Inherent Powers Under Rule 11 of NCLT Rules Cannot Be Used To Circumvent Procedure To Withdraw CIRP Under S.12A IBC & R. 30A: Supreme Court

The Supreme Court Bench led by CJI DY Chandrachud comprising Justices JB Pardiwala and Manoj Misra  held that 'inherent powers' cannot be used to subvert legal provisions, which exhaustively provide for a procedure. To permit the NCLAT to circumvent this detailed procedure by invoking its inherent powers under Rule 11 would run contrary to the carefully crafted procedure for withdrawal. In the Impugned Judgement, the NCLAT does not provide any reasons for deviating from this procedure or the urgency to approve the settlement without following the procedure.

The correct course of action by the NCLAT would have been to stay the constitution of the CoC and direct the parties to follow the course of action in Section 12A read with Regulation 30A of the CIRP Regulations 2016.

Introduction

The Supreme Court in the present case first discussed the evolution of law with respect to CIRP withdrawal application under the IBC.

The Insolvency and Bankruptcy Code (IBC), 2016 did not contain provisions pertaining to withdrawal of application after the admission of an insolvency petition. Absence of relevant provisions created problems for the creditors and the corporate debtor who after the admission of their insolvency petitions arrived at a settlement and wanted to withdraw their petitions. Despite this, the Supreme Court permitted the withdrawal by exercising its extraordinary power under Article 142 of the Indian Constitution even after the admission of the insolvency petition.

The Supreme Court firstly in Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers (2018) invoked its power under Article 142 to record the settlement of the parties and allow the compromise between the creditor and the corporate debtor after the admission of the concerned application. While doing so, this Court also prima facie agreed with the proposition that in view of Rule 8 of the CIRP Rules, the NCLAT cannot use its inherent powers under Rule 11 of the NCALT Rules 2016 to allow a settlement or withdrawal after the admission of the application.

This judgment of the supreme court highlighted lacunae in the current framework of the IBC which required to be filled by suitable legislative actions. This concern was raised by the supreme court in Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem (2018) wherein it was emphasised that instead of coming to this court under article 142, required amendments should made in the statutory framework to address issue of settlement after the admission of insolvency petition.

The court in the above case held that “we are of the view that instead of all such orders coming to the Supreme Court as only the Supreme Court may utilise 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.”

Subsequent Development

After the concerns were raised by the Supreme Court, Ministry of Corporate Affairs constituted an Insolvency Law Committee (ILC). This committee was saddled with a responsibility to address the highlighted lacunae in the IBC. The committee submitted its report on March 26, 2018 in which it recommended the incorporation of withdrawal of insolvency petition after its admission by the NCLT. The committed further recommended that the withdrawal is permissible only if the same is approved with 90% of votes by Committee of Creditors (CoC).

The committee observed that “it was agreed that once the CIRP is initiated, it is no longer a proceeding only between the applicant creditor and the corporate debtor but is envisaged to be a proceeding involving all creditors of the debtor. The intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors.”

The committee further observed that “the Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post admission if the CoC approves of such action by a voting share of ninety per cent. It was specifically discussed that rule 11 of the National Company Law Tribunal Rules, 2016 may not be adopted for this aspect of CIRP at this stage (as observed by the Hon'ble Supreme Court in the case of Uttara Foods and Feeds Private Limited v. Mona Pharmacem) and even otherwise, as the issue can be specifically addressed by amending rule 8 of the CIRP Rules.”

Introduction of Section 12A and Regulation 30A

Subsequently, section 12A was incorporated in the IBC through Amendment Act of 2018. This section permitted the withdrawal of insolvency petition under sections Sections 7, 9, or 10 provided it is approved by the CoC with 90% voting shares. The committee reasoned that the higher threshold for the withdrawal is due to the involvement of all other stakeholders after the admission of the petition.

Regulation 30A was also introduced in the CIRP regulations to align them with section 12A of the IBC. This regulation provided a detailed procedure as to the withdrawal of the petition after its admission but before the invitation for expressions of interest. It also mandated that the application for withdrawal has to be considered within 7 days by the CoC after its submission. Thereafter, if it is approved with 90% voting shares by the CoC, it has to be placed before the NCLT.

