Supreme Court Rules Arbitral Award Nullity If Based on Claim Extinguished by Approved IBC Resolution Plan

New Delhi: In a significant ruling clarifying the interplay between the Insolvency and Bankruptcy Code (IBC), 2016, and arbitration proceedings, the Supreme Court of India has held that an arbitral award based on a claim that stands extinguished by an approved resolution plan under Section 31 of the IBC is a nullity and cannot be executed.

A bench of Justices Abhay S. Oka and Ujjal Bhuyan , in a judgment authored by Justice Bhuyan , set aside orders of the Jharkhand High Court and the Executing Court, allowing an appeal by Electrosteel Steel Limited (now ESL Steel Limited), the corporate debtor. The Court held that the objection to the award's enforceability could be validly raised in execution proceedings under Section 47 of the Code of Civil Procedure (CPC), 1908, even if the award was not challenged under Section 34 of the Arbitration and Conciliation Act, 1996.

The case stemmed from a dispute between Electrosteel Steel Limited (Appellant) and Ispat Carrier Private Limited (Respondent) over outstanding dues for hiring services. The Respondent, a Micro, Small and Medium Enterprise (MSME), initiated proceedings before the West Bengal MSME Facilitation Council under the MSME Development Act, 2006. Conciliation failed, leading to arbitration.

During the arbitration, Electrosteel Steel Limited was admitted into the Corporate Insolvency Resolution Process (CIRP) under the IBC, and a moratorium was declared under Section 14. The arbitration proceedings were accordingly suspended. The Respondent filed its claim with the Resolution Professional, which was partially admitted.

Subsequently, a Resolution Plan was submitted by Vedanta Limited , which proposed 'nil' payment for all operational creditors, including those whose claims were in litigation or not admitted. This plan was approved by the National Company Law Tribunal (NCLT) on April 17, 2018, under Section 31 of the IBC. The NCLT order explicitly stated that claims of all operational creditors were settled at nil. This approval and the treatment of operational creditors were upheld by the NCLAT and the Supreme Court in related appeals filed by other operational creditors.

Following the lifting of the moratorium upon the resolution plan's approval, the MSME Facilitation Council resumed the arbitration proceedings. Despite the approved resolution plan extinguishing the claim, and without the Appellant's participation, the Council passed an arbitral award on July 6, 2018, directing Electrosteel Steel Limited to pay the claimed amount plus interest.

Electrosteel Steel Limited did not challenge this award under Section 34 of the Arbitration Act. However, when Ispat Carrier Private Limited initiated execution proceedings, Electrosteel Steel Limited filed an application under Section 47 CPC before the Executing Court, contending that the arbitral award was a nullity as the underlying claim was extinguished by the approved IBC Resolution Plan.

The Executing Court dismissed the objection, ruling that the Appellant could not question the award's legality in execution without challenging it under Section 34 of the Arbitration Act. The Jharkhand High Court upheld this decision, although it acknowledged that a nullity plea could be raised in execution (albeit within a narrow scope). The High Court, however, erroneously concluded that the approved resolution plan had not determined the Respondent's claim as nil and that the Facilitation Council retained jurisdiction.

Setting aside the lower courts' reasoning, the Supreme Court reiterated the paramountcy of an approved resolution plan under the IBC. Citing its previous judgments in Essar Steel India Ltd. Committee of Creditors vs. Satish Kumar Gupta , Ghanshyam Mishra & Sons (P) Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd. , and others, the Court emphasized that upon approval by the Adjudicating Authority under Section 31 IBC, the resolution plan is binding on all stakeholders, and all claims not included as part of the plan stand extinguished.

The Court noted that the Resolution Plan explicitly provided for settling the claims of operational creditors, including those in ongoing litigation like the Respondent's, at 'nil' value.

"Once a resolution plan is duly approved by the adjudicating authority under sub-section (1) of Section 31, all claims which are not part of the resolution plan shall stand extinguished and no person will be entitled to initiate or continue any proceeding in respect to a claim which is not part of the resolution plan," the Court held.

The bench clarified that the lifting of the moratorium merely allows pending proceedings to resume if the underlying claim still exists. However, once the claim itself is extinguished by the binding effect of an approved resolution plan, any further proceedings related to that claim, including arbitration or execution, become legally untenable.

Consequently, the Court concluded that the MSME Facilitation Council lacked jurisdiction to pass the award after the claim was extinguished by the NCLT-approved resolution plan on April 17, 2018. An award passed without jurisdiction, the Court held, is a nullity and can be challenged in execution proceedings under Section 47 CPC, irrespective of whether a Section 34 application was filed.

"In view of the resolution plan, as approved, the claim of the respondent stood extinguished. Therefore, the Facilitation Council did not have the jurisdiction to arbitrate on the said claim. Since the award was passed without jurisdiction, the same could be assailed in a proceeding under Section 47 CPC," the judgment stated.

The Supreme Court thus allowed the appeal, quashed the execution proceedings, and declared the arbitral award dated July 6, 2018, incapable of being executed. The ruling reinforces the 'clean slate' principle post-CIRP, ensuring that successful resolution applicants are not burdened with pre-CIRP claims not accounted for in the approved resolution plan.