IBC CODE: SETTLEMENT AFTER INITIATION OF CIRP PROCEEDINGS

 

IBC CODE: Settlement after initiation of CIRP proceedings

 

The Insolvency & Bankruptcy Code 2016 (In short IBC or “Code”)  has heralded a new era of corporate resolution process and vista of debt, debtor, manner and mechanism of resolution process or dissolution of a corporate entity is documented in the Code. The Code has travelled a distance ever since, still, as in every new avatar, issues crops up and remedies are to be found on some finer aspects. One such aspect is the scope of settlement under the Code after the initiation of Corporate Insolvency Resolution Process ( CIRP).   

The hon’ble Supreme Court (CORAM: Ms Justice Indira Banerjee and Justice JK Maheshwari in a matter captioned as Ashok G. Rajani v. Beacon Trusteeship Ltd. & Ors  in September 2022 in Civil Appeal No. 4911 of 2021 has not only dealt with the issue but has settled the issue for good. The NCLAT was pleased to issue notice in the Appeal, but did not restrain the Interim Resolution Professional (IRP) from proceeding with Corporate Insolvency Resolution Process (CIRP) of M/s Seya Industries Limited (hereinafter referred to as “Corporate Debtor”). The NCLAT, however, restrained the IRP from constituting a Committee of Creditors (CoC) till the next date of hearing. In the meanwhile, the parties were accorded the opportunity to settle their disputes before the Adjudicating Authority (NCLT) in terms of Section 12A of the IBC read with Rule 11 of the National Company Law Tribunal Rules, 2016 (NCLT Rules). The appeal was kept pending before NCLAT.

In the above context, it may be apt to advert to the prescriptions of Companies Act 2013 and rules framed thereunder. In exercise of power conferred by Section 469 of the Companies Act, 2013, the Central Government has made the National Company Law Tribunal Rules, 2016, hereinafter, referred to as the “NCLT Rules”. Rule 11 of the NCLT Rules reads as:—

 

“11. Inherent Powers.- Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.”

 

The IBC is a comprehensive Code and its object is to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons and further to promote entrepreneurship, availability of credit and balance of interests of all stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India and matters connected therewith or thereto.

 

Moreover, the IBC is an effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets, encourage entrepreneurship, improve business and facilitate more investments leading to higher economic growth and development.

A reading of the statement of objects and reasons with the statutory Rule 11 of the NCLT Rules enables the NCLT to pass orders for the ends of justice including order permitting an applicant for CIRP to withdraw its application and to enable a corporate body to carry on business with ease, free of any impediment.

FACTUAL MATRIX

(i)          What is a matter of record in the present case that the Corporate Debtor initiated Arbitration Proceedings before the High Court of Bombay. While the Arbitral Proceedings, to which the Respondent Nos. 1 to 3 had themselves agreed and consented to, were pending, they filed an application under Section 7 of the IBC before the National Company Law Tribunal (NCLT), Mumbai Bench. The Corporate Debtor filed its statement of claim seeking an award aggregating to Rs. 848,75,30,000/- for losses and damages suffered by it.  The Respondents filed statement of defence and counter claim seeking an award for payment of its claim amounting to Rs. 73,56,59,238/-. The Arbitrator passed an interim award in favour of Beacon Trusteeship and other Respondents and directed the Corporate Debtor to make payment of Rs. 72,06,99,244/- along with interest.  On 21^st April 2021, being aggrieved by the order of the Arbitrator, the Appellant and Corporate Debtor preferred an arbitration petition under Section 34 of the Arbitration and Conciliation Act, 1996 before the High Court of Bombay which is still pending. The NCLT, Mumbai Bench heard the matter and reserved its order on 13^th May 2021. On 1^st July 2021, the Corporate Debtor and the Respondents Nos. 1 to 3 filed a joint application before the NCLT, Mumbai Bench requesting to defer the order as the parties were in the process of arriving at a settlement and sought time till 10^th July 2021. On 12^th July 2021, the Corporate Debtor and the Respondents Nos. 1 to 3 again filed a joint application before the NCLT, Mumbai Bench seeking further time till 23^rd July 2021 for arriving at a settlement. Thereafter, on 26^th July 2021, they again sought time for settlement till 12^th August 2021. On 3^rd August 2021, the NCLT, Mumbai Bench, rejected the request of the parties for further deferment of orders for arriving at a settlement and admitted and allowed the application under Section 7 of the IBC preferred by Respondent Nos. 1 to 3 against Corporate Debtor.

(ii)        Being aggrieved by the order dated 3^rd August 2021 passed by the NCLT, Mumbai Bench, admitting and allowing application for initiating CIRP against the Corporate Debtor, the Appellant who is Director of the Corporate Debtor filed an appeal being Company Appeal (AT)(Insolvency) No. 598 of 2022 in the NCLAT, New Delhi. On 8^th August 2021, the parties had amicably settled their disputes and entered into a formal settlement, a copy of which is annexed to the paper book. On 10^th August 2021, the NCLAT considering the settlement arrived at between the parties, granted interim stay of publication under Section 13 of the IBC and further gave liberty to the parties to adopt procedure under Section 12A of IBC.

