Supreme Court Invokes Article 142 to Permit Withdrawal of CIRP

[Raghav Bhatia is an Advocate, currently practising at the Supreme Court of India & the Delhi High Court. He can be contacted at [email protected]]

Recently, the Supreme Court of India (“Supreme Court”) in Amit Katyal v. Meera Ahuja permitted the parties to settle the matter and withdraw the CIRP proceedings by invoking article 142 of the Constitution of India (“Constitution”). The author respectfully submits that the objective behind article 142 is to allow the Supreme Court to fill the gaps which may come in doing “complete justice” between the parties. Article 142 of the Constitution cannot be invoked in derogation of a statutory provision, which has been done by the Supreme Court in the present case.

Factual Background

Respondent No. 4, Jasmine Buildmart Pvt. Ltd. (“corporate debtor”), had come out with a housing project. However, the housing project could not be completed even after a period of eight years. Therefore, respondents 1 to 3 (“applicants/home buyers”), filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the National Company Law Tribunal (“NCLT”), Delhi seeking initiation of corporate insolvency resolution process (“CIRP”) against the corporate debtor. The appellant is the promoter/majority shareholder of the corporate debtor.

This application was filed prior to the amendment to section 7 of the IBC, which permits 100 or 10% of the home buyers/allottees to file an application under section 7 of the IBC.

Proceedings before the NCLT and the NCLAT

The NCLT admitted the application filed by the applicants and appointed an interim resolution professional (“IRP”) and thus declared a moratorium. The promoter challenged the NCLT order before the NCLAT. The NCLAT, however, dismissed the promoter’s appeal and upheld the admission order.

Thereafter, a committee of creditors (“COC”) was constituted. In the meantime, the promoter challenged the order of the NCLAT before the Supreme Court.

Present Proceedings Before the Supreme Court

By an initial interim order, the Supreme Court had stayed the operation of the NCLAT order.

Subsequently, the Supreme Court noted that the present proceedings were adjourned multiple times because the parties were making an attempt to arrive at a settlement. 

The Supreme Court was informed by the parties that the three applicants as well as 79 other home buyers (i.e., 82 in toto) have agreed to settle the dispute with the corporate debtor and a settlement agreement has also been entered into between the parties.

Accordingly, the applicants preferred an application before the Supreme Court under article 142 of the Constitution, read with rules 11 and 12 of the NCLT Rules, 2016 (“NCLT Rules”), praying for liberty to withdraw the CIRP proceedings.

Relying on section 12A of the IBC, the Supreme Court observed that the NCLT has been empowered to allow withdrawal of a petition admitted under sections 7 or 9 or 10, on an application filed with the approval of 90% voting share of the COC.

In the instant case, the Supreme Court observed that since it had imposed a stay on CIRP proceedings, no proceedings had taken place before the COC. It was further noted that in the COC, 70% of the members are members of the Flat Buyers Association and they are willing to withdraw the CIRP proceedings in accordance with the terms set out in the settlement agreement.

Therefore, as 82 out of 128 home buyers had decided to settle the dispute with the promoter/corporate debtor, the Supreme Court decided to invoke article 142 of the Constitution read with rule 11 of the NCLT Rules and allowed the applicants to withdraw the CIRP proceedings.

The Supreme Court also relied on the recent amendment permitting 100 or 10% of the home buyers/allottees to file an application under section 7 of the IBC. It was observed that the legislative intent behind the amendment is to secure, protect and balance the interests of all home buyers. It was also observed the object and purpose of the IBC is not to kill the company or stall the project. Rather, it is to ensure that the business of the company continues to run.

The Supreme Court concluded by observing that if the CIRP proceedings were allowed to be continued, then there would have been drastic consequences for all the concerned parties. If the CIRP was successfully completed, the home buyers’ claims would have been subject to the resolution plan as approved by the COC. On the other hand, if the CIRP failed, the corporate debtor would go into liquidation. 

Therefore, the Supreme Court allowed the withdrawal of CIRP proceedings.

