Supreme Court Allows Withdrawal of CIRP Before CoC Formation: Abhishek Singh vs. Huhtamaki PPL Ltd. (28 March 2023)

Case Background

The case involves Manpasand Beverages Ltd. (Corporate Debtor), a fruit beverage manufacturer, and Huhtamaki PPL Ltd. (Operational Creditor), a packaging material supplier. 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) due to an outstanding amount of Rs. 1,31,00,825. The NCLT admitted the petition on 01 March 2021, initiating the CIRP.

Two days later, on 03 March 2021, the OC and the Corporate Debtor (CD) reached a settlement where the CD agreed to pay Rs. 95.72 lakhs. The CD paid Rs. 50 lakhs on 04 March 2021 and the remaining Rs. 45.72 lakhs on 08 March 2021. On 10 March 2021, 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 along with the OC’s application under Section 12A of the IBC.

Timeline

Course of Proceedings

The NCLT admitted the Operational Creditor’s petition on 01 March 2021, initiating the CIRP. Subsequently, the Corporate Debtor appealed the admission order before the National Company Law Appellate Tribunal (NCLAT), arguing that the Section 9 petition was not maintainable due to a pre-existing dispute. However, the appeal was withdrawn on 26 March 2021, with the liberty to revive it if the settlement failed. The NCLAT also stayed the formation of the Committee of Creditors (CoC). The NCLT rejected the settlement application on 13 April 2021, leading to the present appeal before the Supreme Court. The IRP constituted the CoC on 15 April 2021, after the NCLT rejected the settlement application.

Legal Framework

The judgment discusses the following key legal provisions:

• Rule 11 of The National Company Law Tribunal Rules, 2016: This rule confers inherent powers on the NCLT to pass appropriate orders to meet the ends of justice or prevent abuse of the Tribunal’s process. It states: “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.”
• Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC): This section allows for 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). It states: “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 mechanism for dealing with applications for withdrawal under Section 12A of the IBC. It allows for withdrawal before the constitution of the CoC by the applicant through the IRP and after the constitution of the CoC by the applicant through the IRP or RP. It states:
  “(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 expression of interest under regulation 36A, the applicant shall state the reasons justifying withdrawal after issue of such invitation.”

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 allow for settlement and withdrawal of proceedings before the constitution of the CoC.
• The NCLT erred in not allowing the withdrawal of proceedings after the settlement was reached and acted upon before the CoC was formed.
• The NCLT should not have considered the claims of other creditors as they should not hinder the settlement between the OC and the CD before the CoC is formed.
• The NCLT wrongly held that Regulation 30A of the IBBI Regulations was not binding on it, as it is a statutory provision.
• The appellant relied on the Supreme Court’s orders under Article 142 of the Constitution, allowing withdrawals in similar cases, and on the judgment in Swiss Ribbons (P) Ltd. v. Union of India, which led to the insertion of Regulation 30A in the IBBI Regulations.

Respondent’s (IRP and Interveners) Arguments:

• The respondents argued that the settlement was in violation of the moratorium under Section 14 of the IBC, as payments were made from the CD’s account after the CIRP was initiated.
• They contended that the suspended directors of the CD made illegal transactions by transferring funds from the CD’s account to their personal accounts.
• They argued that the NCLT was correct in rejecting the withdrawal application, as the proceedings are in rem and other creditors have raised claims.
• The IRP also raised concerns about the non-clearance of his expenses.
• They argued that the appellant should have availed the alternative remedy of filing an appeal before the NCLAT.
• The respondents relied on judgments such as P. Mohanraj v. Shah Bros. ISPAT (P) Ltd. and Dena Bank v. Shivakumar Reddy to support their claims.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the NCLT was correct in rejecting the application for withdrawal of CIRP proceedings under Section 12A of the IBC and Regulation 30A of the IBBI Regulations, when a settlement had been reached before the constitution of the CoC?
2. Whether the NCLT was justified in holding that Regulation 30A of the IBBI Regulations was not binding on it?
3. Whether the NCLT should have considered the claims of other creditors while deciding on the withdrawal application before the constitution of the CoC?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeal, setting aside the NCLT’s order. The Court held that the NCLT should have allowed the withdrawal application as the settlement was reached before the CoC was constituted. The Court emphasized that Regulation 30A of the IBBI Regulations is binding on the NCLT and provides a mechanism for dealing with withdrawal applications filed before the constitution of the CoC. The Court also stated that the claims of other creditors should not hinder a settlement reached before the CoC is formed.

