LEGAL ISSUE: Whether a Corporate Insolvency Resolution Process (CIRP) can be withdrawn before the constitution of the Committee of Creditors (CoC) when a settlement has been reached between the Operational Creditor (OC) and the Corporate Debtor (CD).
CASE TYPE: Insolvency Law
Case Name: Abhishek Singh vs. Huhtamaki PPL Ltd. & Anr.
Judgment Date: 28 March 2023
Date of the Judgment: 28 March 2023
Citation: (2023) INSC 260
Judges: B.R. Gavai, J., Vikram Nath, J.
Can a Corporate Insolvency Resolution Process (CIRP) be withdrawn after a settlement between the operational creditor and the corporate debtor, but before the Committee of Creditors (CoC) is formed? The Supreme Court of India recently addressed this critical question in the case of *Abhishek Singh vs. Huhtamaki PPL Ltd.*, clarifying the legal position on such withdrawals. This judgment provides important guidance on the interpretation of Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC) and Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018.
The Supreme Court, in this case, examined whether the National Company Law Tribunal (NCLT) was correct in rejecting an application for withdrawal of CIRP despite a settlement between the parties before the constitution of the CoC. The bench, comprising Justices B.R. Gavai and Vikram Nath, delivered the judgment, with Justice Vikram Nath authoring the opinion.
Case Background
The appellant, a suspended director of Manpasand Beverages Ltd. (the Corporate Debtor or CD), appealed against the National Company Law Tribunal’s (NCLT) decision to reject the withdrawal of the Corporate Insolvency Resolution Process (CIRP). The Operational Creditor (OC), Huhtamaki PPL Ltd., had initiated the CIRP due to an outstanding payment of Rs. 1,31,00,825. The CD was in the business of manufacturing and distributing fruit beverages with approximately 700 employees and a turnover of Rs. 984.96 Crores in the Financial Year 2018-2019.
On March 1, 2021, the NCLT admitted the OC’s petition and initiated the CIRP. However, just two days later, on March 3, 2021, the OC and CD reached a settlement where the CD agreed to pay Rs. 95.72 lakhs. This settlement occurred before the Committee of Creditors (CoC) could be formed. The CD paid Rs. 50 lakhs on March 4, 2021, and the remaining Rs. 45.72 lakhs on March 8, 2021. Subsequently, the Interim Resolution Professional (IRP) filed an application under Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018, seeking withdrawal of the CIRP.
Timeline
| Date | Event |
|---|---|
| 2018-2019 | Corporate Debtor (CD) has a turnover of Rs. 984.96 Crores. |
| 01.03.2021 | NCLT admits the Operational Creditor’s (OC) petition and initiates CIRP. |
| 03.03.2021 | OC and CD reach a settlement; CD agrees to pay Rs. 95.72 lakhs. |
| 04.03.2021 | CD pays Rs. 50 lakhs to OC. |
| 08.03.2021 | CD pays the remaining Rs. 45.72 lakhs to OC. |
| 10.03.2021 | Interim Resolution Professional (IRP) moves an application under Regulation 30A of IBBI Regulations seeking withdrawal of CIRP. |
| 26.03.2021 | Appeal against the admission order is withdrawn from NCLAT, with liberty to revive if settlement fails; NCLAT stays formation of CoC. |
| 13.04.2021 | NCLT rejects the settlement application. |
| 15.04.2021 | IRP constitutes the CoC. |
| 19.04.2021 | Appellant prefers SLP before the Supreme Court. |
| 20.04.2021 | Supreme Court issues notice and orders status quo. |
| 28.03.2023 | Supreme Court allows the appeal and sets aside the NCLT order. |
Course of Proceedings
Initially, the Operational Creditor (OC) filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal (NCLT), Ahmedabad, claiming an outstanding amount of Rs. 1,31,00,825. The NCLT admitted the petition on March 1, 2021, initiating the Corporate Insolvency Resolution Process (CIRP). Following a settlement between the OC and the Corporate Debtor (CD), an application for withdrawal of the CIRP was filed under Section 12A of the IBC, read with Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018. Simultaneously, an appeal was filed before the National Company Law Appellate Tribunal (NCLAT) against the admission order, which was later withdrawn with the liberty to revive it if the settlement failed. The NCLAT also stayed the formation of the Committee of Creditors (CoC). Despite these developments, the NCLT rejected the settlement application, leading to the appeal before the Supreme Court.