Analysis

In the author’s opinion, the Supreme Court should have refrained from invoking article 142 of the Constitution in the present case. The invocation of article 142 in the present case is not only against the cardinal principle of separation of powers but it also sets a dangerous example for future.

Separation of Powers

Resorting to article 142 of the Constitution to overcome a statutory mandate goes against the very principle of separation of powers between the Judiciary and the Parliament.

The Supreme Court has previously echoed this sentiment of not invoking Article 142 to supplant a statutory provision (see, State of Punjab v. Rafiq Masih). In Delhi Development Authority v. Skipper Construction Co., the Supreme Court held that the “power under Article 142 is meant to supplement the existing legal framework — to do complete justice between the parties — and not to supplant it. It is conceived to meet situations which cannot be effectively and appropriately tackled by the existing provisions of law”. Therefore, under article 142 of the Constitution, the Supreme Court has been empowered to fill the gaps which may arise in doing “complete justice” between the parties.

Highlighting the importance of judicial restraint in IBC, the Supreme Court in Ebix Singapore Private Limited vs. Committee of Creditors of Educomp Solutions Limited (“Ebix”) observed that judicial restraint must be exercised while interpretating economic statutes as “the interpretative maneuvers of the Court have an effect of transgressing into the law-making power of the legislature and disturbing the delicate balance of separation of powers between the legislature and the judiciary”. Interestingly, in Ebix too, the Supreme Court had invoked article 142 of the Constitution to allow modification of resolution plan.

When the IBC has a specific provision which provides for withdrawal of CIRP proceedings (section 12A), the Supreme Court ought not to have invoked article 142 of the Constitution. In the present case, 70% of the members were willing to withdraw the CIRP. However, section 12A of the IBC mandates that the NCLT can permit the withdrawal of an admitted application on an “application made by the applicant with the approval of ninety per cent voting share of the committee of creditors”. In the present case, the facts nowhere suggest that the application for withdrawal had been approved by 90% voting share of the COC. Therefore, by allowing the application for withdrawal under article 142 of the Constitution, the Supreme Court in effect has supplanted and displaced the statutory provision of section 12A of IBC. This is in direct conflict with the earlier judgements explaining the scope of article 142 of the Constitution.

Although the Supreme Court has rightly observed that permitting the CIRP to continue would have serious repercussions for the concerned parties, the correct approach would have been to direct the applicants to file an application under section 12A of the IBC before the NCLT and the same would have been decided in accordance with the statutory scheme of the IBC.

Dangerous Example for Future

The author is of the opinion that the Supreme Court’s approach of thwarting the statutory scheme by invoking article 142 of the Constitution in the present case sets a dangerous example for future, notwithstanding the position of law that a decision under article 142 of the Constitution is not a binding precedent.

This is so because in future where 90% voting share of the COC does not agree for withdrawal of CIRP, parties would approach the Supreme Court praying for withdrawal of CIRP by relying on article 142 of the Constitution. This would result in increased litigation and the associated costs. An application for withdrawal without satisfying the statutory requirement of 90% voting share of the COC would be dismissed by NCLT/NCLAT as the IBC does not allow the NCLT/NCLAT to relax the requirement of 90% mandated under section 12A of the IBC. Further, no forum other than the Supreme Court has powers akin to article 142 of the Constitution.

Therefore, a party in such circumstances would necessarily approach the Supreme Court and by relying on article 142 of the Constitution, pray for withdrawal of CIRP. This will open floodgates to time consuming litigation and thus further clog the Supreme Court with more and more parties praying for withdrawal of CIRP in spite of not meeting the threshold specified under section 12A of the IBC.

Conclusion and Way Forward

The Supreme Court in this judgment has completely supplanted a statutory provision by invoking article 142 and is thus violative of the principle of separation of powers. It will be interesting to see if similar applications for withdrawal of CIRP under section 12A of the IBC are filed by relying on article 142 in the future. The author respectfully submits that courts must refrain from diluting  provisions of the IBC.

– Raghav Bhatia