(iii)       On 12^th August 2021, the parties with the consent of the IRP filed an application under Section 12A of the IBC before the NCLT, Mumbai. However, the same was yet to be listed..

 

Pertinently, on 18^th August 2021, the NCLAT stayed the formation of Committee of Creditors (CoC), but declined to exercise its power under Rule 11 of the NCLAT Rules to take on record the settlement and dispose of the matter. Further, the NCLAT permitted the IRP to issue publication and also handover all assets and proceed with the CIRP even though the matter had been settled between the parties. Being dissatisfied by the order dated 18^th August 2021 of the NCLAT, the Appellant has preferred the present Civil Appeal before the Supreme Court.

 

VIEWS OF SUPREME COURT

 

The Supreme Court has observed that Section 12A of the IBC enables the Adjudicating Authority to allow the withdrawal of an application admitted under Section 7 or Section 9 or Section 10, on an application made by the applicant with the approval of 90% voting shares of the Committee of Creditors in such a manner as may be specified. Section 12A of the IBC clearly permits withdrawal of an application under Section 7 of the IBC that has been admitted on an application made by the applicant. The question of approval of the Committee of Creditors by the requisite percentage of votes, can only arise after the Committee of Creditors is constituted. As per Supreme Court there may probably be no bar to withdrawal by the applicant of an application admitted under Section 7 of the IBC.

 

It is held by Supreme Court that considering the investments made by the Corporate Debtor and considering the number of people dependant on the Corporate Debtor for their survival and livelihood, there is no reason why the applicant for the CIRP, should not be allowed to withdraw its application once its disputes have been settled. The settlement cannot be stifled before the constitution of the Committee of Creditors in anticipation of claims against the Corporate Debtor from third persons. The withdrawal of an application for CIRP by the applicant would not prevent any other financial creditor from taking recourse to a proceeding under IBC. The urgency to abide by the timelines for completion of the resolution process is not a reason to stifle the settlement.

 

What is of worth importance is the fact that the co-ordinate bench of Supreme Court had earlier on 25^th August 2021 in Civil Appeal No. 4993 of 2021 had held as under:

“(3) We have heard learned counsel for the parties. It is not in dispute that CoC has not been constituted so far. This Court in Swiss Ribbons Private Limited v. Union of India – (2019) 4 SCC 17 has held that at any stage, before a Committee of Creditors is constituted, a party can approach National Company Law Tribunal (NCLT) directly and that the Tribunal may, in exercise of its inherent powers under Rule 11 of NCLT Rules, allow or disallow an application for withdrawal or settlement.

 

The Supreme Court has thus settled the dust and the terms are as under:

“It is clear that once the Code gets triggered by admission of a creditor’s petition under Sections 7 to 9, the proceeding that is before the adjudicating authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim. A question arises as to what is to happen before a Committee of Creditors is constituted (as per the timelines that are specified, a Committee of Creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the Committee of Creditors is not yet constituted, a party can approach NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case.”

 

 

In the present case  the applicant-respondent no. 1 had made an application before the NCLT, Mumbai Bench, under Rule 11 of the NCLT Rules for withdrawal of company petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) on the ground that the matter has been settled between the Corporate debtor and the applicant-respondent no. 1. It was thus held that applicant-respondent no. 1 was justified in filing the application under Rule 11 of the NCLT Rules for withdrawal of the company petition on the ground that the matter has been settled between the parties.”

CONCLUSION

The hon’ble Supreme Court had thus directed NCLT to take up the settlement application under Section 12A of the IBC and decide the same in the light of the observations made above. Therefore, now, it is no longer res integra that there is no impediment in considering settlement or withdrawal of case even after initiation of CIRP.

The right to settle the matter or withdrawal of lis is not alien to conventional legal system. However, as per IBC Code, the settlement or withdrawal simpliciter is not a conventional ritualistic affairs and shall have to be only in sync with the provisions in the Code. Once, CIRP is underway after admitting the insolvency petition, the settlement can only take place in terms of the provisions of section 12 A of the IBC Code. In fact, after admitting the insolvency petition, the procedure of resolution is set in motion and Committee of Creditor (CoC) are also constituted. Normally, CIRP process shall result in rehabilitation of a corporate debtor company or dissolution of the corporate debtor company as the case may be. However, the assumption that after initiation of CIRP, there can be no settlement or there shall be no withdrawal is something which is not correct and section 12 A of the Code has the mechanism and norm illustrated in this regard which has found seal of approval from the Supreme Court.