Legal Framework
The judgment primarily revolves around the interpretation and application of the following legal provisions:
- Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC): This section allows the withdrawal of applications admitted under sections 7, 9, or 10 of the IBC, with the approval of 90 percent voting share of the Committee of Creditors (CoC). The provision states:
“12A. Withdrawal of application admitted under section 7,9 or 10 – The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent voting share of the committee of creditors, in such manner as may be specified.”
- Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018 (IBBI Regulations): This regulation provides the procedure for withdrawal of applications under Section 12A of the IBC. It allows for withdrawal before the constitution of the CoC by the applicant through the Interim Resolution Professional (IRP). The relevant part of the regulation states:
“30A. Withdrawal of application. (1) An application for withdrawal under section 12A may be made to the Adjudicating Authority – (a) before the constitution of the committee, by the applicant through the interim resolution professional; (b) after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be: Provided that where the application is made under clause (b) after the issue of invitation for e xpression of interest under regulation 36A, the applicant shall state the reasons justifying withdrawal after issue of such invitation.”
- Rule 11 of the National Company Law Tribunal Rules, 2016 (NCLT Rules): This rule confers inherent powers on the NCLT to pass appropriate orders for meeting the ends of justice or to prevent abuse of the process of the Tribunal. The rule states:
“11. Inherent powers – Nothing in these rules shall be deemed to limit or otherwise affect th e 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.”
Arguments
Appellant’s Arguments:
- The appellant argued that Section 12A of the IBC, Regulation 30A of the IBBI Regulations, and Rule 11 of the NCLT Rules clearly permit settlement between the creditor and the debtor and withdrawal of proceedings before the constitution of the CoC.
- The NCLT erred in not allowing the withdrawal of proceedings as the settlement was arrived at and acted upon before the CoC was constituted.
- The NCLT was swayed by the fact that several other creditors had raised claims against the CD, which should not have been a factor in deciding on the withdrawal application.
- The objection by the IRP regarding the transfer of funds from the CD’s account during the moratorium was not conclusively established by the NCLT itself.
- The NCLT had no jurisdiction to declare that Regulation 30A of the IBBI Regulations was not binding on it.
Respondents’ Arguments (IRP and Interveners):
- The respondents contended that the settlement was in violation of the moratorium as payments were made after the initiation of CIRP, using funds transferred from the CD’s account.
- The withdrawal of proceedings would adversely affect the rights of other creditors who had filed their claims.
- The appellant should have availed the alternative remedy by filing an appeal before the NCLAT.
- The IRP’s expenses had not been cleared.
- The settlement was an illegal act by the suspended directors of the CD, and the court should not put a seal on it.
The appellant argued that the NCLT should have exercised its inherent powers under Rule 11 of the NCLT Rules to allow the withdrawal, whereas the respondents argued that this power should only be exercised after hearing all concerned parties. The respondents contended that the transactions made by the suspended director of the Corporate Debtor (CD) after the initiation of the Corporate Insolvency Resolution Process (CIRP) were illegal and in violation of the moratorium. They argued that these transactions should be a reason to reject the withdrawal application. The respondents also stated that the NCLT was correct in considering the claims of other creditors who had filed their claims after the initiation of the CIRP, as those claims would be affected by the withdrawal.