How each authority was viewed by the Court:

• Swiss Ribbons (P) Ltd. v. Union of India [(2019) 4 SCC 17]* was used to emphasize the need for a mechanism to deal with withdrawal applications before the constitution of the CoC, which led to the insertion of Regulation 30A in the IBBI Regulations.
• Ashok G. Rajani v. Beacon Trusteeship Ltd.& Ors. [(2022) SCC Online SC 1275]* was used to emphasize that settlement should not be stifled by third-party claims before the constitution of the CoC.
• Kamal K. Singh v. Dinesh Gupta & Anr. (Civil Appeal No.4993 of 2021)* was used to support the maintainability of applications under Rule 11 of the NCLT Rules for withdrawal of proceedings before the constitution of the CoC.
• P. Mohanraj v. Shah Bros. ISPAT (P) Ltd. [(2021) 6 SCC 258]* was distinguished by the Court, stating that it does not apply to the present facts as the NCLT was not satisfied that the moratorium had been violated.
• Dena Bank (Now Bank of Baroda) v. Shivakumar Reddy & Anr. [(2021) 10 SCC 330]* was distinguished by the Court, stating that it does not apply to the present facts as the NCLT was not satisfied that the moratorium had been violated.
• Narayanamma and anr. v. Govindappa and Ors. [(2019) 19 SCC 42]* was distinguished by the Court, stating that it does not apply to the present facts as the NCLT was not satisfied that the suspended directors had committed any illegal act.
• Rule 11 of The National Company Law Tribunal Rules, 2016 was used to emphasize the inherent powers of the NCLT to pass orders necessary for meeting the ends of justice.
• Section 12A of the Insolvency and Bankruptcy Code, 2016 was used to explain the provision for withdrawal of applications with the approval of the CoC.
• Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018 was used to highlight the mechanism for withdrawal applications before and after the constitution of the CoC.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to encourage settlements and to ensure that the NCLT does not reject withdrawal applications on technicalities when a settlement is reached before the CoC is formed. The Court emphasized that the purpose of the IBC is to facilitate resolution and that settlements should be encouraged. The Court also noted that Regulation 30A of the IBBI Regulations was specifically introduced to provide a mechanism for withdrawal of applications before the constitution of the CoC, and the NCLT erred in holding that it was not binding.

Fact:Law Ratio: The court focused more on the legal aspects (70%) of the case, particularly the interpretation of Section 12A of the IBC, Regulation 30A of the IBBI Regulations, and Rule 11 of the NCLT Rules. The factual aspects (30%) such as the timeline of events and the settlement between the parties were also considered but were secondary to the legal analysis.

Logical Reasoning:

The Court considered alternative interpretations, such as the argument that the settlement was in violation of the moratorium and that the claims of other creditors should be considered. However, the Court rejected these interpretations, emphasizing that the settlement was reached before the CoC was formed, and the NCLT should have allowed the withdrawal. The Court also noted that the NCLT was not satisfied with the claim that the moratorium had been violated.

The Court’s reasoning was based on the following steps:

1. The Court noted that the settlement was reached before the CoC was formed.
2. The Court emphasized that Regulation 30A of the IBBI Regulations is binding on the NCLT and provides a mechanism for withdrawal applications before the constitution of the CoC.
3. The Court stated that the claims of other creditors should not hinder a settlement reached before the CoC is formed.
4. The Court rejected the argument that the settlement was in violation of the moratorium, noting that the NCLT was not satisfied with this claim.
5. The Court concluded that the NCLT should have allowed the withdrawal application.

The Court quoted the following from the judgment:

• “Once the parties had settled the dispute even before the CoC had been constituted, the application ought to have been allowed then and there rather than await the other creditors to jump into the fray and allow the IRP to proceed further.”
• “The NCLT committed an error in holding that Regulation 30A would have no binding effect. This would amount to defeating the very purpose of substituting Regulation 30A in IBBI Regulations on 25.07.2019 after the judgment of Swiss Ribbons(supra) which was dated 25.01.2019.”
• “The settlement cannot be stifled before the constitution of the Committee of Creditors in anticipation of claims against the Corporate Debtor from third persons.”

Key Takeaways

• Settlements reached before the constitution of the Committee of Creditors (CoC) should be encouraged.
• The National Company Law Tribunal (NCLT) should not reject withdrawal applications on technicalities when a settlement is reached before the CoC is formed.
• Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018 is binding on the NCLT.
• The claims of other creditors should not hinder a settlement reached before the CoC is formed.
• The NCLT has inherent powers under Rule 11 of the NCLT Rules to pass orders necessary for meeting the ends of justice.

Directions

The Supreme Court set aside the NCLT’s order and allowed the application for withdrawal of the CIRP proceedings. The Court also directed that any claim for expenses incurred by the IRP may be dealt with by the NCLT in accordance with the law.

Development of Law

The ratio decidendi of this case is that settlements reached before the constitution of the Committee of Creditors (CoC) should be encouraged, and the NCLT should not reject withdrawal applications on technicalities when a settlement is reached before the CoC is formed. This judgment clarifies the powers of the NCLT in dealing with withdrawal applications under Section 12A of the IBC and Regulation 30A of the IBBI Regulations and emphasizes the binding nature of Regulation 30A. This case reinforces the position that settlements should be encouraged under the IBC framework and that the NCLT should not hinder such settlements by considering third-party claims before the CoC is formed. This is a change in the previous position of the law, which did not have a clear mechanism for withdrawal of proceedings before the CoC was formed.

Conclusion

The Supreme Court’s judgment in Abhishek Singh vs. Huhtamaki PPL Ltd. clarifies the process for withdrawing Corporate Insolvency Resolution Process (CIRP) proceedings when a settlement is reached before the Committee of Creditors (CoC) is formed. The Court emphasized the importance of encouraging settlements and the binding nature of Regulation 30A of the IBBI Regulations. This ruling provides clarity and guidance for the NCLT in dealing with similar cases, ensuring that settlements are not hindered by technicalities or third-party claims.