BY MUSKAN JAIN, QAZI AHMAD MASOOD, FOURTH – YEAR STUDENTS AT RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PUNJAB
INTRODUCTION
Consider an example of a defective product in which a consumer seeks a refund before a store shuts, but the defect is detected after closing, and the refund is not given. This seems unjust since the right had existed before; it was just delayed in being confirmed. The same problem occurs with insolvency. The number of claims is usually decided on the Liquidation Commencement Date (‘LCD’), but liabilities like taxes, regulatory fines, or damages under contract are usually determined later by adjudication. This raises the key question: If the underlying right arose before the LCD but the amount was determined later, should the claim be rejected? This article examines this issue.
The article explores whether the judicial trend to annul claims brought forward after the LCD, as observed in the recent case of SEBI v. Rajiv Bajaj, is in line with the statutory provisions of the Insolvency and Bankruptcy Code, 2016 (‘IBC’ or the ‘Code’) or not. It challenges the National Company Law Appellate Tribunal (‘NCLAT’), which focuses more on the LCD as a rigid cut-off, which does not involve claims like tax demands or regulatory penalties due to pre-liquidation activity. The article argues that this rigidity undermines the Code’s broad definition of “claim,” the liquidator’s power to estimate unliquidated liabilities, and the continuation of proceedings during liquidation.
RECOGNITION OF PRE-LCD CLAIMS AND POST-LCD QUANTIFICATION UNDER THE IBC
Section 3(6) of the IBC broadly defines a claim as a right to payment, which can include disputed, contingent, or unliquidated sums. Consequently, there can be a claim even in cases where the amount remains undecided or is in the process of adjudication. The Code distinguishes between the existence of a right to payment and subsequently ascertaining its value, i.e., a liability may be incurred by pre-LCD events even though the value is determined subsequently.
Section 33 provides that the liquidation commences following the failure of the Corporate Insolvency Resolution Process (‘CIRP’), marking the LCD. Creditors submit claims before the liquidator under Section 38, which he validates and either admits or rejects under Sections 39–40. Although the courts tend to consider the LCD as a cut-off for certainty in the distribution, the Code does not prohibit later quantification of liabilities generated out of pre-LCD obligations.
Section 33(5) further permits the statutory proceedings to be instituted against a corporate debtor (‘CD’) in liquidation with the sanction of the adjudication authority. This reflects realism in the law as regulatory, taxation, and arbitral procedures are frequently multi-staged and cannot be terminated when liquidating. Parliament authorised the tribunals to determine the continuance of such proceedings instead of requiring termination at the LCD. The contradiction of doctrinal nature appears in the cases when the proceedings are permitted to proceed, and yet their results are not considered in the liquidation estate. This issue surfaced in SEBI v. Rajiv Bajaj, wherein the proceedings were permitted, yet their outcome had no distributive effect.
This has two effects: the license granted in Section 33(5) turns out to be largely illusory, and jurisprudence turns inconsistent, in that the issue of liability can be established, but has no distributive effect. A logical approach involves dealing with claims on grounds of their pre-LCD nature and dealing with post-LCD quantification by use of liquidator estimation under Regulation 25, provisional admission of claims, and escrow or holdback provisions. In the absence of such harmonisation, Section 33(5) risks permitting adjudication in form and not in economic substance.
THE NCLAT APPROACH: FREEZING LIABILITIES AS ON LCD AND THE CONCEPTUAL ERROR OF CONFUSING THE EXISTENCE OF A CLAIM
The jurisprudential challenge with the dogmatic doctrine of LCD-freeze is that it confuses three analytically separate terms of existence, crystallisation, and quantification of liability. Liability arises due to the actions of the debtor- breach of contract, violation of the statutes, torts, or violation of regulations. Crystallisation is a process through which the liability is formally confirmed by the court or authority, whereas quantification is the process through which the numerical value of the owed amount is established. These phases can both be sequential and non-constitutive.
Adjudication does not create liability; it acknowledges and ascertains it. A claim can thus exist even if contested, conditional, or even unquantified. Handling the absence of adjudication as the lack of liability replaces procedural timing with substantive existence. Following this logic, the amount of taxes payable, penalties, or regulatory fees based on the discovery of the LCD is exempt on the basis that the liability did not exist earlier.
Such an approach was observed in SEBI v. Rajiv Bajaj, wherein the liquidator declined the claim by SEBI to impose a penalty of 21.80 lakh, since this penalty was imposed after the LCD. The court of appeal ruled that only claims crystallised as they were on the LCD can be admissible under Regulations 12(2)(a) and 13 of the Insolvency and Bankruptcy Board of India (‘IBBI’) (Liquidation Process) Regulations, 2016. However, this fails to appreciate a crucial distinction, which is the fact that the existence of liability and its quantification are distinct. A claim can already exist where the wrongful conduct preceded the LCD or proceedings were already started before the LCD, or the final amount was not obtained due to procedural delays.
