Supreme Court Rules Arbitral Awards Not Included in IBC Resolution Plans Are Unenforceable

In a landmark judgment, the Supreme Court of India addressed the enforceability of arbitral awards in the context of insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016. The case revolved around Electrosteel Steels Ltd. (now M/s ESL Steel Ltd.) and Ispat Carriers Pvt. Ltd., focusing on whether an arbitral award obtained by Ispat Carriers could be enforced after the approval of a resolution plan under the IBC.

Ispat Carriers, a registered Micro, Small, and Medium Enterprise (MSME), had supplied cranes and trailers to Electrosteel Steels Ltd. under two purchase orders. Disputes arose over unpaid dues, leading Ispat Carriers to approach the West Bengal MSME Facilitation Council. After conciliation efforts failed, arbitration proceedings commenced on June 7, 2017. However, these proceedings were suspended following the National Company Law Tribunal's (NCLT) imposition of a moratorium under Section 14 of the IBC on July 21, 2017.

During the Corporate Insolvency Resolution Process (CIRP), Ispat Carriers submitted its claim to the Interim Resolution Professional (IRP), who partially admitted the claim. Subsequently, Vedanta Ltd. submitted a resolution plan on March 29, 2018, proposing a nil value settlement for operational creditors. The NCLT approved this plan on April 17, 2018, effectively settling operational creditors' claims at nil and lifting the moratorium. Although several operational creditors challenged the approval, their appeals were dismissed, and Ispat Carriers did not file any challenge.

After the moratorium ended, the Facilitation Council resumed arbitration proceedings, culminating in an award dated July 6, 2018, directing Electrosteel to pay Rs. 1.59 crore to Ispat Carriers. Electrosteel contested the enforceability of this award, arguing that the claim had been extinguished under the approved resolution plan.

The Supreme Court, comprising Justices Abhay S. Oka and Ujjal Bhuyan, held that upon approval of the resolution plan by the NCLT, any claims not included in the plan stood extinguished. The Court emphasized that allowing enforcement of such claims would undermine the finality of the resolution process and the principle of providing a "fresh start" to the corporate debtor. The Court stated:

"We have no hesitation to hold that upon approval of the resolution plan by the NCLT, the claim of the respondent being outside the purview of the resolution plan stood extinguished. Therefore, the award dated 06.07.2018 is incapable of being executed."

This decision aligns with previous judgments, including the Essar Steel case, reinforcing the principle that a successful resolution applicant should not be burdened with undecided claims post-approval of the resolution plan. The ruling underscores the importance of finality in insolvency proceedings and the necessity for all creditors to assert their claims within the CIRP framework.

The judgment serves as a critical precedent, clarifying that arbitral awards obtained after the approval of a resolution plan, for claims not included in the plan, are unenforceable. It highlights the imperative for creditors to actively participate in the insolvency process to safeguard their interests.