Submissions by Parties
| Main Submission | Appellant’s Sub-Submissions | Respondents’ Sub-Submissions |
|---|---|---|
| Validity of Settlement and Withdrawal |
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| NCLT’s Approach |
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| Transactions during Moratorium |
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Issues Framed by the Supreme Court
The Supreme Court addressed the following issues:
- Whether the National Company Law Tribunal (NCLT) was correct in rejecting the application for withdrawal of the Corporate Insolvency Resolution Process (CIRP) under Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC), read with Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018, when a settlement had been reached between the Operational Creditor (OC) and the Corporate Debtor (CD) before the constitution of the Committee of Creditors (CoC).
- Whether the NCLT was justified in holding that Regulation 30A of the IBBI Regulations was not binding on it.
- Whether the NCLT should have exercised its inherent powers under Rule 11 of the NCLT Rules to allow the withdrawal of the CIRP.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether the NCLT was correct in rejecting the application for withdrawal of the CIRP before CoC formation. | Incorrect. | The settlement was reached before the CoC was formed, and the NCLT should have allowed the withdrawal application. |
| Whether the NCLT was justified in holding that Regulation 30A of the IBBI Regulations was not binding on it. | Incorrect. | Regulation 30A is a statutory provision and is binding on the NCLT. |
| Whether the NCLT should have exercised its inherent powers under Rule 11 of the NCLT Rules to allow the withdrawal of the CIRP. | Yes. | The NCLT should have invoked its inherent powers to meet the ends of justice and allow the withdrawal. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | Legal Point | How Considered |
|---|---|---|---|
| Swiss Ribbons (P) Ltd. v. Union of India [(2019) 4 SCC 17] | Supreme Court of India | Withdrawal of CIRP before the constitution of CoC | The Court referred to paragraph 82 of this judgment, which held that NCLT can use its inherent powers to allow or disallow withdrawal applications before CoC formation. |
| Ashok G. Rajani v. Beacon Trusteeship Ltd.& Ors. [(2022) SCC Online SC 1275] | Supreme Court of India | Settlement before CoC formation | The Court relied on this judgment to emphasize that settlement cannot be stifled before CoC formation in anticipation of third-party claims. |
| Kamal K.Singh v. Dinesh Gupta & Anr. [Civil Appeal No.4993 of 2021, dated 25.08.2021] | Supreme Court of India | Maintainability of applications under Rule 11 of NCLT Rules | The Court relied on this case to hold that applications under Rule 11 of the NCLT Rules are maintainable for withdrawal of proceedings before the CoC is constituted. |
| P. Mohanraj v. Shah Bros. ISPAT (P) Ltd. [(2021) 6 SCC 258] | Supreme Court of India | Violation of Moratorium | The Court distinguished this case, stating that even if there was a violation of moratorium, the settlement could not be stalled. |
| Dena Bank (Now Bank of Baroda) v. Shivakumar Reddy & Anr. [(2021) 10 SCC 330] | Supreme Court of India | Violation of Moratorium | The Court distinguished this case, stating that even if there was a violation of moratorium, the settlement could not be stalled. |
| MSTC Limited v. Adhunik Metalliks Ltd. and others [(2019) SCC Online NCLAT 146] | National Company Law Appellate Tribunal | Violation of Moratorium | The Court distinguished this case, stating that even if there was a violation of moratorium, the settlement could not be stalled. |
| Indian Overseas Bank v. Mr. Dinkar T. Venkatsubramaniam, Resolution Professional for Amtek Auto Limited [(2017) SCC Online NCLAT 584] | National Company Law Appellate Tribunal | Violation of Moratorium | The Court distinguished this case, stating that even if there was a violation of moratorium, the settlement could not be stalled. |
| Manoj K. Daga v. ISGEC Heavy Engineering Limited and others [(2020) SCC On line NCLAT 869] | National Company Law Appellate Tribunal | Violation of Moratorium | The Court distinguished this case, stating that even if there was a violation of moratorium, the settlement could not be stalled. |
| Narayanamma and anr. v. Govindappa and Ors. [(2019) 19 SCC 42] | Supreme Court of India | Illegal act of suspended directors | The Court distinguished this case, stating that the NCLT was not satisfied with the alleged violation. |
| Ram Saran Das v. CTO Calcutta & Anr. [AIR 1962 SC 1362] | Supreme Court of India | Alternative remedy | The Court held that the plea of alternative remedy does not benefit the interveners. |
| Titaghur Paper Mills Co. Ltd. v. State of Orissa [(1983) 2 SCC 433] | Supreme Court of India | Alternative remedy | The Court held that the plea of alternative remedy does not benefit the interveners. |
Judgment
How each submission made by the Parties was treated by the Court?
