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 21st 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 13th May 2021.
On 1st 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 10th July 2021. On 12th 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 23rd July
2021 for arriving at a settlement. Thereafter, on 26th July
2021, they again sought time for settlement till 12th August
2021. On 3rd 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 3rd 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 8th 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 10th 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 12th 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 18th 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 18th 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 25th 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
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