India: Effect Of Settlement Between The Parties After Admission Of Application Under IBC Code: An Update

Going forward from the write-up on the subject-topic1 we hereby discuss recent judgments thereafter on the issue of what happens to the proceedings initiated under Insolvency & Bankruptcy Code 2016 ("I&B Code") where the parties to the application pending before the adjudicating authority have arrived at a mutual settlement amongst themselves.

As earlier written about, on case to case basis there may be a very little scope that the application, after admission, may be permitted to be withdrawn. However, in entirety the mandate of Rule 8 of the Adjudicating Authority Rules is to be applied in letter and spirit. So far as the issue of allowing settlement between parties arising out of insolvency petitions is concerned, the NCLT and NCLAT have ruled that post admission of application, withdrawal of petitions cannot be sought on grounds that the matter has been settled between the parties. On the cost of repetition, it is reiterated that Rule 8 (Withdrawal of application) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (the 'Adjudicating Authority Rules') provides as under:

"The Adjudicating Authority may permit withdrawal of the application made under rules 42, 63 or 74, as the case may be, on a request made by the applicant before its admission."

In the matter titled"Parker Hannifin India Private Limited versus Prowess International Private Limited"5 the Corporate Debtor filed an application for withdrawal of petition on the ground that they had arrived at an amicable resolution and hence, he is no longer inclined to pursue the petition. The Kolkata Bench of the NCLT observed:

"After the admission, the Petition acquires the character of Representative suit and through publication of notices in Newspapers, applications have been invited from all the creditors of the company to file their claim. After admission of application under IBC 2016, the Petition cannot be dismissed on the basis of compromise between Operational Creditor and Operational Debtor, because other creditors have a right to file their claim. After admission of petition under IBC 2016, the nature of petition changes to a Representative Suit and the lis does not remain only between Operational Creditor and Operational Debtor. Hence, they alone have no right to withdraw the petition after admission."

Further, in the matter of Aryan Mining & Trading Corporation (P) Ltd. versus Ganesh Sponge (P) Ltd.6 the application was filed jointly by both parties for withdrawal of original application in terms of settlement between parties. The Kolkata Bench of the NCLT observed:

" ... The above rule clearly permits withdrawal of application under Insolvency & Bankruptcy Code only before admission. In this case, it is undisputed that the petition has been admitted and order has been passed for initiating CIRP. Therefore, in compliance of Rule 8 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016, permission cannot be given to withdraw the petition."

In light of various appeals of similar nature filed before the Supreme Court, the Honorable Court in the matter titled Uttara Foods and Feeds (P) Ltd. versus Mona Pharmachem7 laid down a similar view as in the Lokhandwala case (supra). With a view to obviate unnecessary appeals in matters where terms of settlement have been reached between parties, the Hon'ble Court also assigned the Ministry of Law and Justice to make amendments to the relevant Rules so as to include such inherent powers. The Hon'ble Apex Court observed that the Government should amend the provision regarding the inherent power of NCLT and NCLAT8 to allow withdrawal of petitions filed under Insolvency Code in case the matter is settled by the parties. Currently, under Rule 8 of the Adjudicating Authority Rules, Adjudicating Authority cannot exercise their inherent powers to allow withdrawal of petition after it has been admitted by the Adjudicating Authority. As a result, appeals against order of NCLAT are being filed before Supreme Court which alone can exercise its powers under Article 142 of the Constitution to allow withdrawal of cases filed under I&B Code where agreement has been reached between the parties. The Apex Court held that:

"... insteadofallsuchorderscomingtothe Supreme Courtasonlythe Supreme Court may utilize its powers under Article 142 of the Constitution of India, the relevant Rules be amended by the competent authority so as to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached.

On the facts of the present case, we take on record the settlement between the parties and set aside the NCLAT order."

In furtherance of the said recommendation, the MCA vide Notification No. 35/14/2017 dated November 16th, 2017 has constituted an Insolvency Law Committee to take stock of the functioning and implementation of the Code, identify issues that may be impacting the efficiency of the corporate insolvency resolution regime and make suitable recommendations. The Committee will submit its recommendation within 2 months of its first meeting, which is expected to come out soon now.


1 Volume I Issue II of Insolvency Round Up newsletter

2 Application by financial creditor

3 Application by operational creditor

4 Application by corporate applicant

5 I.A. No. 2226/KB/2017; order dated May 29, 2017

6 CA(IB) No.322/KB/2017; order dated August 3,2017

7 Civil Appeal No. 18520 of 2017

8 As per Rule 11 of NCLAT Rules, nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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