| Submission | Court’s Treatment |
|---|---|
| Appellant’s submission that Section 12A of the IBC, Regulation 30A of the IBBI Regulations, and Rule 11 of the NCLT Rules permit settlement and withdrawal before CoC formation. | Accepted. The Court held that these provisions do allow for settlement and withdrawal before the constitution of the CoC. |
| Appellant’s submission that the NCLT erred in not allowing withdrawal when the settlement was reached and acted upon before CoC formation. | Accepted. The Court found that the NCLT should have allowed the withdrawal application. |
| Appellant’s submission that the NCLT was swayed by the claims of other creditors, which should not have been a factor. | Accepted. The Court agreed that claims of other creditors should not have been a factor in deciding on the withdrawal application before CoC formation. |
| Appellant’s submission that the objection by the IRP regarding the transfer of funds during the moratorium was not conclusively established. | Accepted. The Court noted that the NCLT itself was not satisfied with the IRP’s objection. |
| Appellant’s submission that the NCLT had no jurisdiction to declare that Regulation 30A of the IBBI Regulations was not binding on it. | Accepted. The Court held that the NCLT erred in ignoring the statutory provision of Regulation 30A. |
| Respondents’ submission that the settlement violated the moratorium as payments were made after CIRP initiation using CD’s funds. | Rejected. The Court stated that even if there was a violation, it could be dealt with separately and should not stall the settlement. |
| Respondents’ submission that the withdrawal would adversely affect other creditors’ rights. | Rejected. The Court held that other creditors have their own legal remedies and their rights would not be affected by the withdrawal. |
| Respondents’ submission that the appellant should have availed the alternative remedy by filing an appeal before the NCLAT. | Rejected. The Court noted that it had already entertained the SLP and was not inclined to entertain the objection. |
| Respondents’ submission that the settlement was an illegal act by the suspended directors of the CD. | Rejected. The Court noted that the NCLT itself was not satisfied with such violation. |
| Respondents’ submission that the IRP’s expenses had not been cleared. | Rejected. The Court held that the IRP’s expenses could be recovered under Regulation 30A of IBBI Regulations. |
How each authority was viewed by the Court?
The Court relied on Swiss Ribbons (P) Ltd. v. Union of India [(2019) 4 SCC 17]* to highlight that the NCLT has the inherent power to allow or disallow withdrawal applications before the constitution of the CoC. The Court also relied on Ashok G. Rajani v. Beacon Trusteeship Ltd.& Ors. [(2022) SCC Online SC 1275]* to emphasize that settlements should not be stifled before the constitution of the CoC. Further, the Court relied on Kamal K.Singh v. Dinesh Gupta & Anr. [Civil Appeal No.4993 of 2021, dated 25.08.2021]* to support the maintainability of applications under Rule 11 of the NCLT Rules for withdrawal of proceedings before the CoC is constituted. The other cases cited by the respondents were distinguished by the Court.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the following factors:
- Settlement before CoC Formation: The Court emphasized that the settlement between the Operational Creditor (OC) and the Corporate Debtor (CD) was reached and acted upon before the Committee of Creditors (CoC) was constituted. This was a crucial factor in the Court’s decision to allow the withdrawal of the Corporate Insolvency Resolution Process (CIRP).
