whether the adjudicating authority or the resolution professional have the power to determine, ascertain, or crystallise the unascertained claims.

What is a Claim Pending Adjudication?

As per section 3(6)(b) of the IBC, a 'claim' is a right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.

The definition clarifies a claim is a right to remedy for breach of contract irrespective of whether such right is disputed or not. a 'claim pending adjudication' is a claim, mostly contractual claims, where the quantum of such claim is unascertained and is disputed in a competent forum in order to make such quantum ascertained is known as a claim pending adjudication. Unascertained claims must be adjudicated by a civil court or any other competent forum to ascertain or determine the quantum of such claim, giving a right to the other party with certainty.

Disputed Claims and the Adjudicating Authority

The rights and duties of the AA towards the unascertained or disputed claims in both admission of the application to initiate the corporate insolvency resolution process ("CIRP") and adjudicating it to crystalise and determine the quantum of such claim were not clearly defined in the IBC. Some provisions endeavour to make it clear, but there is more ambiguity to understand.

Admissibility of CIRP application by AA

Section 3(10) of the IBC stipulates that "creditor" means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor, and a decree-holder'. Even though the definition is inclusive, the express inclusion of a decree-holder within the ambit of a creditor makes it unambiguous that a claimant whose claim is unascertained and pending adjudication is excluded. It can also be the other way, that's the reason why we already mentioned the ambiguous nature of the definitions.

In Gujarat Urja Nigam Ltd v/s. Nitesh Cogeneration Pvt Ltd. An agreement was entered between the Gujarat Urja Nigam Ltd (Operational Creditor) and Nitesh Cogenerative Pvt Ltd ("Corporate Debtor") which stipulated the provision of liquidated damages in case of a breach. The corporate debtor defaulted in complying with the terms of that agreement by virtue of which the operational creditor invoked his right to liquidated damages and filed a petition under section 9 of IBC. It was held that liquidated damages can not trigger insolvency proceedings unless adjudicated upon by a court of law or any competent forum.

National Company Law Tribunal (NCLT) also held that proceedings under the IBC are not for determining, crystalising, or ascertaining the quantum of damages. Liquidated damages even though stipulated expressly can only be ascertained by an adjudication of a court of law. The quantum of damages and the reasonability of such contractual claim is subject to adjudication. It was evident that contract damage claims are a subject matter of civil suit and NCLT is not an appropriate authority to decide.

In Sandeep Mittal v/s ASREC (India) Ltd. and Ors. the National Company Law Appelate Tribunal (NCLAT) addresses that whether obligations arising from a sale agreement qualify as financial debt as enumerated under Sec 5(8) of the IBC. This case highlights the importance of distinguishing between financial transactions and contractual defaults in order to safeguard the IBC framework from being misused as a tool for making contractual claims in commercial disputes. By analysing the true nature of the transaction, the NCLAT has reaffirmed that the IBC is not a forum for enforcing civil remedies, it is a mechanism to address genuine insolvency concerns.

Adjudicating Authority as the Adjudicator

Section 60(5)(a) of the IBC stipulates that "Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of:

1. Any application or proceeding by or against the corporate debtor or corporate person.

The literal interpretation of this definition clarifies that the AA has a residuary jurisdiction by virtue of which the AA is empowered with the power to entertain claims made by or against the corporate debtor.

However the NCLT in Sri Krishna Constructions v/s. Vasudevan, RP of Tiffins Barytes Asbestos & Paints Ltd. held that the AA, under its residuary jurisdiction, can not settle the ongoing disputed claims in court. Further in Encote Energy (India) Pvt Ltd Vs. V. Venkatachalam the NCLAT held that the AA could not resolve a claim involving disputed facts, as such matters must be determined by a court with appropriate jurisdiction.

In Roma Enterprises Vs. Mr. Martin S.K Golla, RP the NCLAT held that when resolving a disputed claim necessitates the AA to assess factual issues, it is generally disinclined to decide such claims. Even though section 60(5) confers broad jurisdiction upon the Adjudicating Authority, this jurisdiction has not been construed to include the power to adjudicate disputed claims.

In M/s Embassy Property Developments Pvt Ltd. v/s. State of Karnataka & Ors. the Supreme Court (SC) held that "Section 60(5) of the IBC grants wide jurisdiction to the AA, however, this authority does not extend to matters of public law". In its obiter dicta, the SC clarified the scope of "questions of public law", noting that cases pending before the Income Tax Appellate Tribunal fall outside the jurisdiction of the AA. This implies that certain proceedings, which may influence the valuation of a disputed claim, are beyond the AA's jurisdiction.

Disputed Claims and the Resolution Professional

According to section 18(b) of the IBC the Resolution Professional shall receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made u/s 13 and 15. The major concern is whether the RP has the power to decide not to admit any claim where the quantum of such claim is disputed and whether the RP has the power to determine the quantum of such disputed claim.

Admissibility of Disputed Claim by RP

As per section 18(b), it is the duty of the RP to receive and collate the claims submitted by creditors. The law is silent on whether the RP has the power to reject a claim where the collation of such a claim was not supported by the documents available with the corporate debtor.

