2024 (8) TMI 1155 - HC - Insolvency and Bankruptcy

Challenge to an interim award under Section 31 (6) of Arbitration and Conciliation Act, 1996 - rejection of the respondent/petitioner s application under Section 16 of the 1996 Act operates as res judicata in respect of the impugned interim award - alleged future losses covered by the counter claim could be dismissed at the outset on the ground of approval of the Resolution Plan in respect of the claimant/company or not. Whether the rejection of the respondent/petitioner s application under Section 16 of the 1996 Act operates as res judicata in respect of the impugned interim award? - HELD THAT - The basis of the decision turning down the objection to the arbitrator s jurisdiction under Section 16 of the 1996 Act was the moratorium under Section 14 of the IBC which attends a CIRP mandatorily. The learned Arbitrator held that since the claim and the counter claim were interconnected, the moratorium did not prevent the Arbitrator from taking up the counter claim as well. There was no adjudication, nor was any issue raised in respect of the effect of approval of a Resolution Plan on the counter claim. The subsequent approval of the Resolution Plan, which extinguished the rights of the creditors, altered the scenarioaltogether, furnishing a fresh cause of action for the interim award. Hence, there cannot arise any question of the previous rejection of the Section 16 application operating as a bar to the learned Arbitrator deciding independently on the application for interim award - this issue is decided in the negative, holding that the earlier order of rejection of the claimant s application under Section 16 of the 1996 Act did not operate as res judicata or prevent the impugned award from being passed. Whether the alleged future losses covered by the counter claim could be dismissed at the outset on the ground of approval of the Resolution Plan in respect of the claimant/company? - HELD THAT - It has been repeatedly held, time and again, by different authorities including the Supreme Court that all claims, even if pending on the date of the Resolution Plan stand extinguished upon its approval. The convoluted arguments advanced by the petitioner on the meaning of future losses are not relevant in the context of the IBC, since even if the losses continue to occur prospectively, the seed of the said losses already came into existence in a nascent form on the date of making of the claim - in terms of Section 31 of the IBC and as per the ratio laid down in Ghanashyam Mishra 2021 (4) TMI 613 - SUPREME COURT , the claims incorporated in the petitioner s counter claims pending before the learned Arbitrator stood finally extinguished with the approval of the Resolution Plan and need not or could not have been further adjudicated by the Arbitral Tribunal - the issue is decided against the petitioner and it is hereby held that the alleged future losses covered by the counter claim could be dismissed at the outset on the ground of approval of the Resolution Plan in respect of the claimant/company. Hence, the learned Arbitrator was perfectly justified in dismissing the counter claims of the respondent/petitioner at the inception in view of the approval of the Resolution Plan in respect of the claimant-Company - no ground for interference with the impugned interim award passed under Section 31 (6) has been made out under Section 34 of the 1996 Act, since this Court does not find any patent illegality or anything to shock the conscience sufficiently to set aside the said interim award. The learned Arbitrator arrived at quite plausible and legally correct findings in dismissing the counter claims. Petition dismissed.

Summary

Issues Involved:
1. Res judicata effect of the rejection of the Section 16 application.
2. Dismissal of future losses covered by the counterclaim due to the approval of the Resolution Plan.

Issue-Wise Detailed Analysis:

1. Res Judicata Effect of the Rejection of the Section 16 Application:
The petitioner argued that the impugned interim award is barred by the principle of res judicata, as the learned Arbitrator had previously dismissed the claimant's application under Section 16 of the Arbitration and Conciliation Act, 1996, on the same grounds. The court noted that the rejection of the Section 16 application occurred before the approval of the Resolution Plan. The subsequent approval of the Resolution Plan, which extinguished the rights of creditors, provided a fresh cause of action for the interim award. Thus, the earlier order did not operate as res judicata, and the learned Arbitrator was not barred from deciding on the application for the interim award.

2. Dismissal of Future Losses Covered by the Counterclaim Due to the Approval of the Resolution Plan:
The court examined the provisions of the Insolvency and Bankruptcy Code (IBC) and noted that the approval of a Resolution Plan by the Adjudicating Authority is binding on all creditors, including the petitioner. The petitioner was a financial creditor and was entitled to make claims before the resolution professional. The court highlighted that the claims could be received and collated by the resolution professional until the plan was finalized and approved by the Adjudicating Authority. The counterclaims filed by the petitioner were within the period before the approval of the Resolution Plan. The court emphasized that the Resolution Plan extinguished all claims, including counterclaims under any pending arbitration proceedings, as per Clause 12.4.1 of the Resolution Plan. The court also noted that the argument regarding future losses was not relevant in the context of the IBC, as the claims arose before the filing of the counterclaim and stood extinguished upon the approval of the Resolution Plan.

Conclusion:
The court held that the earlier order of rejection of the claimant's application under Section 16 did not operate as res judicata. The alleged future losses covered by the counterclaim could be dismissed at the outset due to the approval of the Resolution Plan. The learned Arbitrator was justified in dismissing the counterclaims of the petitioner. Consequently, the application under Section 34 of the Arbitration and Conciliation Act, 1996, was dismissed, affirming the impugned interim award dated April 3, 2024. There was no order as to costs, and any interim order stood vacated. The court also refused the petitioner's prayer for an extension of the interim order staying the arbitration proceeding.