- Statutory Provisions: The Court underscored that Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC), read with Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018, allows for withdrawal of CIRP applications before the constitution of the CoC. The Court held that Regulation 30A is a statutory provision and is binding on the NCLT.
- Inherent Powers of NCLT: The Court noted that the NCLT has inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016, to pass orders necessary for meeting the ends of justice. The Court held that the NCLT should have invoked these powers to allow the withdrawal of the CIRP, especially when the settlement was reached before the CoC was formed.
- Rejection of Technicalities: The Court observed that the NCLAT had specifically directed the NCLT to pass orders on the withdrawal application without standing on technicalities. The Court found that the NCLT had ignored this direction and was overly concerned with technicalities.
- Rights of Other Creditors: The Court clarified that the rights of other creditors would not be adversely affected by the withdrawal of the CIRP in this case. The Court noted that other creditors would have their own legal remedies to pursue their claims.
- Violation of Moratorium: The Court noted that the NCLT itself was not satisfied with the IRP’s submission that there was a violation of the moratorium. The Court held that even if there was a violation, it could be dealt with separately and should not stall the settlement.
The Court’s reasoning focused on the need to facilitate settlements and avoid unnecessary delays in the insolvency process, especially when a settlement is reached before the formation of the CoC. The Court also emphasized the importance of adhering to statutory provisions and exercising inherent powers to ensure justice.
| Sentiment | Percentage |
|---|---|
| Settlement before CoC Formation | 30% |
| Statutory Provisions | 25% |
| Inherent Powers of NCLT | 20% |
| Rejection of Technicalities | 10% |
| Rights of Other Creditors | 10% |
| Violation of Moratorium | 5% |
Fact:Law Ratio
| Category | Percentage |
|---|---|
| Fact | 40% |
| Law | 60% |
Logical Reasoning
Key Takeaways
- Settlements Before CoC Formation: The Supreme Court has clarified that settlements reached between the Operational Creditor (OC) and the Corporate Debtor (CD) before the constitution of the Committee of Creditors (CoC) should be given due consideration, and the NCLT should not reject withdrawal applications based on technicalities.
- Binding Nature of Regulation 30A: The Court has affirmed that Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018, is a statutory provision and is binding on the NCLT.
- Inherent Powers of NCLT: The NCLT has the inherent power under Rule 11 of the National Company Law Tribunal Rules, 2016, to allow withdrawal of CIRP applications before the constitution of the CoC to meet the ends of justice.
- Rights of Other Creditors: The withdrawal of a CIRP application due to a settlement between the OC and the CD before CoC formation does not adversely affect the rights of other creditors, who are free to pursue their own legal remedies.
- Violation of Moratorium: Alleged violations of the moratorium should not be a reason to stall the settlement process, and can be dealt with separately.
Final Order
The Supreme Court allowed the appeal and set aside the order of the National Company Law Tribunal (NCLT). The Court held that the NCLT should have allowed the withdrawal of the Corporate Insolvency Resolution Process (CIRP) as the settlement was reached before the constitution of the Committee of Creditors (CoC). The Court also directed that the expenses of the Interim Resolution Professional (IRP) could be recovered as per Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018.
Concluding Remarks
The Supreme Court’s judgment in *Abhishek Singh vs. Huhtamaki PPL Ltd.* provides a significant clarification on the withdrawal of Corporate Insolvency Resolution Processes (CIRPs) before the constitution of the Committee of Creditors (CoC). The Court’s emphasis on facilitating settlements and adhering to statutory provisions while exercising inherent powers reinforces the objective of the Insolvency and Bankruptcy Code, 2016 (IBC), which aims at the timely resolution of insolvency. This judgment is a crucial guide for adjudicating authorities and stakeholders in the insolvency process, ensuring that settlements are not unnecessarily stalled due to technicalities and that the interests of all parties are duly considered.