Arbitration vs. Insolvency: When a Corporate Debtor’s Revival Seals the Fate of All Unsettled Claims

Introduction

The intersection of insolvency law and arbitration often presents a complex legal quandary: can a claim that emerged or crystallized after the commencement of insolvency proceedings, and was ultimately excluded from the approved Resolution Plan, still be pursued through arbitration? This precise question formed the core of a recent, significant ruling by the Delhi High Court.

In a decisive observation in JSW Ispat Special Products Limited Versus Bharat Petroresources Limited¹ The Bench of Justice Jyoti Singh unequivocally held that any claims—even those arising post-insolvency commencement—that are not incorporated into the approved Resolution Plan are deemed extinguished and, critically, non-arbitrable. This judgment reinforces the supremacy and finality of a Resolution Plan under the IBC².

The specific dispute arose when the Corporate Debtor, having successfully undergone the CIRP³ and secured NCLT approval for its Resolution Plan, challenged an arbitral award. The Respondent sought arbitration for estimated expenditure claims arising ICD⁴, a significant portion of which was not included in the approved plan.

The Petitioner’s Counsel mounted a two-pronged attack: first, arguing that the award was void because the Presiding Arbitrator had failed to disclose his previous judicial involvement in the same matter as NCLAT Chairperson, violating the ACA’s mandatory disclosure rules. Second, on merits, it was argued that once the Resolution Plan was approved, all non-included claims stood irrevocably extinguished and were non-arbitrable under the IBC. Conversely, the Respondent’s Counsel defended the award, asserting the Presiding Arbitrator’s prior judicial role did not imply bias. On merits, they contended that the claims awarded arose after the ICD and, having not been entertained by the Resolution Professional, were therefore not extinguished by the Resolution Plan, which primarily addressed pre-ICD liabilities.

This case required the Court to balance the finality accorded to a Resolution Plan under the IBC with the right to seek recourse for future-arising contractual claims, all while adjudicating serious allegations of an arbitral tribunal’s procedural mandate. The subsequent analysis will delve into the underlying legal principles concerning the extinguishment of claims under the IBC and the mandatory disclosure requirements under the ACA that ultimately shaped the Court’s decision.

The fundamental conflict between the finality of the IBC and the continuation of prior contractual rights often lands at the doors of the High Courts and the Supreme Court, Can the Resolution Plan ever be anything less than an instrument of absolute finality, legally “freezing” all claims against the Corporate Debtor? The heart of the matter lies in Section 31 of the IBC, which dictates that once the Adjudicating Authority (NCLT) approves a Resolution Plan, it is binding on the corporate debtor and all stakeholders—including creditors, guarantors, and even the Central and State Governments. This provision is the legal hammer that solidifies the “clean slate” for the successful resolution applicant. 

The Supreme Court, in the seminal case of Ghanashyam Mishra and Sons P. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd⁵., removed any vestige of doubt regarding the scope of this provision. The Court categorically held that on the date of the Resolution Plan’s approval, all claims which are not a part of the plan shall stand extinguished. No person, the court affirmed, would be entitled to initiate or continue any proceedings in respect to such claims. This extinguishing effect is so absolute that it applies even to statutory dues owed to the Government for the period prior to the approval date, reinforcing the overriding effect of the IBC via Section 238. Why has the Supreme Court adopted this absolute stance, effectively denying the resurrection of old debts? 

As highlighted in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta⁶, a successful Resolution Applicant cannot be suddenly faced with “undecided” claims after the plan’s acceptance. Such an event would be a “hydra head popping up,” throwing into “uncertainty” the liabilities of the revived corporate debtor. The entire scheme of the IBC—from the information memorandum (prepared under Section 29 with details gathered by the RP, per Regulation 36) to the eventual Resolution Plan—is designed to ensure the applicant knows the exact quantum of debt to be paid. This principle has been consistently reiterated by the Supreme Court in cases like Ruchi Soya Industries Limited v. Union of India, Ajay Kumar⁷ Radheyshyam Goenka v. Tourism Finance Corporation of India Limited⁸, and RPS Infrastructure Limited v. Mukul Kumar⁹. The message is clear: whether a claim is actively rejected by the RP or simply not included, it is extinguished once the plan gets the NCLT’s seal.

If a claim is deemed extinguished under the IBC, can it nonetheless be pursued through arbitration, thereby overriding the finality of the Resolution Plan? In the present High Court matter, the crucial issue was whether claims, even those arising post-ICD (Insolvency Commencement Date) that the Resolution Professional did not collate, could still be arbitrable. The respondent argued their claims, including outstanding cash calls and abandonment costs (some arising even after the plan’s approval), were not covered by the plan and should therefore be subject to arbitration under the contract. However, the Court, relying on the Ghanashyam Mishra doctrine, observed that since the claims were not part of the approved Resolution Plan, they stood extinguished and were therefore not arbitrable. Even the lifting of the moratorium (under Section 14), the Court noted in Electrosteel Castings Ltd. v. Reena Singh doesn’t revive a claim that has been extinguished by the finality of the Resolution Plan. If the claim is dead under the IBC, no arbitration tribunal (or any other forum) has the jurisdiction to breathe life back into it. The Electrosteel judgment perfectly encapsulated this position, holding that the claim, being outside the purview of the Resolution Plan, stood extinguished, rendering the arbitral award itself one passed without jurisdiction.

