Limits On Inherent Powers: Supreme Court Clarifies Rule 11 In Insolvency Withdrawals

Introduction

The Supreme Court in a recent judgment¹ held that the inherent powers under Rule 11 of the National Company Law Appellate Tribunal Rules (NCLAT Rules) cannot be used to circumvent the procedure of withdrawal of an application filed under Section 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016 (IBC) read with the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations).

Facts

• The Board of Control for Cricket in India (BCCI) filed a Section 9 petition against Think and Learn Pvt. Ltd. (Corporate Debtor) concerning an operational debt.
• Additionally, GLAS Trust Company LLC (Appellant) filed a Section 7 petition against the Corporate Debtor.
• The National Company Law Tribunal (NCLT) admitted BCCI's Section 9 petition and dismissed the Section 7 petition filed by the Appellant, in light of the admission of BCCI's Section 9 petition.
• The Appellant appealed to the National Company Law Appellate Tribunal (NCLAT) against NCLT's order, contesting the dismissal of the Section 7 petition and promoters of the Corporate Debtor appealed against the admission of the Section 9 petition, respectively.
• During pendency of the appeal before the NCLAT, and after the commencement of the CIRP but before the committee of creditors (CoC) could be constituted, one of the promoters of the Corporate Debtor entered into a settlement with BCCI on behalf of the Corporate Debtor.
• In light of the settlement agreement, the NCLAT invoked Rule 11 of the NCLAT Rules for allowing the settlement and accordingly set aside the NCLT's order.
• The Appellant filed a civil appeal before the Supreme Court challenging the withdrawal of the CIRP and raised substantial questions on the NCLAT's jurisdiction to allow withdrawal of the CIRP.

Development of the legal framework for withdrawal of CIRP and settlement

• Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, allows the NCLT to withdraw applications made by a creditor under Sections 7, 9 or 10 before the admission of the application.
• In 2018, the IBC was amended by the Insolvency and Bankruptcy (Second Amendment) Act, 2018 which introduced Section 12A which allowed the Adjudicating Authority, i.e. the NCLT, to allow the withdrawal of an application already admitted under Section 7, 9 or 10 on an application made with the approval of 90 percent voting share of the CoC. Simultaneously, the CIRP Regulations were amended and Regulation 30A was introduced which set out a detailed procedure to withdraw the application under Section 12A of the IBC.
• In light of the decision passed in the judgment of Swiss Ribbons (P) Ltd. vs. Union of India² , Regulation 30A of the CIRP Regulations was amended in 2019 to provide procedures to make an application for withdrawal before the NCLT under Section 12A, both before and after the constitution of the CoC.

Decision by the Supreme Court

The Supreme Court noted that inherent powers may be exercised only when there are no express provisions under the legal framework and that such powers cannot be exercised in contravention of, conflict with or ignorance of express provisions of law³.

IBC and its Regulations have developed mechanisms for withdrawal or settlement at both stages after admission—namely, before and after the CoC is constituted. Since the IBC under Section 12A read with the CIRP Regulations under Regulation 30A already contain a procedure for withdrawal of CIRP, the NCLAT, cannot use its inherent powers under Rule 11 of the NCLAT Rules to subvert legal provisions where the IBC and Regulations provide for a procedure.

The Supreme Court held that NCLAT ought to have stayed the constitution of the CoC and direct the parties to follow the course of action laid down in Section 12A of the IBC read with Regulation 30A of the CIRP Regulations, namely an application submitted by the IRP/ RP before the NCLT for withdrawal of CIRP. This is necessary as once CIRP is admitted, the proceedings become proceeding in rem and therefore, the application for withdrawal is to be decided after hearing all the parties concerned⁴.

Conclusion

The Supreme Court's judgment establishes that the NCLAT cannot rely on its inherent powers under Rule 11 to bypass established procedures such as for withdrawal of CIRP applications under the IBC. By restricting the use of inherent powers, the Court reinforces that where specific provisions exist, tribunals must adhere strictly to these procedures rather than invoking general powers. The judgement effectively underscores the primacy of following the structured process laid down within the IBC for maintaining legal consistency and certainty in insolvency proceedings.

Footnotes

1. GLAS Trust Company LLC vs. BYJU Raveendran & Ors. (Civil Appeal No. 9986 of 2024)

2. (2019) 4 SCC 17

3. Ram Chand and Sons Sugar Mills (P) Ltd. v. Kanhayalal Bhargava (1966 SCC OnLine SC 215)

4. Swiss Ribbons (P) Ltd. vs. Union of India

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