Supreme Court on Settlement of Insolvency Proceedings

[Guest
post by Aayush Mitruka, a lawyer
based in Delhi]
The Supreme Court in a decision this week in
Lokhandwala
Kataria Construction Limited v Nisus
Finance And Investment Managers, LLP
allowed a settlement by entering
into consent terms by the parties after the insolvency proceedings under
section 7 of the Insolvency and Bankruptcy Code, 2016 (the “Code”)  were admitted. 
The Supreme Court did so in exercise of its powers under Article 142 of
the Constitution of India.
Background
The financial creditor, Nisus Finance and
Investment Managers, LLP, filed an insolvency application under section 7 of
the Code before the National Company Law Tribunal, Mumbai Bench (“NCLT”) against
the corporate debtor, Lokhandwala Kataria Construction Limited. The application
was admitted by the NCLT; however, subsequently the parties settled the matter
between themselves. On that ground, the parties approached the National Company
Law Appellate Tribunal (“NCLAT”) with a prayer to set aside the decision of the
NCLT since the dispute was now settled.
The vital question before the NCLAT was
whether an application can be withdrawn after the same has been admitted. The NCLAT,
in view of Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016,[1] and did
not allow
the creditors to withdraw the application. It was observed 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once it is admitted, it cannot be withdrawn and is required to follow the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 can not be closed till claim of all the creditors are
satisfied by the corporate debtor.
Lokhandwala strongly emphasised Rule 11 of
the National Company Law Appellate Tribunal Rules, 2016[2] and sought that the NCLAT exercise
its inherent power. The NCLAT refused to do so as the said Rule 11 has not been
adopted for the purpose of the Code and only Rules 20 to 26 have been adopted. It
ruled that in the absence of any specific inherent power bestowed upon it, the
question of exercising inherent power did not arise in the present case.
Findings
of the Supreme Court
It was against the above findings of the NCLAT
that the parties approached the Supreme Court by way of an appeal. The novel question
before the Court was whether, in view of Rule 8, the NCLAT could exercise its
inherent power as envisaged under Rule 11 to allow a compromise. The Supreme
Court, without extensively dealing with this question on its merits, concurred
with the finding of the NCLAT and observed that the NCLAT does not have any
such power.
Interestingly, “since all the parties are before [it]”, the Supreme Court exercised
its power under Article 142 of Constitution of India “to put a quietus to the matter
and disposed of the appeal based on the consent terms entered into by the
party. Pertinently, since the Court invoked its discretionary power under
Article 142, this order does not attain the status of a binding precedent under
Article 141 of the Constitution of India. This will apply and be binding only
on the parties before the Court.
Conclusion
This decision of the Supreme Court renders
the Code as a mere tool for recovery of debt by the financial creditor, although
this was never the intent behind the Code. Additionally, absent any inherent
powers of the NCLAT in the matters relating to the Code, it may also open
floodgates to litigation wherein cases of similar nature will inevitably have
to be agitated before the Supreme Court.
The Hon’ble Supreme Court appears to have
taken a piecemeal approach. The object behind the Code, inter alia, is to maximise return to creditors through pooling of all
the assets for the benefit of all. These proceedings are collective in nature
and are meant for the benefit of both the corporate debtor and creditors. Once
the application is admitted, it no longer remains a dispute between the two
parties and it assumes the nature of a representative character and all the
creditors are eligible to join to secure the most suitable outcome. This
decision, indirectly, would amount to refusal of claims by the other creditors.
It is questionable whether the exercise of power under Article 142 was
warranted in the present case considering that such powers, in the past, have
been invoked for the purposes of doing larger good. The wider consequences of
this decision remain to be seen.
– Aayush Mitruka



[1] Rule 8 reads:
“8
Withdrawal of Application – The Adjudicating Authority may permit withdrawal of
the application made under Rules 4, 6 or 7, as the case may be, on a request
made by the applicant before its admission.”
[2] Rule 11 reads:
“11. Inherent
powers – Noting 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.”

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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