Does a Judge or Arbitrator’s previous judicial role in a related appeal constitute the kind of “involvement” that mandates recusal under the principles of natural justice? A procedural challenge was simultaneously raised regarding the integrity of the arbitral process. Could the Presiding Arbitrator’s previous involvement—as the NCLAT Chairperson who had dismissed an appeal by the Respondent on a related legal issue—warrant his disqualification under the Arbitration and Conciliation Act, 1996 (ACA)? The Petitioner argued this constituted “involvement” that compromised the arbitrator’s impartiality. 

However, the Court turned to precedents like Supreme Court Advocates-on-Record Association and Another v. Union of India¹⁰ (Recusal Matter), which cited Grant Hammond’s view that disqualification typically requires a direct pecuniary interest or connections like consanguinity or enmity. Crucially, the Court distinguished between being “involved” in a previous avatar (such as an advisor or consultant, as suggested in HRD Corporation v. GAIL (India) Ltd.)¹¹ and merely acting as an adjudicator or a judge on a legal issue. In this case, the NCLAT order had merely decided a legal issue—whether the RP was legally empowered to include future claims under Section 18(1)(b) of the IBC—without ruling on the claims’ enforceability. The High Court found the Arbitral Tribunal’s ultimate finding on the collating of claims post-ICD to be an independent legal conclusion, not one influenced by the NCLAT order. Therefore, the mere act of having previously adjudicated a related legal point did not render the Presiding Arbitrator de jure ineligible for alleged bias.

Conclusion 

The judgment stands as an emphatic judicial endorsement of the “clean slate” doctrine foundational to the IBC. By affirming that any claim—whether pre- or ICD—not explicitly incorporated into the approved Resolution Plan is extinguished and non-arbitrable, the Delhi High Court has fortified the finality of the insolvency process. This ruling ensures that the successful resolution applicant inherits a company with defined and “frozen” liabilities, shielding it from the “hydra head” of surprise claims that could sabotage the corporate debtor’s revival. Furthermore, the meticulous distinction drawn between an Arbitrator’s prior role as an adjudicator and a true conflict of interest provides crucial clarity under the Arbitration and Conciliation Act, 1996 (ACA), confirming that the mere act of previously deciding a related legal point doesn’t necessitate recusal, thereby maintaining a pool of qualified legal experts for complex commercial arbitrations.

However, in achieving this necessary certainty, the judgment inevitably poses pressing questions for the future of commercial contracting in the shadow of insolvency. While the rule is clear, how should operational creditors effectively mitigate the risk of post-ICD claims that crystallize after the Resolution Plan is approved, such as long-term contractual liabilities or unforeseen abandonment costs? Does the IBC framework sufficiently account for the difference between a pre-ICD claim that was willfully not filed, and a legitimate claim that was simply incapable of quantification or verification until much later, effectively leaving the latter without a remedy? Ultimately, this verdict compels the market to accept the supremacy of the IBC over contractual dispute mechanisms, demanding that parties involved in insolvency proceedings adopt an almost prophetic vigilance in forecasting and presenting all potential liabilities to the Resolution Professional, regardless of how nascent they may seem.

Citations

1. JSW Ispat Special Products Limited Versus Bharat Petroresources Limited O.M.P. (COMM) 533/2024
2. Insolvency and Bankruptcy Code, 2016 
3. Corporate Insolvency Resolution Process
4. post-Insolvency Commencement Date 
5. Ghanashyam Mishra and Sons Private Limited through the Authorised Signatory v. Edelweiss Asset Reconstruction Company Limited through the Director and Others, (2021)9 SCC 657
6. Essar Steel (India) Ltd. (CoC) v. Satish Kumar Gupta, (2020) 8 SCC 531 : (2021) 2 SCC (Civ) 443
7. Ruchi Soya Industries Limited and Others v. Union of India and Others, (2022) 6 SCC 343
8. Radheyshyam Goenka v. Tourism Finance Corporation of India Limited, (2023) 10 SCC 545
9.  RPS Infrastructure Limited v. Mukul Kumar and Another, (2023) 10 SCC 718
10. Supreme Court Advocates-on-Record Association and Another v.Union of India (Recusal Matter), (2016) 5 SCC 808
11. HRD Corporation (Marcus Oil and Chemical Division) v. GAIL (India) Limited (formerly Gas Authority of India Limited), (2018) 12 SCC 471

Expositor(s): Adv. Anuja Pandit