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Post-Resolution Determination of Claims: A Dilemma for Creditor’s Rights

Post-Resolution Determination of Claims: A Dilemma for Creditor’s Rights

Given, the limitations of the 9, 2016 (“IBC”) in determining the value of disputed claims during the resolution process, most resolution plans admit the disputed claims with their repayment being dependent on the adjudication of the claim post the approval of the resolution plan. Such an admission of claims has been seen as a method to improve insolvency procedure by enabling time-bound resolution, but such a method raises certain problems in the Indian context. This article analyses the current framework of post-resolution adjudication of disputed claims while also highlighting the problems and proposing solutions to address the same.  

Framework for Post-Resolution Determination of Claims The National Company Law Appellate Tribunal (“NCLAT”) in Standard Chartered Bank v. Satish Kumar Gupta had upheld a direction by the adjudicating authority to admit disputed claims in total. However, the Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta reversed the order of the NCLAT by directing that disputed claims be admitted at 1 INR with the payment of the claim dependent on the outcome of the adjudication of the claim rather than the admission of claims in their entirety.

Thus, the Supreme Court in Essar Steel carved out an adjudication mechanism for disputed claims by allowing them to be admitted and to be paid after the value of the claim has been determined by adjudication. However, in cases such as Tata Steel BSL Ltd. v. Varsha w/o Ajay Maheshwari, the Bombay High Court observed that the adjudicating authority had approved a resolution plan which earmarked a fixed amount to satisfy disputed claims that has been notionally admitted.

The Court held that when a resolution plan has earmarked an amount for the satisfaction of such claims, the creditor’s claim would only be satisfied from the earmarked amount. In-Office of the Specified Officer v. Mr. V. Venkatachalam, the NCLAT, held that it is within the commercial wisdom of the committee of creditors to set apart a certain amount to satisfy an unliquidated claim which would arise after the completion of the resolution process.

In these cases, while the adjudication of claims after the approval of the resolution plan is continued, there is an upper limit to the amount available for the repayment of claims even before the value of the claim has been determined, thus giving rise to issues such as the denial of inter-se equality and minimum liquidation value to the creditors.

Violation of Inter-Se Equality among Creditors The earmarking of fixed amounts for the payment of disputed debts upon their adjudication may result in operational creditors with disputed debts receiving payment to a lesser extent than other operational creditors. This is especially problematic since the NCLAT in Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd. had held that a resolution plan could not discriminate among similarly situated classes of creditors. In Binani Industries Limited v. Bank of Baroda, wherein, the NCLAT relied on the principles of value maximization of assets and balancing the interests of all stakeholders to hold that a resolution plan providing for inter-se unequal treatment of creditors is discriminatory and would not be approved under Section 31 of the IBC regarding the approval of a Resolution Plan.

In cases where disputed claims of operational creditors have to be paid from an earmarked amount, there may be inter-se inequality among creditors since other creditors would have been paid a certain percentage of their claims, while disputed claims would be paid from the earmarked amount rather than being paid as a percentage. For example, in a situation where the operational creditors have been fully paid, disputed claims by being limited to an earmarked amount may not be fully paid back as the value of the claim after adjudication not contemplated in calculating the earmarked amount. Payment of Lower amount than Liquidation Value Section 30(2) of the IBC provides that a resolution plan must provide for a minimum payment of the liquidation value to the operational creditors.

The Supreme Court in Maharashtra Seamless Limited v. Padmanabhan Venkatesh interpreted Section 30(2) to mean that operational creditors may be paid a lower amount than the liquidation value if the financial creditors and the operational creditors have received the same percentage of their claim. However, as per the Supreme Court’s judgment in Essar Steel, in cases where there is a difference in the percentage of the claim received by the financial creditors and the operational creditors, then the operational creditors would be entitled to receive at least the liquidation value.

The Adjudicating Authority would ensure that the earmarked amount under a resolution plan is enough to provide for the payment of liquidation value to the creditors based upon the valuation of their claims.  The final determination of the value of the claims may lead to situations where the earmarked amount is insufficient to provide for the payment of the liquidation value to creditors with disputed claims. In such a situation, the protection available to the operational creditors under Section 30(2) would be rendered meaningless.

Conclusion The setting apart of fixed amounts in resolution plans for the satisfaction of disputed claims post the adjudication of the claims may result in operational creditors with disputed claims facing prejudice due to unequal treatment and in some cases receiving less than the liquidation value. A method to prevent such prejudice to the creditors with disputed debts is to admit their claims with no upper limit for the satisfaction of the claims. However, this would result into resolution applicants having to take on the risk of satisfying disputed claims in their entirety. Further, to accommodate the fixed amount offered for satisfaction of disputed claims, the resolution applicant would be incentivized to offer lesser amounts to creditors whose claims are not disputed, thus prejudicing them and going against the objective of value maximization of assets.

To prevent this, the resolution plan can provide for the satisfaction of the disputed claims at the same percentage as that of the rest of the claims, rather than setting apart a fixed amount, thus ensuring that the creditors with disputed claims do not face unequal treatment or payment of less amount than the liquidation value. In the absence of such a provision in the resolution plan, the creditors with disputed claims may be better off by accepting a lower value for a disputed claim by either modifying the claim or signing a claim determination deed with the resolution professional through which the value of the disputed claim could be negotiated during the resolution process, rather than wait for the adjudication of the claim after the approval of the resolution plan. This would ensure that even if there is a reduction in the value of the claims, the claims would be satisfied on the same footing as other creditors and in most cases would yield a higher value than the liquidation value for creditors with disputed claims.

 

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