Supreme Court upholding IBC’s finality over extinguished claims

The Hon’ble Supreme Court of India in Electrosteel Steel Limited (Now ESL Steel Limited) v. Ispat Carrier Private Limited dated April 21, 2025, has ruled that an arbitral award, passed after the approval of a corporate insolvency resolution plan (CIRP) which had settled the underlying claim at nil, is a nullity and cannot be executed. This judgment reinforces the “clean slate” principle of the Insolvency and Bankruptcy Code (IBC) and underscores its overriding effect over other statutes and prior claims once a resolution plan is duly approved.

The appeal, Electrosteel Steel Limited (Now ESL Steel Limited) vs Ispat Carrier Private Limited, was filed challenging a High Court judgment that upheld an Executing Court’s order to enforce an arbitral award against Electrosteel. The Respondent, Ispat Carrier Private Limited, had filed claims under the Micro, Small and Medium Enterprises Development (MSME) Act, 2006, with the Facilitation Council in 2014, leading to arbitration. Subsequently, in 2017, CIRP was initiated against Electrosteel, imposing a moratorium that put the arbitral proceedings in abeyance. The Respondent filed its claim with the Resolution Professional, which was partly admitted. A resolution plan, which settled all operational creditors’ claims at nil value, was submitted by Vedanta Limited and approved by the NCLT on April 17, 2018, ending the moratorium. Despite this, the Facilitation Council resumed arbitration after the moratorium was lifted and passed an award on July 6, 2018, directing Electrosteel to pay INR 1,59,09,214.00 plus interest. Electrosteel did not challenge this award under Section 34 of the Arbitration and Conciliation Act, 1996. When the Respondent sought to execute the award, Electrosteel objected, arguing the award was a nullity as the claim was extinguished by the approved resolution plan. Both the Executing Court and the High Court dismissed Electrosteel’s objections, primarily stating that the award should have been challenged under Section 34 of the 1996 Act and that the Facilitation Council retained jurisdiction.

The Hon’ble Supreme Court held as follows:

• Approved Resolution Plan is Binding and Extinguishes Unprovided Claims: The Hon’ble Supreme Court reiterated that once a resolution plan is duly approved by the Adjudicating Authority under Section 31(1) of the IBC, it becomes binding on the corporate debtor and all its stakeholders, including creditors, central and state governments, guarantors, and other stakeholders. All claims that are not a part of the approved resolution plan stand extinguished, and no person can initiate or continue any proceeding in respect of such claims.
• “Clean Slate” for Corporate Debtor: The Hon’ble Court emphasized that a successful resolution applicant cannot be faced with “undecided” claims after the resolution plan is accepted, as this would create uncertainty and defeat the objective of providing a “fresh slate” to the corporate debtor.
• Lack of Jurisdiction for Arbitral Proceedings Post-Approval: The Facilitation Council lost jurisdiction to arbitrate on the Respondent’s claim once the resolution plan, which settled such claims at nil, was approved by the Ld. NCLT. The Hon’ble High Court’s view that the Facilitation Council did not lose jurisdiction was erroneous. Since the award was passed by the Facilitation Council without jurisdiction, it is considered a nullity and is incapable of being executed.
• Objection to Nullity in Execution Proceedings: An arbitral award can be challenged in execution proceedings under Section 47 of the Civil Procedure Code (CPC) on the very limited ground that it is a nullity or void ab initio, even if it was not challenged under Section 34 of the Arbitration and Conciliation Act, 1996. The High Court’s view to the contrary was deemed unsustainable.

In light of this judgment, it is critically important for operational creditors to actively participate in the CIRP and ensure their claims are appropriately addressed in the resolution plan. If a claim is not provided for or settled at nil, and the creditor disputes this, they must challenge the resolution plan as per Section 61(3) of the IBC. Failure to do so means the approved plan is binding, and the claim will be extinguished, making any parallel proceedings like arbitration in the present case, futile and the resulting awards non-executable.