The equation of “unadjudicated” with “non-existent” eliminates contingency liabilities and makes legitimate pre-LCD obligations disappear, distorting the true financial status of the CD. A doctrine that ties the existence of claims to post-facto crystallisation makes insolvency a matter of procedural finality as opposed to substantive accounting of rights. The rigorous LCD crystallisation method thus favours the time of adjudication, rather than the juridical content of liability, and is conceptually limited and practically rigid.
REASONS AGAINST THE NCLAT POSITION
The institutional issues underlying the LCD-freeze approach cannot be dismissed on the basis of doctrinal criticism only. The need for finality is the best argument. Liquidation is a time-bound process aimed at realising and distributing assets with predictability, allowing continually changing liabilities risks to delay closure and undermine commercial certainty. Intimately linked here is the inability to estimate complex or speculative claims, including contingent tax liabilities, regulatory fines, or litigation-based damages, which might be beyond the knowledge of the liquidator and lead to arbitrary valuations or exaggerated claims.
Another concern is the potential destabilisation of the distribution waterfall. When liabilities after LCD are recognised following interim or final distributions, the previously paid dividends may need to be recalculated, which interferes with predictability and creditor confidence. An effective administrative burden exists, as well, in the fact that the liquidator can only realise and distribute assets, and not make specialised forensic decisions as to liability.
It is not a question of absolute finality and unrestricted uncertainty, but one of moderated inclusion and categorical exclusion. Rejection of post-LCD claims is disproportionate. The middle ground is in the estimation mechanisms under tribunal control and backed by safeguards, which is more efficient, fairer, and more practical to the institution.
OVERLOOKING REGULATION 25: POWER TO ESTIMATE CLAIMS
This strictness of the exclusion of claims that are measured following the Liquidation Commencement Date ignores a vital stipulation in the liquidation apparatus Regulation 25 of the IBBI (Liquidation Process) Regulations, 2016. The provision recognises that insolvency often involves liabilities whose value cannot be precisely determined and therefore requires the liquidator to estimate claims where the amount is uncertain due to contingency or other reasons. The language is significant. The regulation compels the liquidator to find a reasonable value for which no exact quantification can be made by applying the term shall estimate. It does not permit rejection just because a claim is contingent, contested, or even under adjudication.
The provision is an assumption of the structure of the Code: liquidation should occur even in the case of uncertainty. Estimation is the institutional process by which this uncertainty is dealt with without eliminating legitimate liabilities. Practically, estimation can be based on objective references like the statutory penalty list, precedents of similar cases, the role of the proceedings, documentary evidence, or the opinion of experts. Conservative/range-based valuations can maintain distributional certainty, but they need to be sure that the liquidation estate captures the potential liabilities.
The failure to observe Regulation 25 thus distorts the concept. The consideration of the lack of final adjudication as a reason to be rejected makes it practically impossible to make the pre-liquidation liabilities invisible. In addition, a harsh freeze of LCD can serve as a motive to take a strategic pause in the regulatory or statutory action in such a way that the liabilities do not become crystallised until the liquidation begins. Well used, Regulation 25 can prevent such a result by permitting provisional recognition of pre-LCD liabilities, which would provide a balance between procedural finality and substantive fairness.
A targeted amendment to Sections 38 and 40 of the IBC that clearly distinguishes between the existence of a claim rooted in pre-LCD conduct and its quantification occurring post-LCD would be another structurally sound solution like Regulation 25. This strategy is supported by comparative frameworks to accommodate contingent and uncertain liabilities without sacrificing distributional certainty. Rule 14.1 of the UK Insolvency (England and Wales) Rules, 2016 anchors claim admissibility to the origin of the obligation rather than the date of its formal determination. A similar statutory clarification in the IBC would resolve the doctrinal ambiguity at its source, lending legislative backing to what Regulation 25 currently achieves only at the regulatory level.
CONCLUSION: TO A STILL MORE SENSITIVE DOCTRINE
Going back, lastly, to the store shop metaphor. One of the customers requested a refund for the defective product; the defect was verified after the shutters were closed. There is no defence of refusal to grant a refund in that case, amounting to refusal to serve in defence of discipline, but on refusal of fairness, as the operative condition, timely ordering, was fulfilled. The insolvency law is faced with a similar dilemma. Where the pre-liquidation conduct results in regulatory, contractual, or statutory proceedings, but does not end until the LCD, the timing of adjudication is usually institutional, as opposed to creditor-driven. The omission of these claims by the reason that they are quantified after LCD raises the distributive accident to the distributive entitlement and deforms the design of the Code.
The answer is not a very strict exclusion but a moderate inclusion. The claims that are based on the pre-LCD conduct are to be acknowledged as the true financial status of the debtor, despite the fact that the value of the claims has not been resolved yet. The liabilities may rather be within institutional protection, as the structure already takes into consideration. Under Regulation 25, such as estimation, the liquidator is able to value a business at a reasonable amount in the event that quantification is yet to be undertaken. Correctly used, these instruments maintain both finality and equity, such that valid commitments are not killed just due to the fact that their exact worth had made it onto the stage too late in the process.
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