India: Effect Of Settlement Between The Parties On The Application Filed And Admitted Under Insolvency And Bankruptcy Code, 2016

While two parties litigate out their dispute before a court of law, there is always a possibility that a mutual settlement may be arrived at during the course of proceedings. There may also be a case that the parties were already negotiating for settlement of dispute; however either of the parties moves the court / tribunal as a matter of abundant caution. This could include reasons such as negotiations not appearing to be productive, running out on limitation period, strategy, business call etc.

Here, we analyze the fate of proceedings initiated under Insolvency & Bankruptcy Code 2016 ("I&B Code") where the parties to the application pending before the adjudicating authority have wriggled out a settlement amongst themselves. However, there is a catch 22 situation! What if the application has been admitted by the adjudicating authority!

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (the 'Adjudicating Authority Rules') has an answer to that. Rule 8 (Withdrawal of application) of the Adjudicating Authority Rules provides as under:

In the matter titled "Mother Pride Dairy India Pvt. Ltd. Versus Portrait Advertising & Marketing Pvt. Ltd.", the Hon'ble National Company Law Tribunal (NCLAT) while noting that the dispute amongst the parties to the proceedings had been settled after admission of the application of the operational creditor, observed as under:

In the Mother Pride (supra) case, the Hon'ble NCLAT while rejecting the appeal also made a direction that the impugned order passed by the adjudicating authority i.e. National Company Law Tribunal (NCLT) or order passed by the NCLAT will not come in the way of the appellant to satisfy and settle the claim of other creditors. If the appellant satisfies the claim of other creditors, whoever has made claim, in that case Insolvency Resolution Professional (IRP) will bring the matter to the notice of NCLT for closure of the resolution process. Further, NCLT in such case will consider the case in accordance with law, even before completion of Resolution process and may close the matter.

Similarly in West Bengal Essential Commodities Supply Corporation Ltd. Versus Bank of Maharashtra, the Hon'ble NCLAT rejected the submission regarding ongoing settlement discussions between the appellant and the financial creditors; and accordingly dismissed the appeal on the ground that the learned Adjudicating Authority having noticed that the application preferred by the respondent financial creditor is complete and in absence of any defect, admitted the application under section 9 of the I&B Code.

There is another aspect in a few cases that has been entertained by the Hon'ble NCLAT for deciding whether the stage of admission of the application has been crossed to such an extent that the same cannot be permitted to be withdrawn. In below two cases, the Hon'ble NCLAT had to scrutinize the case on the ground whether the notice was served upon the corporate debtor before admitting the application or not in order to grant liberty to withdraw the application.

The Hon'ble NCLAT in Agroh Infrastructure Developers Pvt. Ltd. Vs. Narmada Construction (Indore) Pvt. Ltd. held that since the adjudicating authority did not serve notice upon corporate debtor before admitting the application (which was against the principles of natural justice) and also that the parties had settled the dispute, therefore the operational creditor could withdraw the application even after admission of the application by the Adjudicating Authority.

In Company Appeal (AT) (Insolvency) No. 103 & 108 of 2017 titled Inox Wind Ltd. Vs. Jeena & Co., the Hon'ble NCLAT decided upon two appeals against two orders, one for admission of the application of operational creditor under section 9 of the I&B Code and the second one for appointment of IRP. In this case the appellant/ corporate debtor submitted that the impugned order has been passed by the Adjudicating Authority in violation of principle of natural justice i.e. without giving any notice to the corporate debtor prior to admission of the application while placing reliance was placed on the decision of the NCLAT in "Innoventive Industries Ltd Vs ICICI Bank and Another". The appellant also apprised the NCLAT that the appellant is a solvent company and is in a position to pay the dues; moreover, the dues of the respondent/Financial Creditor stood paid as on date along with those of other financial creditor. The Hon'ble NCLAT, while noting the submissions of the appellant (also confirmed by the respondent) held that the order passed by the adjudicating authority for admission of the application was passed in violation of rules of natural justice and against the decision of the NCLAT in Innoventive case and therefore set aside both the impugned orders under challenge. In the result, the appointment of IRP, order declaring moratorium, freezing of account and all other order passed by NCLT pursuant to impugned orders and action taken by the IRP including the advertisement published in the newspaper calling for applications were declared illegal. Further, the NCLT was directed to close the proceedings and the appellant was released from the rigour of law. Accordingly, the appellant company was allowed to function independently through its Board of Directors with immediate effect.

In another case, Hon'ble NCLT, Division Bench Chennai in the matter titled "M/s. Phoneix Global DMCC vs. M/s. A&A Trading International Pvt. Ltd." while exercising its inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016 (the 'NCLT Rules') recalled its order for commencement of corporate insolvency resolution process and declaration of moratorium. In this case pursuant to admission of section 9 application, the corporate debtor duly paid the outstanding amount and settled its dispute with the operational creditor. The Hon'ble NCLT observed that since IRP was not appointed as the operational creditor had not proposed any IRP and a reference to this effect was lying pending with the Insolvency & Bankruptcy Board of India resulting in no public announcement being made in the matter. The Hon'ble Tribunal further observed and noted that since the corporate debtor has confirmed (by way of affidavit) that there are no other dues towards any other creditors and that the corporate debtor has paid dues to the operational creditor, therefore the dispute stood settled between parties to the application. Accordingly, the Hon'ble NCLT was pleased to dismiss the application as withdrawn on three counts (i) non appointment of IRP, (ii) non issuance of public announcement and (iii) settlement of dispute between parties to the application.

Going further, the Hon'ble NCLAT in the matter titled "Lokhandwala Kataria Construction Private Limited Versus Nisus Finance and Investment Managers LLP" dismissed the appeal preferred by the appellant / corporate debtor against admission of application under section 7 of the I&B Code; and held that "... before admission of an application under Section 7, it is open to the Financial Creditor to withdraw the application but once it is admitted, it cannot be withdrawn and is required to follow the procedures laid down under Sections 13, 14, 15, 16 and 17 of I&B Code, 2016. Even the Financial Creditor cannot be allowed to withdraw the application once admitted, and matter cannot be closed till claim of all the creditors are satisfied by the corporate debtor". The Hon'ble NCLAT also rejected the submission of the appellant for invocation of inherent powers under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 (the 'NCLAT Rules') as the said Rule 11 of the NCLAT Rules has not been adopted for the purpose of I&B Code and only Rules 20 to 26 have been adopted in absence of any specific inherent power and where there is no merit, the question of exercising inherent power did not arise.

Against the above order, the corporate debtor preferred an appeal before the Hon'ble Supreme Court for decision on the question as to whether in view of Rule 8 of the Adjudicating Authority Rules, the NCLAT could utilize the inherent power recognized by Rule 11 of the NCLAT Rules to allow a compromise before it by the parties after admission of the matter. The Hon'ble Apex Court while concurring prima facie with NCLAT's view that the inherent power could not be so utilized; applied its powers under Article 142 of the Constitution of India put a quietus to the matter. The Hon'ble Apex Court disposed of the appeal by holding that since the parties undertook to abide by the consent terms in toto and that the appellant also undertook to pay the sums due on or before the dates mentioned in the consent terms therefore, it was fit case for withdrawal of application before the adjudicating authority.

In conclusion, 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.

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.