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                                            Anil K Khaware

Founder & Sr Associate

Societylawandjustice.com

WRIT PETITION AGAINST A TRIBUNAL

 

Writ petition against a Tribunal

The Article 226 of Constitution of India deals with the rights relating to writ remedy against the violation of legal rights of citizen as opposed to Article 32 of Constitution of India which is for enforcement of fundamental rights. In fact, Article 226 is in a sense wider, in as much as, the writ remedy lies before high courts and in respect of infringement of both legal rights and fundamental rights. The writ remedy shall lie in respect of rights of citizen; However, Article 21 of the constitution relating to right to life and personal liberty is available to a foreigner as well. The reason of this could be well understood. In a welfare state, there cannot be a fetter to right to life even against a foreigner.  The writs are of following kinds:

(i)          Writ of Habeas Corpus

(ii)        Writ of Certiorari

(iii)       Writ of Mandamus

(iv)       Writ of Prohibition

(v)         Writ of Quo Warranto

 

The moot point of discussion, however, is the desirability or necessity of making Tribunal as a party to a writ petition. We know that with a view to maintain a writ petition, the relief shall directed against state or instrumentality of state as defined under Article 12 of constitution of India. What is of pertinence is that there are several instances, where the orders of tribunal itself is challenged under the writ petition as appellate remedy is not provided for. The vexed question is- whether, order passed by a Tribunal, if impugned in a writ petition shall entail that Tribunal should be made a party or a tribunal shall only be represented as State? No doubt, as per Article 12 of Constitution of India, the writ shall only lie against State and State is defined in the said Article. Still further, if substantial stake in any entity is that of state then too, a writ shall lie against that entity. As narrated, however, the crux of the discussion shall revolve around the desirability or necessity of a Tribunal to be arraigned as a party and in case it is done, whether, the same is permitted or not? In other words, whether a writ petition shall be maintainable, in case, a Tribunal is not made a party, or conversely, if Tribunal is made a party, whether the same shall be an unnecessary act. In practice, one is beset with such a situation often and therefore, a peep into the spectrum of law shall be imperative. Before going further, it is worthwhile to mention that Civil Courts or courts dealing with criminal case and judge heading them are not made a party and that probably emanates from the fact that provision of Revisional Jurisdiction as per Code of Criminal Procedure finds mention in section 401 of Cr.P.C and section 397-399 of Cr.P.C, the former for impugning order/judgment before the high court and the latter before the Sessions Courts from the orders passed by ld Magistrates. Similarly, as per Code of Civil Procedure, Revisional jurisdiction provisions are there as per Section 115 of Code of Civil Procedure. Needless to say that even as per Article 227 of Constitution of India, such orders of District Civil Courts, which is neither revisable nor appealable, still under Article 227 of Constitution of India such orders could be impugned and arraigning a presiding officer of civil courts as a party is not necessary.         

The earlier precedents in this regard could be have of a Constitution Bench decision of Supreme Court rendered in Thansingh Nathmal and others vs. The Superintendent of Taxes , Dhubri, reported in AIR 1964 SC 1419. It is held that the exercise of wide jurisdiction of the High Court under Article 226, is subject to self imposed limitation. The Supreme Court had explained that as under:

          

“The High Court does not therefore act as a court of appeal against the decision of a court or tribunal, to correct errors of fact, and does not by assuming jurisdiction under Article 226 trench upon an alternative remedy provided by statute for obtaining relief. Where it is open to the aggrieved petitioner to move another tribunal, or even itself in another jurisdiction for obtaining redress in the manner provided by a statute, the High Court normally will not permit by entertaining a petition under Article 226 of the Constitution, the machinery created under the statute to be bypassed, and will leave the party applying to it to seek resort to the machinery so set up.”

It is held by hon’ble Supreme Court in M.S kazi Vs Muslim Education Society & Ors (Civil Appeal No.11976-11977 of 2014 that:

“43.Therefore, the proposition that can safely be culled out is that the authorities or the tribunals, who in law are entitled to defend the orders passed by them, are necessary parties and if they are not arrayed as parties, the writ petition can be treated to be not maintainable or the court may grant liberty to implead them as parties in exercise of its discretion. There are tribunals which are not at all required to defend their own order, and in that case such tribunals need not be arrayed as parties. To give another example:- in certain enactments, the District Judges function as Election Tribunals from whose orders a revision or a writ may lie depending upon the provisions in the Act. In such a situation, the superior court, that is the High Court, even if required to call for the records, the District Judge need not be a party. Thus, in essence, when a tribunal or authority is required to defend its own order, it is to be made a party failing which the proceeding before the High Court would be regarded as not maintainable.” 

 

         The principle thus emerges is that if appellate remedy is available, no writ shall lie. For instance, award published by an Arbitrator cannot be challenged under the writ petition, since alternate remedy of raising objection to award is prescribed as per the provision of Section 34 of Arbitration & Conciliation Act 1996 (As amended and up to date). However, if no statutory appeal is provided for, then only a writ petition shall lie. For instance, the order passed by the Debt Recovery Tribunal (DRT) shall be appealable before DRAT, but the order passed by DRAT is not appealable and hence, a writ petition against the order of DRAT shall lies and the order of DRAT could be challenged by way of writ petition based on order through State.   

As regards desirability of making a tribunal a party in writ petition, the Supreme court or High Courts are generally not in favour of arraigning Tribunal as party. No doubt, if the conduct of Tribunal itself comes in question, then the Tribunal also can be made party. As a convention, therefore, it is not found desirable to make a tribunal a party in a writ petition, unless, the conduct of the tribunal itself is a question to be looked into.      

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         Anil K Khaware

         Founder & Senior Associate

Societylawandjustice.com