Claim Extinguished by Approved IBC Resolution Plan Renders Arbitral Award a Nullity, Executing Court Can Refuse Enforcement: Supreme Court - 2025-04-21

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Approved IBC Resolution Plan Gives 'Fresh Slate', Extinguishes All Prior Claims, Renders Subsequent Arbitral Award a Nullity: Supreme Court

New Delhi: In a significant ruling clarifying the supremacy of the Insolvency and Bankruptcy Code (IBC), the Supreme Court has held that once a resolution plan is approved by the National Company Law Tribunal (NCLT), all claims not included in it are permanently extinguished. The bench, led by Justice UjjalBhuyan , declared that an arbitral award passed for such an extinguished claim is a legal nullity and cannot be executed.

The Court emphasized that such a void award can be challenged during execution proceedings under Section 47 of the Code of Civil Procedure (CPC), even if the aggrieved party did not file a challenge under Section 34 of the Arbitration and Conciliation Act, 1996.

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Case Background: A Tale of Two Proceedings

The dispute originated from claims filed by a supplier (respondent) against a corporate debtor (appellant) before the West Bengal Micro, Small and Medium Facilitation Council under the MSME Act for an outstanding amount of approximately Rs. 1.59 crore. While these arbitral proceedings were ongoing, the appellant company entered the Corporate Insolvency Resolution Process (CIRP) under the IBC.

A moratorium was imposed, and the arbitral proceedings were stayed. The supplier submitted its claim to the Resolution Professional. Subsequently, a resolution plan submitted by Vedanta Limited was approved by the NCLT on April 17, 2018. Crucially, this plan settled the claims of all operational creditors, including the respondent, at "nil" value, effectively giving the corporate debtor a "fresh slate."

Despite the NCLT's approval extinguishing the debt, the Facilitation Council resumed the arbitration after the moratorium was lifted and passed an award on July 6, 2018, in favour of the supplier for the full amount. The corporate debtor did not challenge this award under Section 34 of the Arbitration Act. When the supplier initiated execution proceedings, the debtor objected, arguing the award was a nullity due to the approved resolution plan. The Executing Court and the Jharkhand High Court rejected this objection, leading to the present appeal before the Supreme Court.

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Arguments at the Forefront

• Appellant's Contention (Corporate Debtor): The appellant argued that the approval of the resolution plan under Section 31 of the IBC extinguished the respondent's claim entirely. Therefore, the Facilitation Council had no jurisdiction to arbitrate on a non-existent debt, rendering its award void ab initio . They contended that an award suffering from such an inherent lack of jurisdiction is a nullity and can be challenged at the execution stage under Section 47, CPC, irrespective of a prior challenge under the Arbitration Act.

• Respondent's Contention (Operational Creditor): The respondent countered that the appellant's failure to challenge the award under Section 34 of the Arbitration Act made it final and binding. They argued that Section 34 is the sole remedy to challenge an award and that the lifting of the moratorium revived the arbitral proceedings. They asserted that the Executing Court could not go behind the award and examine its validity on merits.

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Supreme Court's Analysis: Upholding the 'Clean Slate' Doctrine

The Supreme Court overturned the High Court's decision, finding it erroneous and contrary to established law. Justice Bhuyan , writing for the bench, meticulously analyzed the interplay between the IBC and other laws.

On the Finality of the Resolution Plan:

The Court reiterated the "clean slate" principle established in landmark cases like Essar Steel India Ltd. (2020) and Ghanshyam Mishra and Sons (P) Ltd. (2021) . It extracted pivotal paragraphs from these judgments to reinforce the legal position:

> "once a resolution plan is duly approved by the adjudicating authority under sub-section (1) of Section 31 , the claims as provided in the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors... On the date of approval of resolution plan by the adjudicating authority, all such claims, which are not a part of the resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan."

The Court noted that the approved plan explicitly settled the claims of operational creditors, including those in arbitration, at "nil." The respondent's claim was, therefore, legally extinguished on the date the NCLT approved the plan.

On the Jurisdiction of the Arbitral Tribunal and Executing Court:

The bench clarified the procedural rights of the parties post-approval of the resolution plan:

1. Arbitral Award is a Nullity: Since the respondent's claim was extinguished by the resolution plan, the Facilitation Council lacked jurisdiction to continue the arbitration and pass an award. The resulting award was a nullity, non-est in the eyes of law.
2. Challenge at Execution Stage is Permissible: The Court held that an objection to an award's executability on the grounds of it being a nullity due to an inherent lack of jurisdiction can be raised under Section 47 of the CPC. This right is not contingent on a prior challenge under Section 34 of the Arbitration Act.
3. High Court's Error: The Supreme Court held that the High Court was incorrect in its reasoning. It stated, "View taken by the High Court that because the appellant did not challenge the award under Section 34 of the 1996 Act, therefore, it was precluded from objecting to execution of the award at the stage of Section 47 of CPC is wholly unsustainable."

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Final Decision and Implications

The Supreme Court allowed the appeal, setting aside the orders of the High Court and the Executing Court. It quashed the execution proceedings, ruling that the arbitral award was incapable of being executed.

This judgment serves as a powerful reaffirmation of the IBC's objectives, ensuring that a successful resolution process provides a corporate debtor with a genuine "fresh slate." It prevents "hydra head popping up" of old claims post-resolution, which would undermine the certainty and viability of the insolvency process. Furthermore, it clarifies the scope of an executing court's power under Section 47, CPC, to refuse enforcement of an arbitral award that is fundamentally void due to a lack of jurisdiction.