The Supreme Court of India has delivered a significant judgment in Electrosteel Steel Limited (Now M/s ESL Steel Limited) v. Ispat Carrier Private Limited (Civil Appeal No. 2896 of 2024), clarifying the binding nature of resolution plans approved under the Insolvency and Bankruptcy Code, 2016 (IBC) and their impact on arbitration proceedings.
Background Facts
The case involved a complex interplay between arbitration proceedings under the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) and insolvency proceedings under the IBC.
Ispat Carrier Private Limited (respondent) had filed claims before the West Bengal Micro, Small and Medium Facilitation Council for outstanding amounts totaling ₹1,59,09,214.33 against Electrosteel Steel Limited (appellant). While these arbitration proceedings were pending, the appellant’s financial creditors initiated insolvency proceedings, leading to the imposition of a moratorium and the appointment of an interim resolution professional.
Following the corporate insolvency resolution process (CIRP), the National Company Law Tribunal (NCLT) approved a resolution plan submitted by Vedanta Limited. Significantly, this plan settled all claims of operational creditors at nil value. After the moratorium was lifted, the Facilitation Council resumed arbitration proceedings and passed an award in favor of the respondent.
The appellant challenged the execution of this award, arguing that the NCLT-approved resolution plan had extinguished all claims of operational creditors, including the respondent’s claim, rendering the arbitral award a nullity.
Key Legal Issues
The Supreme Court, in a judgment delivered by Justice Ujjal Bhuyan, addressed several critical legal questions:
- Whether an arbitral award could be challenged in execution proceedings under Section 47 of the CPC on grounds of nullity
- Whether the Facilitation Council had jurisdiction to pass an award after the NCLT had approved a resolution plan
- Whether claims not included in an approved resolution plan stand extinguished
The Court’s Analysis
Challenging Arbitral Awards in Execution Proceedings
The Court affirmed that an arbitral award can be challenged during execution under Section 47 of the CPC, but only on limited grounds of jurisdictional infirmity or voidness. Importantly, the Court clarified that such a challenge is not contingent upon filing a petition under Section 34 of the Arbitration and Conciliation Act, 1996.
The Court relied on the established principle from Vasudev Dhanjibhai Modi v. Rajabhai Abdul Rehman (1970) that “only a decree which is a nullity can be the subject matter of objection under Section 47 CPC and not one which is erroneous either in law or on facts.”
The Binding Nature of Resolution Plans
The Court emphasized the binding effect of NCLT-approved resolution plans, citing its earlier landmark decisions in Essar Steel India Ltd. v. Satish Kumar Gupta (2020), Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. (2021), and Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Ltd.(2023).
Particularly noteworthy was the Court’s reference to the three-Judge Bench ruling in Ghanshyam Mishra, which established that:
- Once a resolution plan is approved by the adjudicating authority, claims provided in the plan stand frozen and are binding on all stakeholders
- Claims not part of the resolution plan stand extinguished
- No proceedings can be initiated or continued for claims not included in the plan
The Court reiterated that a successful resolution applicant cannot be faced with “undecided” claims after the resolution plan is accepted, as this would create uncertainty around amounts payable and undermine the fresh start envisioned by the IBC.
Jurisdiction of the Facilitation Council Post-Resolution Plan
The Supreme Court held that the Facilitation Council lacked jurisdiction to arbitrate on the respondent’s claim after the NCLT’s approval of the resolution plan. The Court found that the resolution plan had clearly provided that all claims covered by any suit, cause of action, or arbitration shall be settled at nil.
Importantly, the Court clarified that the lifting of the moratorium does not revive claims extinguished by an approved resolution plan. The purpose of a moratorium is merely to ensure that no further demands are raised or adjudicated during the CIRP.
The Final Ruling
The Supreme Court allowed the appeal, set aside the High Court’s judgment, and quashed the execution proceedings. The Court held that upon approval of the resolution plan, the respondent’s claim stood extinguished, rendering the arbitral award unenforceable.
Implications for Stakeholders
This judgment has significant implications for various stakeholders:
For Corporate Debtors and Resolution Applicants
The ruling reinforces the “clean slate” principle under the IBC, assuring resolution applicants that they will not face unexpected claims after a resolution plan is approved. This enhances certainty in the resolution process and likely encourages more potential bidders.
For Operational Creditors
The judgment underscores the importance of actively participating in the CIRP by filing claims with the resolution professional. Operational creditors should be vigilant about the treatment of their claims in resolution plans and challenge such plans if necessary under Section 61 of the IBC.
For Arbitral Tribunals
The ruling establishes clear boundaries on arbitral jurisdiction in cases where an IBC resolution plan has been approved, signaling that arbitral tribunals must defer to the finality of NCLT-approved resolution plans.
For Executing Courts
Courts executing arbitral awards must now carefully examine whether the claims involved might have been extinguished by an IBC resolution plan, even if the award itself was not challenged under Section 34 of the Arbitration Act.
Conclusion
The Supreme Court’s judgment in Electrosteel Steel Limited v. Ispat Carrier Private Limited reinforces the supremacy of the IBC over other laws when it comes to debt resolution and insolvency matters. It establishes that an NCLT-approved resolution plan has the effect of extinguishing all claims not included in it, and even arbitral tribunals cannot revive such claims by passing awards after the approval of the resolution plan.
This decision provides much-needed clarity on the interaction between insolvency proceedings and arbitration, emphasizing the finality and binding nature of resolution plans under the IBC. It represents a significant development in India’s evolving insolvency jurisprudence and is likely to guide future cases involving similar intersections of laws.
This blog post is authored by the legal team at AUGUST ATTORNEYS LLP, Advocates, Solicitors and Legal Consultants. The information provided is for educational purposes only and should not be construed as legal advice. For specific legal assistance, please consult with a qualified attorney.