Scope of Settlement under the Insolvency and Bankruptcy Code, 2016

[Kanika Sood is a lawyer based in Delhi]

Pre-Ordinance Position

Under the Insolvency and Bankruptcy Code, 2016 (the “Code”) a settlement between the creditor and debtor could be carried out by making an application of withdrawal under Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules), 2016 beforethe admission of the application by the Adjudicating Authority.

The Code, however, was silent on situations of compromise between the parties after the application had been admitted. This issue first came up before the Supreme Court in Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP., where the Court allowed the settlement afterthe application had been admitted by exercising powers under Article 142 of the Constitution.  Following this, in Uttara Foods and Feeds Private Limited v. Mona Pharmachem, the Supreme Court recommended that the relevant Rules be amended by the competent authority so as to include the power of allowing settlement. In late 2017, this (and other developments) led to the formation of the Insolvency Law Committee to look into proposals for amending the Code.

In parallel, the Binani Cement insolvency petition brought out how settlements could be used as a means by the parties to exit the insolvency process. Binani approached the Supreme Court when it attempted to carry out a settlement with an unsuccessful bidder afterthe Resolution Professional had submitted the resolution plan which had been approved by over 99% of the creditors. The Supreme Court refused to allow the settlement under Article 142, stating there was no need for interference at the stage of the proceeding, and that the settlement was seemingly a way to subvert the insolvency process, thereby forcing Binani to withdraw its appeal.

Post- Ordinance Position

A few months later, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 was promulgated on June 6, 2018. The Ordinance inserted section 12A for withdrawal of applications afterthey have been admitted by the Adjudicating Authority.

“12A. Withdrawal of application admitted under section 7, 9 or 10– The Adjudicating Authority may allow the withdrawal of applications admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent voting share of the committee of creditors, in such manner as may be prescribed.”

The Ordinance recognises the distinction between a claim before and after it has been admitted, as was pointed out in Parker Hannifin India Private Limited v/s Prowess International Private Limited, that after admission the petition acquires “the character of a Representative Suit” and cannot be dismissed based on a compromise between a creditor and debtor, as other creditors would also have the right to file their claim.This was reiterated by the Report by the Insolvency Committee, which states that “…..[insolvency] 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 amendment therefore ensures that insolvency remains a collective proceeding against the debtor rather than as a pressure tactic by an individual for the recovery of money.

The Ordinance also gives the power of withdrawal to the Adjudicating Authority (‘AO’) and the Report by the Insolvency Committee states that “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.”Instead of amending the rules to include settlement within the inherent powers of the Tribunal, Section 12A allows the AO to decide each application on a case-to-case basis. This allows the application for withdrawal to be filed at any stage as long as it meets the 90% threshold and the final decision to allow the settlement stays with the National Company Law Tribunal.

According to the Press Information note issued by the Ministry of Corporate Affairs on the Ordinance, 2018, withdrawal will only be permissible before the publication of notice inviting expressions of interest and commencement of bids. This gives the parties a short period of time once the application has been admitted to the Resolution Professional asking inviting expressions of interest. And, even if there is a settlement, the threshold for acceptance by the CoC is very high. The Ordinance has reduced the voting threshold from 75% to 66% for major decisions such as approval of resolution plan, extension of the CIRP period etc, as well as 51% for routine decision in order to facilitate the resolution process. Both these conditions make settlement practically impossible in cases of multiple creditors. And thus, the debtor is unlikely to be able to extricate itself from insolvency once it has crossed a certain point in the process. Applicants must be far more wary now to initiate insolvency, as the means of exit has been narrowed significantly.

– Kanika Sood