1

Issue

X supplied goods to Y. Y defaulted in payment for the same. X initiated arbitration proceedings
against Y. During the pendency of the arbitration proceedings, Y get admitted in Corporate
Insolvency Resolution Process (“CIRP”) and subsequently a resolution plan is approved. The
resolution plan contains a clause which states that all pending/past litigations or arbitrations stand
extinguished. Does X have a remedy against such clause or can X continue the arbitration
proceeding against Y after lifting of the moratorium?

Response/ Opinion:

A. Jurisprudence

i. Legislative Intent behind Moratorium and Conflict with the Doctrine of Clean Slate

A bare perusal of section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”),
would indicate that the legislature empowered the Adjudicating Authority to pass an
order declaring moratorium to prohibit any person from instituting or continuing any
legal proceeding against the corporate debtor from the date of commencement of
insolvency. Such mortarium ceases to have any effect from the date of approval of the
resolution plan or passing of an order of liquidation under section 33 of the IBC. Further,
section 60(6) of the IBC provides that in computing the period of limitation specified for
any suit or application by or against a corporate debtor for which an order of moratorium
has been made, the period during which such moratorium is in place shall be excluded.

The legislative intent was, therefore, to temporarily suspend all legal proceedings against
the corporate debtor, during its restructuring process, and not extinguish all past
litigations. In the event, the legislature intended to extinguish the same, then instead of
moratorium, it could have provided for termination of all pending litigations. It may be
argued that the provision for moratorium has been incorporated to ensure smooth
continuation of pending litigations, in the event, the order of admission of a corporate
debtor is set aside by the Appellate Tribunal/ Supreme Court or an order of withdrawal
is made pursuant to section 12A of the IBC. Even in that scenario, the legislature could
have provided for reinstatement of terminated proceedings, in the eventuality of the order
of CIRP admission being set aside or passing of an order withdrawal under section 12A
of the IBC.

In this regard, it is further pertinent to peruse section 32A of the IBC, which specifically
bars prosecution against the corporate debtor or the new management under the
resolution plan for any liability which the corporate debtor may have incurred for any
prior offences. The word used in this section is ‘offence’. Under the General Clauses Act,
1897, ‘offence’ means any act or omission made punishable by any law for the time being
in force. Therefore, the legislature has specifically omitted to create any bar on
continuation of any civil proceeding against the corporate debtor, which does not fall
within the scope of ‘offence’. This provision was enacted to provide limited protection
to the new management and the shareholders of the corporate debtor and the assets of the
corporate debtor.

A conjoint reading of these provisions can lead to only one conclusion, that any pending
civil litigation (i.e.) which had commenced prior to CIRP, has not been ipso facto barred
after the corporate debtor is released from CIRP pursuant to an order under section 31(1)
of the IBC.

ii. Contingent Claim and Doctrine of Clean Slate

The judgements of the Hon’ble Supreme Court in the case of Essar Steel India Ltd.
Committee of Creditors v. Satish Kumar Gupta1(“Essar Steel”), and in the case of
Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.2
(“Edelweiss”) held,

1
Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531
2
Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657
 2

“A successful resolution applicant cannot suddenly be faced with “undecided”

claims after the resolution plan submitted by him has been accepted as this would
amount to a hydra head popping up which would throw into uncertainty amounts
payable by a prospective resolution applicant who would successfully take over the
business of the corporate debtor. All claims must be submitted to and decided by
the resolution professional so that a prospective resolution applicant knows exactly
what has to be paid in order that it may then take over and run the business of the
corporate debtor. This the successful resolution applicant does on a fresh slate.”

The doctrine of clean state is not provided under any provision of the IBC. The Hon’ble
Supreme Court has interpreted section 31(1) of the IBC in particular facts and
circumstances to carve out this doctrine. Hence, it is to be remembered that the doctrine
of clean slate is to be used in a particular factual matrix as it is trite law that, observations
of courts are not to be read as Euclid's theorems nor as provisions of the statute. These
observations must be read in the context in which they appear. Judgments of courts are
not to be construed as statutes3.

The instant issue is factually different from the facts of the cases of Essar Steel and
Edelweiss. The ratio of a fresh slate/ clean slate would not be applicable beyond such
factual matrix and in case:
a. The claim was submitted with the Resolution Professional;
b. The claim was categorised as a contingent claim, which is dependent upon the
outcome of a litigation/ arbitration;
c. The contingent claim was disclosed to the prospective resolution applicant(s) before
submission of resolution plan(s); and
d. The claimant did not receive any monetary benefit pursuant to the implementation
of the resolution plan.

B. Judicial Precedent

The claim of X in the instant case is a contingent claim and as such is covered by the judgement
of the Supreme Court in the case of Fourth Dimension Solutions Ltd. vs. Ricoh India Ltd. &
Ors.4(“Fourth Dimension”).

In this case, the Supreme Court was faced a similar situation. Fourth Dimension (“FDSL”) had
initiated an arbitration proceeding against Ricoh India, the Corporate Debtor, which was
pending on the date of commencement of the CIRP. Thereafter, the resolution plan sought to
extinguish all pending litigations including the one initiated by FDSL. The said resolution plan
was also approved (“Approval Order”) by the National Company Law Tribunal. An appeal
was preferred by FDSL against the Approval Order before the National Company Law
Appellate Tribunal (“NCLAT”). The Hon’ble NCLAT5 upheld the Approval Order citing the
judgement of the Hon’ble Supreme Court in the case of Essar Steel.

FDSL, thereafter filed a civil appeal against the order of NCLAT before the Hon’ble Supreme
Court, whereby the Supreme Court disallowed extinguishment of the pending arbitration
proceedings, thereby paving the way for FDSL to continue the stalled arbitration proceedings
against the corporate debtor post completion of the CIRP.

Further, the Hon’ble NCLAT, in the matter of Goltens India Pvt. Ltd. vs. Sudip Bhattacharya,
Insolvency Resolution Professional of Reliance Naval and Engineering Ltd6 (“Goltens
India”), held that the claim being a contingent claim, in the event the suit is decreed, the decree
holder shall be entitled to claim the decretal amount from the Successful Resolution Applicant.

3
Haryana Financial Corpn. v. Jagdamba Oil Mills, (2002) 3 SCC 496 : 2002 SCC OnLine SC 140
4
Fourth Dimension Solutions Ltd. vs. Ricoh India Ltd. & Ors ; Civil Appeal No. 5908 of 2021; Judgement dated
January 21, 2022.
5
Fourth Dimension Solutions Ltd. vs. Ricoh India Ltd. & Ors; Company Appeal (AT) (Insolvency) No. 1471 of 2019;
Judgement dated July 26, 2021
6
Goltens India Pvt. Ltd. vs. Sudip Bhattacharya, Insolvency Resolution Professional of Reliance Naval and
Engineering Ltd; Company Appeal (AT) (Insolvency) No. 571 of 2022; NCLAT Principal Bench; Judgement dated
August 16, 2022
 3

C. Conclusion

In both the afore-cited case, (i.e.) Fourth Dimensions and Goltens India, the claims were
earmarked as NIL or at a notional value of Re. 1 and valuation of the contingent claims were
not carried out by the Resolution Professional under Regulation 14 of the Insolvency And
Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons)
Regulations, 2016.

In the instant case, it is unclear how the claim of X has been treated by the Resolution
Professional. In the event, the same were beyond the scope of estimation, as it would require
adjudication by a competent court of law or tribunal and hence, earmarked at a notional value
or marked as NIL, being contingent, under the approved resolution plan, X would be within its
rights to continue the arbitration proceeding, post completion of CIRP.