Monday, 26 March 2018

IBC, 2016 - Tribunal to be empowered to discontinue Insolvency Resolution Process in case of settlement between parties


The government had appointed a 14-member panel presided by Injeti Srinivas the Secretary of Corporate Affairs and 
M S Sahoo, chief Insolvency and Bankruptcy Board of India (IBBI)  to review the (Insolvency and Bankruptcy Code) IBC, 2016 to make the resolution process smoother. 

The panel may suggest that National Company Law Tribunal (Tribunal) should be empowered to dismiss/halt the resolution proceedings if 90% of the Creditors or Lenders agree or give their consent for the withdrawal of the resolution proceeding.

Till now this power is exercised by only the Supreme Court of India under Article 142 of the Constitution of India.   

Ordinarily the CIRP process once commenced cannot be ended even if the debt of the Petitioner creditor has been paid in full or settlement is reached between the Corporate Debtor and claimant.  

Recent Supreme Court Ruling

The Hon'ble Supreme Court while hearing a case concerning corporate debtor Lokhandwala Kataria Construction Pvt. Ltd on an application filed by Financial Creditor Nisus Finance and Investment Manager LLP ruled that a settlement agreement can be considered and a case can be withdrawn after Insolvency Proceedings have started against a company. The said case was initiated before Mumbai bench of the National Company Law Tribunal (NCLT).

Later the Company and the Creditor approached the National Company Law Appellate Tribunal (NCLAT) with an appeal to withdraw the petition filed under IBC as they had settled the dispute and that some of the dues had already been paid to which NCLAT ruled that a case under IBC, 2016 can only be withdrawn before the admission of an insolvency case and not after that, aggrieved to this, the parties filed an appeal before the Supreme Court.

At a policy level, the argument is that once the resolution process is triggered, a collective mechanism commences which places all creditors at par.  Allowing the (single) triggering party to settle the dispute post admission may adversely impact the interests of other creditors, whose rights and interests would have otherwise been protected during the resolution process.

Also “The policy underlying IBC shifts the incentive of the parties from individual recovery actions to collective action. In that context, after a petition has been filed in NCLT, allowing out-of-court bilateral settlement between the borrower and one creditor may contradict that basic objective of collective action,”

However, Supreme Court allowed a settlement to be considered under Article 142 of the Indian Constitution which provides that “the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it”.  In the order, Supreme Court also observed that NCLT and NCLAT do not have inherent powers and will be ruled by provisions of IBC.

Re: Uttara Foods and Feeds Private vs. Mona Pharmachem (Civil Appeal No. 18520 OF 2017) 

The Hon'ble Supreme Court directed the competent authorities (i.e MCA/ IBBI) to formulate rules in such manner so as to include inherent powers of the NCLAT, eliminating unnecessary appeals being filed before Courts in the matters where settlement has been reached between the parties.

Rationale behind prohibiting the tribunals:- 

After the admission of the petition, it acquires the character of representative suit and through publication in newspapers, other creditors get a right to participate in the insolvency resolution process and therefore IBC does not allow the petition to be dismissed on the basis of a compromise between the operational creditor and corporate debtor.

To make sure that Article 142 is restricted to facts of a particular case and may not act as a precedent for the NCLT or NCLAT to assert an out-of-court settlement in every other insolvency case, Supreme Court also observed that “Since this order is under Article 142, it should be treated on the facts of that particular case and not as a precedent of general applicability “which will be highly subjective in its substantial.

However, we might see some more cases of similar nature come up and process would need to mature accordingly. The government may also consider amending the IBC, 2016 to make provisions for settlement of insolvency proceedings once a plea is admitted.

Providing the power to the NCLT to halt the resolution process while considering the settlement agreement could help avoid complications like the one that has arisen in the Binani Cement resolution in which the defaulting promoters and UltraTech, which came in behind winning bidder Dalmia Bharat, have struck a deal to take over the promoters’ stake. Currently, only the Supreme Court can exercise powers under Article 142 of the constitution in cases that are pending in the NCLT.


“If this recommendation is accepted, it will significantly impact the bidding process. For the banks, this will bring an opportunity of minimizing their losses on defaulting loans as after gathering the 90% support of the lenders and creditors effectively gives likely buyers an opportunity to enter into one-time settlement with banks, operational creditors and employees/workmen while bankruptcy proceedings are on.

In the Binani Cement case, the bid from Dalmia Bharat-led consortium was approved by the lenders Ultra-Tech said its offer to the Binani promoters improves on the Dalmia. Under IBC, once a company is admitted to the bankruptcy process, it cannot exit until a resolution plan is put in place within 270 days or the loan account is regularised. If this doesn’t happen before the 270-day deadline, the company has to go into liquidation. However, a case can be withdrawn during the period between the referral of the case to NCLT and before admission of the Insolvency process.

Current research states that out of 2,700 cases that have been referred to NCLT by operational creditors, close to 2,000 were withdrawn before admission since the dispute was settled outside court.

Even after the strict ruling laid down by the Supreme Court National Company Law Tribunal and National Company Law Appellate Tribunal did not adhere to the decision of the apex court and allowed the out of court settlement after the admission of the case for insolvency process under IBC.

Some cases on settlement agreement :-


Argoh Infrastructure Developers

The appellant, corporate debtor first argued that no notice under Section 8 was provided by the operational creditor, which was rejected.

The appellant also argued that no notice by the NCLT was given and therefore, the order admitting the application was in violation of principles of natural justice. The NCLAT, here as well, declined to agree.

But the judgment somewhat ambiguously records that the parties have ‘settled’ the dispute and if the appealed order is set aside on grounds of violation of principles of natural justice, the respondent, operational creditor will withdraw the application .

It appears from the wordings of the judgment, thus, that the NCLT order was set aside on grounds of violation of principles of nature justice to simply pave the way for settlement post admission. 

Ruling by NCLT, Chennai

In the case of Phoenix Global DMCC Chennai Bench allowed settlement exercising its powers under Rule 11, and also because the Resolution Professional hadn’t been appointed and public announcement wasn’t made. 

Although this ruling came before the Supreme Court had passed its Order, the NCLAT ruling in the case of Lokhandwala would still serve as precedent.  In fact, the facts of this case are similar to Lokhandwala to the extent that a public announcement wasn’t made in either. And on that point, the NCLAT had ruled,

“Mere admission without subsequent step of advertisement having carried out, would not amount to refusal of claim of other creditors.  Such submission as made by learned counsel for the appellant cannot be accepted in view of the provisions of the Act. ”

Call this ignorance of law or, defiance to precedents. 

Other important questions required to be answered from the panel:-
  • Among them is one that lenders should be allowed to invoke personal guarantees of promoters of companies facing bankruptcy while the resolution process is underway. There is no clarity on similar seizures with regard to guarantees made by corporates. 

  • Other recommendations are that home buyers should be treated on par with unsecured creditors and lenders should be allowed to implement a resolution plan if two-thirds of them by value agree to it, versus 75% now. 

  • The first is aimed at protecting those who have bought homes from real estate developers that enter the insolvency process while the second is to prevent smaller borrowers from delaying resolution plans. 

The committee is expected to submit its recommendations for amendments to the IBC this month to finance minister Arun Jaitley, also corporate affairs minister. Parliament will have to approve them before they become law.
** The author is associated with VEDA LEGAL advocates and solicitors 
** All the views expressed above are personal comments of the author and does not form any sort of legal opinion
** Viewers are requested to refer to original texts of the orders referred above for more details

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