Supreme Court Settlement Orders in Insolvency Cases: Opening of Pandora’s Box?

[Guest post by Anupam Choudhary, who is an Associate at Agram Legal Consultants, a law firm based in Mumbai. The views and opinions expressed are those of the author and do not reflect the view of his firm nor do they constitute legal opinion.]

The Supreme Court has recently, in two orders, allowed settlement to be recorded between the parties even when the insolvency application had already been admitted. In the cases of Lokhandwala Kataria Construction Pvt. Ltd. vs. Nisus Finance and Investment Manager, LLP and Mothers Pride Dairy India Pvt. Ltd. vs. Portrait Advertising and Marketing Pvt. Ltd, the Supreme Court disposed of proceedings pending before National Company Law Tribunal (“NCLT”) after recording settlement terms between the parties. Under the Insolvency and Bankruptcy Code, 2016 (“Code”), an application cannot be withdrawn once the same has been admitted but the Supreme Court used its special powers to record the settlement. The order delivered in Lokhandwala Kataria has been discussed earlier on this Blog.

A creditor can initiate corporate insolvency resolution process against the corporate debtor for default of payment by filing an application under the Code. In the above mentioned cases, the insolvency applications were admitted by the NCLT after default on the part of the company was established by the creditor. Thereafter, the corporate debtor (the company) and the creditor reached a settlement, and approached the National Company Law Appellate Tribunal (“NCLAT”) for withdrawal of the insolvency application pursuant to the settlement reached between the creditor and the corporate debtor. However, the NCLAT rejected the prayer for withdrawal of the application.

Subsequently, the parties approached the Supreme Court to record their settlement terms under Article 142 of the Constitution which gives Supreme Court special powers to consider such cases to meet the ends of justice. It is important to note that Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides that an application can only be withdrawn before its admission by the NCLT. The question that arose for adjudication before the Supreme Court was whether, in view of this rule, the NCLAT could use its inherent power recognized by Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 that allows a compromise before it by the parties after admission of the insolvency application. The Supreme Court observed that the NCLT/NCLAT cannot allow withdrawal of an insolvency application once the insolvency application has been admitted, and that the NCLAT was correct in not allowing the withdrawal of the insolvency applications.

However, the Supreme Court used its power under Article 142 of the Constitution, which provides that the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it. The Court recorded consent terms between the parties and allowed the insolvency application to be withdrawn even after the application had been admitted by the NCLT. The reason as stated in the Lokhandwala Kataria order for using this special power was “since all the parties are before [it]”.

The Court used its special powers in these cases and allowed the parties to record their settlement. The Supreme Court, however, observed that the correct position under law still remains that an application cannot be withdrawn after the application has been admitted by the NCLT.

These orders cannot be construed as binding precedents as the Supreme Court used its special powers in the present cases. The NCLT/NCLAT cannot record settlement between the parties, and the same can only be done by the Supreme Court exercising its power under Article 142 of the Constitution. However, the Code does not provide for settlement of cases and it remains to be seen whether the Insolvency and Bankruptcy Board of India would come up with an amendment providing for the same. Considering that two settlements were recorded within a span of a week, this is going to open the floodgates for parties to approach the Supreme Court for recording their settlements.

Those in favour of a settlement mechanism after the initiation of the corporate insolvency process argue that this will help consenting parties to settle their dispute mutually. Therefore, a company would be given a chance to revive itself without a change in the management structure to run the company albeit within the settlement terms. Also, the company would be able to focus on its business affairs with the existing board of directors who would be better suited to run its affairs as compared to a Resolution Professional who might not have sector specific knowledge and an understanding of the company history or its policies. Also, this will give recalcitrant debtors or other debtors who have the resources and funds to pay their debts, another chance to make good their debts and continue their affairs normally again.

However, the disadvantages of having such a process outweigh the advantages. First of all, the insolvency resolution process is meant to be a collective process rather than an individual one. Although the application may be filed by one or few creditors, all the creditors would be involved in the process once it starts. Hence, it would be unfair for other creditors if the applicant creditor withdrew his application after reaching a settlement with the debtor. Another drawback of such a provision would be that creditors would be encouraged to file insolvency petitions because it would enhance their bargaining position with respect to the debt owed. The spirit of the Code meant it to be a collective process for reviving the company rather than it being used as a debt recovery mechanism. If such a mechanism is added in the Code, the floodgates for filing insolvency applications could be wide open. Also, it would lead to a lot of difficulties if the settlement terms are again breached by the company. Which forum would the adjudication lie on breach of such terms? Can a creditor again go for an insolvency process (which would take it back to square one)? Even if the terms are not breached, would other creditors who are not party to the settlement terms file an application for their debts? If yes, will the settlement terms run parallel to the process once admitted or will it be separate?

The Supreme Court has held that an insolvency application cannot be withdrawn once the insolvency process starts, but by exercising its special powers to record consent terms for doing justice; the Supreme Court has given food for thought to legislators to have such a mechanism in the Code. If such a mechanism is provided, it would open up a Pandora’s Box and bring multiple complexities that the resolution process would better off without.

– Anupam Choudhary

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