In M/s Udhyaman Investments Pvt Ltd Vs. M/s Tiffins Barytes Asbestos and Paints Ltd. the NCLAT held that under section 18 of the IBC, the IRP or the RP, as the case may be, is tasked with receiving and collating claims submitted by creditors. The process of collection and collation of claims by RP, does not include adjudging disputed claims. While collating the claims, the RP is obligated to receive and verify the claims, including the supporting documents.

In this particular case, the RP found that the claim was not supported by relevant documents and, therefore, did not consider it for accepting as a claim. The AA reviewed the RP's action and found no fault in the process of collation. The AA also held that "It is important to note that the CIRP cannot be transformed into a process for adjudging disputed claims". In light of these circumstances, the NCLAT held that it had no reason to interfere with the order passed by the RP.

In Swiss Ribbons Pvt. Ltd. v. Union of India, the SC held that:
"The RP is responsible for receiving and collating all claims submitted by creditors". However, it clarified that the RP possess only administrative powers and not quasi-judicial powers. Even while exercising discretionary powers while verifying claims, the RP acts solely in an administrative capacity, which implies that they lack the authority to reject submitted claims.

Resolution Professional as the Adjudicator

Regulation 14 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations,2016 (CIRP regulations) stipulates that 'Where the amount claimed by a creditor is not precise due to any contingency or other reason, the interim resolution professional or the resolution professional, as the case may be, shall make the best estimate of the amount of the claim based on the information available with him.' this regulation implies that the RP is aquainted with adjudicatory or quasi-judicial powers to determine the quantum of an unascertained claim.

The same was adversely decided in some cases as follows:

In Prasad Gempex v. Star Agro Marine Exports Pvt. Ltd., the RP decreased the value of a claim submitted by a creditor. Referring to the principles established in Swiss Ribbons, the Adjudicating Authority observed that, "as the RP is not possessed with quasi judicial powers, they have no jurisdiction to adjudge claims submitted by operational creditors". Since the resolution plan had already been approved, the AA permitted the creditor to pursue proceedings in another competent court to determine the quantum of the claim, relying on Section 60(6) of the IBC.

It is also relevant to consider Regulation 14 of the CIRP Regulations, which authorises the RP to "make the best estimate" of a claim if the creditor's claim amount is unquantifiable due to contingencies. This implies that the RP has the authority to estimate the quantum of disputed claims, subject to review by the AA. However, courts have consistently denied the practical exercise of this jurisdiction.

Consequences of non-admission

The IBC did not specify the appropriate authority to adjudicate disputed claims. In the Essar Steel case, the SC permitted the resolution plan to admit disputed claims at a notional value of INR 1, to be paid contingent upon the outcome of the proceedings determining the claim's quantum by the relevant forum. However, for resolution applicants who are unwilling to take the risk of admitting claims with undetermined values, the IBC's silence on an adjudicatory mechanism to resolve such disputes acts as a barrier.

Potential resolution applicants were not ready to assume the risk as the court's judgement is always uncertain. As held in the Essar Steel case, the corporate debtor should pay the claimant contingent on the court's decision by virtue of which the resolution applicants may not show interest in providing a resolution plan to restructure the corporate debtor.

If a disputed claim is not admitted in a resolution plan then the contractual right of the claimant will be affected detrimentally, provided, the court rules in his favour in the near future. It is a well settled law that once a resolution plan got approved, no new claim can be made against the corporate debtor.

Conclusion
The lack of relevant provisions in the IBC to safeguard the interests of contractual right holders, may detrimentally affect them financially.

A person who, at the time of initiation of CIRP, is not a financial creditor or an operational creditor as per the provisions of the IBC, but holds a contractual right to receive payment from the corporate debtor, may not secure his interest or get paid if such CIRP leads to the resolution of the corporate debtor.

The Successful Resolution Applicant (SRA) only considers the debts which are admitted by the Resolution Professional while making a Resolution Plan and by virtue of non admission of the claim of the contractual right holder by the RP, no considerations are given to those aggrieved parties by the SRA.

The AA and the RP in many cases stated that they do not entertain the adjudication of any contractual claims and the IBC is not a forum for enforcing civil remedies, it is a mechanism to address genuine insolvency concerns. The AA also states that the quantum of a claim and the rationale for such contractual claim is subject to adjudication. It was evident that contract claims are a subject matter of civil suit and NCLT is not an appropriate authority to decide.

The moratorium provisions u/s 14(1)(a) of the IBC stipulates that no new suit or continuation of pending suits or proceedings against the corporate debtor in any court of law, tribunal, arbitration panel or other authority are entertained and are prohibited. This provision is contrary to what is suggested by the AA i.e to proceed in a competent forum and not in NCLT.

The "clean slate" approach, discharging corporate debtors from unresolved claims post resolution plan approval, raises concerns about recoveries of the contractual right holders.

The lack of clarity in the Provisions of the IBC on adjudging or quantifying disputed claims makes reforms necessary. A viable mechanism for resolving such claims within the CIRP framework is significant to balance the interests of claimants and to ensure the effectiveness of insolvency resolution plan. Without such provisions, the holders of the contractual right to payment face significant uncertainty.

Reference:

• https://www.ibbi.gov.in/uploads/whatsnew/2020-10-01-210733-43cms-9224c9b668aac0d6149a5d866bfb4c79.pdf
• https://ibbi.gov.in//legal-framework
• https://indiankanoon.org