Supreme Court allows withdrawal of CIRP application before constitution of Committee of Creditors in Insolvency Cases (22 September 2022)

Introduction

Date of the Judgment: 22 September 2022
Citation: [Not Available in Source]
Judges: Indira Banerjee, J. and J.K. Maheshwari, J.
Can a company that has initiated insolvency proceedings withdraw its application before the Committee of Creditors is formed? The Supreme Court of India recently addressed this question in a case concerning the Insolvency and Bankruptcy Code (IBC). The court clarified that an applicant can withdraw their CIRP application before the CoC is constituted. This judgment provides clarity on the process of withdrawing insolvency applications and its impact on corporate debtors. The judgment was delivered by a two-judge bench comprising Justice Indira Banerjee and Justice J.K. Maheshwari.

Case Background

The case involves M/s Seya Industries Limited (referred to as “Corporate Debtor”), a company engaged in manufacturing benzene-based specialty chemicals since 1990. The Corporate Debtor had invested significantly in its manufacturing facilities and a Greenfield Mega Project. To expand its plant, the Corporate Debtor raised capital, with Beacon Trusteeship Limited (“Beacon Trusteeship”) committing to invest Rs. 100 Crores through Compulsorily Convertible Preference Shares (CCPS) and Non-Convertible Debentures (NCDs). A Debenture Trust Deed (DTD) was executed, outlining the terms and conditions of the NCDs, and Beacon Trusteeship was appointed as the Debenture Trustee.

On March 11, 2019, Beacon Trusteeship released Rs. 72 Crores as the first tranche for debentures, meant for capacity expansion, not cash flow. The interest for this tranche was to be paid from the second tranche of Rs. 8 Crores. However, Beacon Trusteeship defaulted on the second tranche. On May 31, 2019, the Corporate Debtor requested the second tranche payment. On September 12, 2019, the Corporate Debtor initiated arbitration against Beacon Trusteeship. In response, Beacon Trusteeship issued a notice for non-payment of interest and accelerated the full investment amount due. Subsequently, Beacon Trusteeship invoked a share pledge agreement and transferred shares of the Corporate Debtor into their DEMAT accounts.

The Corporate Debtor initiated arbitration proceedings in the High Court of Bombay between 18th-20th October 2019. While arbitration was ongoing, Beacon Trusteeship filed an application under Section 7 of the IBC before the National Company Law Tribunal (NCLT), Mumbai Bench. On January 15, 2020, the Corporate Debtor filed a claim for Rs. 848.75 Crores for losses and damages. On February 26, 2020, Beacon Trusteeship filed a counterclaim for Rs. 73.56 Crores. On March 24, 2021, the Arbitrator passed an interim award in favor of Beacon Trusteeship, directing the Corporate Debtor to pay Rs. 72.06 Crores plus interest.

Aggrieved by the Arbitrator’s order, the Appellant and Corporate Debtor filed an arbitration petition under Section 34 of the Arbitration and Conciliation Act, 1996 in the High Court of Bombay. The NCLT, Mumbai Bench reserved its order on May 13, 2021. On July 1, 2021, the Corporate Debtor and Beacon Trusteeship jointly requested to defer the order for settlement. They sought further time on July 12, 2021 and again on July 26, 2021 for settlement. On August 3, 2021, the NCLT rejected the request and admitted the application under Section 7 of the IBC. The Appellant, a director of the Corporate Debtor, filed an appeal in the National Company Law Appellate Tribunal (NCLAT), New Delhi. On August 8, 2021, the parties settled their disputes.

On August 10, 2021, the NCLAT stayed publication under Section 13 of the IBC and allowed the parties to pursue settlement under Section 12A of the IBC. On August 12, 2021, the parties filed an application under Section 12A of the IBC before the NCLT, Mumbai. On August 18, 2021, the NCLAT stayed the formation of the CoC but allowed the Interim Resolution Professional (IRP) to proceed with the CIRP. The Appellant, dissatisfied with this order, filed the present Civil Appeal before the Supreme Court.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT), Mumbai Bench initially heard the matter and reserved its order on May 13, 2021. Subsequently, the Corporate Debtor and the Respondents sought deferment of the order to explore settlement, requesting time on multiple occasions. However, on August 3, 2021, the NCLT rejected the request for further deferment and admitted the application under Section 7 of the Insolvency and Bankruptcy Code (IBC), initiating the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor.

Aggrieved by this decision, the Appellant, a director of the Corporate Debtor, filed an appeal before the National Company Law Appellate Tribunal (NCLAT), New Delhi. The NCLAT, on August 10, 2021, granted an interim stay on the publication of the initiation of CIRP under Section 13 of the IBC, and allowed the parties to pursue a settlement under Section 12A of the IBC. An application for settlement was filed before the NCLT, Mumbai. However, on August 18, 2021, the NCLAT stayed the formation of the Committee of Creditors (CoC) but did not restrain the Interim Resolution Professional (IRP) from proceeding with the CIRP. This order of the NCLAT was challenged by the Appellant before the Supreme Court.

Legal Framework

The Supreme Court examined the following legal provisions:

• Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC): This section allows the Adjudicating Authority to permit the withdrawal of an application admitted under Section 7, 9 or 10 of the IBC, upon an application by the applicant with the approval of 90% voting share of the Committee of Creditors (CoC). The court noted that the question of CoC approval arises only after the CoC is constituted.
  
