Introduction: Setting the stage for the Case
Section 31 of the Insolvency and Bankruptcy Code 2016 (IBC) provides that once the Adjudicating Authority (AA) is satisfied with the Resolution Plan (RP), as approved by the Committee of Creditor (CoC), it shall by order approve the RP which shall be binding on the Corporate Debtor (CD) and its employees, members, creditors, [including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues. The intent behind the binding nature of Sec. 31 of the IBC is to provide a clean slate or a fresh start to the Successful Resolution Applicant (SRA). SRA should not be suddenly burdened with claims of the past. Sec. 31 provides that solidity to a sick debtor company, for the SRA to assess all the claims and decide in reality, what has to be paid for.

Nevertheless, in the case of Indian Oil Corporation Limited (IOCL) v. ArcelorMittal Nippon Steel (AMNS),  India Limited, Supreme Court (SC) has set aside the order of Delhi High Court (DHC) in the case of IOCL v. AMNS India Limited that upheld the finality of the approved RP and the well-established Clean Slate theory (CST). SC has ordered appointment of arbitrators and constitution of the arbitral tribunal.

To put forth, this blog has been divided into two parts. First, it discusses the redundancy of the DHC judgment in light of new judgment passed by the SC under Arbitration and Conciliation Act 1996 (Arbitration Act), and discussing alternatives that IOCL could have adopted in the first place to avoid the disorder. Second, it discusses the implication of the decision adopted by the SC by overturing CST under IBC.

IOCL v. AMNS:  Idleness of the Eye of the Needle Test
IOCL, an Operational Creditor (OC), executed a Gas Supply Agreement (GSA) in favour of Essar Steel Ltd. and thereafter assigned all its rights and obligations emanating from GSA to Essar Oil Ltd. Later, a dispute arose between the parties related to failure to lift the entire adjusted annual contract quantity (AACQ) under Article 14.1 of the GSA. IOCL issued a demand notice, subsequently, upon not receiving any payments, issued a notice of dispute. Lastly, in July 2017, IOCL invoked arbitration.

In August 2017, the National Company Law Tribunal (NCLT), Ahmedabad, admitted petition under Sec. 7 of the IBC seeking initiation of the corporate insolvency resolution proceedings (CIRP) against Essar Steel India Limited (‘ESIL’). IOCL participated in the proceedings and the Resolution Professional admitted the claim at a notional amount of INR 1 due to the pending arbitration. However, NCLT excluded IOCL’s claim that was further affirmed by NCLAT.

AMNS, the SRA, took 100 per cent reign of ESIL. Once the RP was successfully implemented, IOCL issued a notice to AMNS to pay amounts as per the payable in terms of GSA that led to the present petition before the DHC.

Fundamental Issues
(A). Whether the approval of the RP resulted in the extinguishment of all claims that the IOCL could enforce against the AMNS; and

(B). Whether the approval of the RP would render the disputes which are sought to be referred for the consideration of an Arbitral Tribunal non-arbitrable.            

Judgment
The DHC answered in affirmative on the basis of CST. The DHC recognized the right of the SRA to take over the corporate debtor on a “clean slate”. Noting the judgment of Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd, wherein it laid down clearly that the SRA cannot suddenly be faced with “undecided” claims which would throw into uncertainty, amounts payable by the SRA who successfully take over the business of the CD.

The DHC also answered in affirmative with a combined reading of extinguishment of claims after approval of RP and non-arbitrability under Sec. 11 of the Arbitration Act through “eye of the needle” test. Highlighting the judgment of NTPC Ltd. v. M/s SPML Infra Ltd., where it was held that it is only in cases “where the question of non-arbitrability is self- evident, ex facie manifest and where it is possible to come to a clear and definite conclusion on the question of non-arbitrability that the Courts would refuse to refer parties to arbitration”. Therefore, where claims which are not part of the RP stood extinguished and no person could “initiate or continue” any proceedings in respect of such claims, made it non-arbitrable dispute.

Incongruity in the Needle: Reference to Arbitration
Unsurprisingly, the coupled energy of Sec. 14 Moratorium of the IBC during the pending insolvency proceedings and applicability of Sec. 31 CST of the IBC after the approval of RP will lead to extinguishment of claims outside the purview of RP and nothing to be disputed for. Thereby, the applicability of ‘eye of the needle’ test was hollow while deciding the future of claims.

In light of the recent SC judgment SBI General Insurance Co. Ltd. V. Krish Spinning, “eye of the needle” test is not in “….conformity with the principles of modern arbitration which place arbitral autonomy and judicial non-interference on the highest pedestal.” The test required to examine contested facts and appreciate prima facie evidence that goes against the ‘minimal court intervention’ (MCI) principle.

Under Arbitration Act, at the first instance, without going into the question of weighing evidence, the Court shall refer the dispute to arbitration as per Sec. 8 of the Arbitration Act. It is submitted that if IOCL had raised existence of real dispute, under the inclusive definition of dispute Sec. 5(6) of the IBC, at an appropriate stage, regarding the breach of contract or payment between the parties, The Court shall compulsorily had to refer the dispute to arbitration. At the establishment of pre-existing dispute, IBC provisions could not have been invoked as per Sec. 9(5)(ii)(d) of the IBC in favour of OC. It can also be ascertained through the timeline of factual matrix that dispute regarding lifting of AACQ and even issue of demand notice was prior to the initiation of CIRP.

If the intention of IOCL was to decide upon payments, then proceeding via IBC was not ideal. As, it is has turned the CST upside down via the order of the SC.

Reigniting the CST
SC set aside the DHC judgment. Keeping all the rights and contentions of the parties, including on the question of arbitrability, open. SC’s order warrants criticism on different note. First, although kept open, it raises serious concern regarding the finality and binding nature of the RP as per Sec. 31 of the IBC. It goes against the iron-clad theory laid down by the SC in the above-mentioned case of Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd and Essar Steel India Ltd. (CoC) v. Satish Kumar Gupta that states management should be able to break free from the shackles of the past, and medicine the ailing company on clean slate.

Second, it defeats the larger legislative intent behind IBC. One of the dominant objectives of IBC is to revive the CD, keep it running as an on-going concern and maximize value assets. Appointing arbitrators after the approval of RP defeats such objectives of IBC. SRA would be burdened with superfluous costs related to arbitration proceedings pushing it farther away from standing back on its feet. Not to mention, the arbitral award may end up in a challenge under Sec 34 of the Arbitration Act before the Court. The sheer ineffectuality of that can be highlighted through the case of Electrosteel Steel Limited v. Ispat Carrier Private Limited, the SC held that award becomes incapable of execution once RP has been approved by the AA, making it a dead-end. It effectively reinstates CST under Sec. 31 of the Code avoiding any resurgence of past claims for the SRA that debauch the implementation of the RP.

Conclusion: Towards Harmonious balance
The decision lands the interplay of Arbitration Act and IBC into murky waters. The decision of SC may discourage SRA from reigning the sickened company. It may throw the assessment of a successful RP off the charts by dragging it through multiple fees and litigations and incur losses. It raises important questions regarding the implementation of the objectives of IBC. To the end, SC’s decision to appoint arbitrators in view of the joint agreement and consent of parties between IOCL and AMNS, is it sufficient to override the hardcore objectives of IBC and principle of CST, needs to be answered definitely. Until then it becomes imperative for the creditors to raise dispute at the appropriate stage so as to protect themselves from loss. Therefore, a balanced approach under CST is required for maintaining fairness and viability of the Code.