Lacunae In Existing Provisions

Remedy in case of absence of the CoC after the admission of the petition was not provided in neither under section 12A nor under Regulation 30A. Furthermore, the procedure for withdrawal after the invitation for expression of interest had also not been outlined in the Regulation.

This gap was noted by the Supreme Court in Brilliant Alloy Private Limited vs S Rajagopal and Ors (2022), a two-judge bench of the Supreme Court observed that “the requirement in Regulation 30A, as it stood then, that the application must be made before the issuance of an invitation for expression of interest was only directory. The regulation, it was held, has to be read along with Section 12A, which does not contain any bar on withdrawal after the issuance of an invitation for expression of interest.”

The constitutionality of section 12A was challenged before the Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India (2019). The court upheld its constitutionality and held that withdrawal with 90% CoC approval was justified considering the interests of all other creditors. The court in the above matter further noted that “this high threshold has been explained in the ILC Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantially all the financial creditors, have to grant their approval to an individual withdrawal or settlement.”

The court in the same case further held that “we make it clear that at any stage where the Committee of Creditors is not yet constituted, a party can approach NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement.”

In response to the lacunae identified by the Supreme Court in Regulation 30A in the above cases, this regulation was again amended to align it with the observations of the court. Now, it permitted the withdrawal both before and after the constitution of the CoC through IRP or RP respectively. It also permitted the withdrawal even after the issuance of expression of interest provided sufficient reasons are provided for late withdrawal.

Essence Of The Above Discussion

The court summarised the principles culling out from the above discussion and held as under:

These may be summarized as follows:

Before the application under Sections 7, 9 or 10 is admitted by the NCLT:

Such cases are squarely covered by Rule 8 of the NCLT Rules, which requires that the applicant approach the NCLT directly. The NCLT may then pass an order permitting the withdrawal of the application. At this stage, as the CIRP process has not been initiated, the proceedings are still in personam, as between the applicant creditor and the corporate debtor. Therefore, while approving the withdrawal at this stage, the NCLT may restrict its enquiry to only hear the applicant creditor and corporate debtor, and other potential creditors are not stakeholders at this stage.

After an application under Sections 7, 9, or 10 is admitted, but before the CoC has been constituted:

Although Section 12A continues to be silent on this aspect, after the decision in Swiss Ribbons (supra), Regulation 30A was amended to provide for this eventuality. An application for withdrawal in such cases may be made by the applicant through the IRP.46 The IRP will then place the application before the NCLT, which may pass an order either approving or rejecting the application. As noted above, once the application has been admitted, the proceedings are no longer the sole preserve of the applicant creditor and the corporate debtor. They are now in rem and at this stage, the NCLT must hear the concerned parties and consider all relevant factors before approving or rejecting the application for withdrawal. The NCLT being a quasi-judicial body, must not act as a mere post office, which stamps and approves every settlement agreement, without application of judicial mind.

After an application under Section 7, 9 or 10 is admitted, the CoC has been constituted and the invitation for expression of interest has not been issued:

Section 12A read with Regulation 30A provides exhaustively for this scenario. In such cases, the application for withdrawal is to be placed before the NCLT, through the IRP or the RP. The application is first placed before the CoC and after ascertaining approval with a ninety percent voting share, the RP shall submit the application to the NCLT.

After an application under Section 7, 9 or 10 is admitted, the CoC has been formed and the invitation for expression of interest has been issued:

The procedure is the same as that detailed in (iii) above, with the added requirement stemming from the proviso to Regulation 30A (1). in such cases, the applicant must state the reasons for withdrawal at this belated stage.

The Supreme Court applied the above discussed legal framework on the fact of the present case and held that the NCLAT committed a mistake in admitting CIRP withdrawal application by exercising its inherent power under Rule 11.

The court further noted that after the admission of the insolvency petition and before the constitution of the COC, the correct recourse would have been to file a withdrawal application through IRP before the NCLT. The court while setting aside the impugned order observed that inherent powers under Rule 11 should not be used to bypass the established legal procedure under section 12A of the IBC and Regulation 30A of the CIRP Regulations.

Accordingly, the impugned order of the NCLAT was set aside.

Case Title : GLAS TRUST COMPANY LLC Vs BYJU RAVEENDRAN | Diary No. - 35406/2024

Citation : 2024 LiveLaw (SC) 826

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