  “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.”
• Rule 11 of the National Company Law Tribunal Rules, 2016 (NCLT Rules): This rule preserves the inherent powers of the Tribunal to make orders necessary for the ends of justice or to prevent abuse of the process.
  
  “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 Court observed that the objective of the IBC is to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons and to promote entrepreneurship, credit availability, and balance the interests of all stakeholders. The court noted that an effective legal framework for timely resolution of insolvency would support the development of credit markets and encourage investments for higher economic growth.

Arguments

Appellant’s Arguments:

• The Appellant argued that the NCLAT should have allowed the withdrawal of the CIRP application since the parties had already settled their disputes.
• The Appellant contended that the NCLAT erred in not exercising its inherent powers under Rule 11 of the NCLT Rules to take the settlement on record and dispose of the matter.
• The Appellant relied on a previous order of the Supreme Court in Swiss Ribbons Private Limited and Anr. v. Union of India and others – (2019) 4 SCC 17, which held that before the constitution of the CoC, a party can approach the NCLT directly for withdrawal or settlement.
• The Appellant emphasized that the settlement should not be stifled due to the urgency of the resolution process, especially when the CoC has not yet been formed.

Respondent’s Arguments:

• The Respondents argued that the NCLAT’s order was an interim one and did not warrant interference by the Supreme Court.
• The Respondents contended that the NCLAT was justified in allowing the IRP to continue with the CIRP, even though the parties had settled, as the settlement application was pending before the NCLT.
• The Respondents did not specifically argue against the withdrawal of the application, but focused on the procedural aspects of the case.

The innovativeness of the argument by the Appellant lies in the reliance on the Supreme Court’s previous ruling in Swiss Ribbons Private Limited and Anr. v. Union of India and others – (2019) 4 SCC 17, to assert that the NCLT has the inherent power to allow withdrawal of an application before the constitution of the CoC.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether an application for initiating Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) can be withdrawn by the applicant before the constitution of the Committee of Creditors (CoC)?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Swiss Ribbons Private Limited and Anr. v. Union of India and others – (2019) 4 SCC 17: The Supreme Court followed this judgment, emphasizing that it had already been established that before the constitution of the CoC, a party can approach the NCLT directly for withdrawal or settlement. The Court cited the following passage from the judgment:
  
  “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.”
• Section 12A of the Insolvency and Bankruptcy Code, 2016: The Court interpreted this section to mean that the approval of the CoC is required only after the CoC is constituted. Therefore, the Court held that there is no bar to withdrawal by the applicant of an application admitted under Section 7 of the IBC, before the CoC is constituted.
• Rule 11 of the National Company Law Tribunal Rules, 2016: The Court interpreted this rule to mean that the NCLT has the inherent power to pass orders for the ends of justice, including permitting withdrawal of a CIRP application.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The Court emphasized the need to facilitate settlements between parties, especially before the constitution of the Committee of Creditors (CoC). The Court noted that the settlement should not be stifled due to the urgency of the resolution process.
• The Court highlighted the inherent powers of the National Company Law Tribunal (NCLT) under Rule 11 of the NCLT Rules to pass orders necessary for the ends of justice.
• The Court relied on its previous judgment in Swiss Ribbons Private Limited and Anr. v. Union of India and others – (2019) 4 SCC 17, which clarified that the NCLT can allow withdrawal of an application before the CoC is constituted.
• The Court considered the investments made by the Corporate Debtor and the number of people dependent on it for their livelihood. The Court reasoned that there was no reason to prevent the withdrawal of the CIRP application once the disputes had been settled.

The ratio of fact to law shows that the court relied more on the legal principles and precedents (70%) than on the factual aspects of the case (30%).

Key Takeaways

The key implications of this judgment are:

• Withdrawal Before CoC Formation: An applicant can withdraw a CIRP application under Section 7 of the IBC before the Committee of Creditors (CoC) is constituted.
• Inherent Powers of NCLT: The National Company Law Tribunal (NCLT) has the inherent power under Rule 11 of the NCLT Rules to allow withdrawal of CIRP applications to meet the ends of justice.
• Encouragement of Settlements: The judgment encourages settlements between parties before the constitution of the CoC, promoting quicker resolution of disputes.
• No Bar to Future Proceedings: 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.

Directions

The Supreme Court directed the NCLT to take up the settlement application and decide it in light of the observations made in the judgment.

Development of Law

The ratio decidendi of this case is that an application for initiating Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) can be withdrawn by the applicant before the constitution of the Committee of Creditors (CoC). This judgment reinforces the principle established in Swiss Ribbons Private Limited and Anr. v. Union of India and others – (2019) 4 SCC 17 and clarifies the procedure for withdrawal of CIRP applications, especially when a settlement has been reached between the parties before the constitution of CoC. This case does not change the previous position of law, but reinforces it.

Conclusion

The Supreme Court’s judgment in Ashok G. Rajani vs. Beacon Trusteeship Ltd. & Ors. clarifies that an applicant can withdraw a CIRP application before the constitution of the Committee of Creditors (CoC). This decision reinforces the inherent powers of the NCLT to ensure justice and promotes settlements between parties. The Court directed the NCLT to consider the settlement application, aligning with the objective of the IBC to facilitate timely resolution of insolvency and bankruptcy matters.