The Insolvency and Bankruptcy Code, 2016 [“IBC”] was enacted to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process in a time bound manner. Prior to the introduction of IBC, various other Acts, viz. Sick Industrial Companies (Special Provisions) Act, 1985; the Recovery of Debts due to Banks and Financial Institutions Act, 1993; the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Companies Act, 2013, held the field and provided a forum for insolvency proceedings. However, the previous regime was found to be inadequate, ineffective and resulted in undue delays which consequently led to introduction of IBC which consolidated the above Acts and provided a single forum for taking up insolvency and liquidation proceedings against the Corporate Debtor.
Statutory Framework at a Glance
Chapter II of the IBC provides that Corporate Insolvency Resolution Process [“CIRP”] can be triggered in the following three ways-
- By a Financial Creditor u/s 7 of IBC;
- By an Operational Creditor u/s 9 of IBC;
- By a Corporate Debtor itself u/s 10 of IBC.
Section 4 of IBC mandates a minimum amount of default of Rupees One Lakh for initiation of CIRP against the Corporate Debtor. This amount was subsequently enhanced by the Legislature from Rupees One Lakh to Rupees One Crore, vide notification dated 24.03.2020. Once the Application filed by any of the above is admitted, the National Company Law Tribunal [“NCLT”] inter alia issues the following directions-
- Declares Mortarium in terms of Section 14 of IBC prohibiting continuance of pending proceedings and initiation of new proceedings against the Corporate Debtor with the exception of only those proceedings which may result in enrichment of financial health of the corporate debtor.
- Issue a public announcement of CIRP against the Corporate Debtor- Section 13 (b)
- Call for submission of claims under Section 15 of IBC
- Appoint an interim resolution professional [“IRP”] in terms of Section 16 of IBC.
- The power of the board of Directors of the corporate debtor is suspended and now vests in the IRP. – Section 17
Section 12 of IBC mandates that the CIRP against the Corporate Debtor shall be completed within a period of 180 days from the date of admission of the application subject to a maximum period of 330 days. Once the IRP collates all the claims against the Corporate Debtor, he constitutes a Committee of Creditors [“COC”] u/s 21of IBC comprising of all the Financial Creditors of the Corporate Debtor who take part in the voting process for approval or rejection of a resolution plan submitted by prospective resolution applicant(s). Section 30(4) of IBC postulates that the COC may approve a resolution plan by a vote of not less than 66% of voting share of the financial creditors. Once a Resolution Plan has been approved by the COC, the Resolution professional shall submit the Resolution Plan to the NCLT in terms of Section 30(6). The NCLT, after being satisfied that the Resolution Plan approved by the COC can be effectively implemented, shall approve the Resolution Plan vide an order passed u/s 31(1) of the IBC. The Order passed u/s 31(1) of the IBC has the effect of cessation of mortarium imposed upon the Corporate Debtor in terms of Section 14. The Corporate Debtor, thereafter, is given a new lease of life and a clean slate to start over, thereby fulfilling the primary objective of the IBC i.e. revival of the Corporate Debtor.
Once Application is admitted the proceedings take the character of proceedings in Rem
The admission of an application u/s 7,9 or 10 of the IBC is a significant event as the same triggers the provisions of the code as seen above. Prior to the admission of the application, the proceedings are in personam i.e. only between the applicant creditor and the corporate debtor. However, the moment the application is admitted by the adjudicating authority it follows a chain of events and now all the creditors who have a claim against the corporate debtor take part in the insolvency proceedings with the constitution of the CoC u/s 21 of the Code thereby transitioning into proceedings in rem. The Supreme Court in Indus Biotech Pvt. Ltd. vs Kotak India Venture (Offshore) Fund (2021) 6 SCC 436, similarly observed and held that mere filing of an application and its pendency before admission cannot be construed as triggering point of a proceedings in rem. However, once the application is admitted, third party rights are created in all the creditors of the corporate debtor which result in an erga omnes effect.
Inherent Powers of NCLT/NCLAT
Rule 11 of the NCLT Rules 2016 and the NCLAT Rules 2016 [“NCLT Rules”] confer inherent power upon the adjudicating authority which mirror Section 151 of the CPC as follows-
| Rule 11 of NCLT Rules 2016 & NCLAT Rules 2016 | Section 151 of CPC |
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“11. Inherent powers.- Nothing 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.” |
“151. Saving of inherent powers of Court.— Nothing in this Code shall be deemed to limit or otherwise affect the inherent power of the Court to make such orders as may be necessary for the ends of justice or to prevent abuse of the process of the Court.”
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In a consistent line of precedents the Hon’ble Supreme Court has held that the inherent powers of the court or the adjudicating authority ought not to be invoked in a perfunctory manner and the court should be circumspect while invoking such powers in a case at hand. In Ram Cand and Sons Sugar Mills Pvt. Ltd. vs Kanhayalal Bhargava11966 SCC OnLine SC 215, the Supreme Court held that the inherent powers must not be exercised if its exercise is inconsistent with or comes into conflict with, any of the powers expressly or by necessary implication conferred by other provisions of the Code. If there are express provisions exhaustively covering a particular topic they rise to a necessary implication that no power shall be exercised in respect of the said topic otherwise than in the manner prescribed in the provisions.
Introduction of Section 12A of IBC
While IBC provides an exhaustive procedure to take the CIRP to a logical conclusion, however, at the time of introduction of the Code, it lacked provisions to address a situation wherein the Applicant Creditor seeks withdrawal of the Application upon settlement reached between the parties. Although Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 permitted the withdrawal of applications u/s 7, 9, or 10 of the IBC before the admission of the Application. However, the Code, or its allied Rules and Regulations, did not provide for withdrawal of the application after the admission of the Application by the adjudicating authority. In absence thereof, the Supreme Court, in various cases had to invoke its plenary powers under Article 142 of the Constitution to permit withdrawal of the application on account of settlement between the creditors and the corporate debtor after the application had been admitted by the NCLT. Proceedings before and after the admission of the application, as seen from above, are fundamentally different. Before the admission of the application, the proceeding only concern the applicant creditor and the Corporate Debtor (in personam). Therefore, any settlement reached between them and subsequent withdrawal of the application, does not pose any difficulty. However, once the application is admitted, a host of other creditors also join the proceedings who have a claim against the Corporate Debtor (in rem). Therefore, in that event, it needs to be examined whether the settlement proposed caters to the interests of all the creditors or is it merely between a few creditors and the corporate debtor thereby being prejudicial to the rights of the other creditors to the proceedings.
An issue therefore arose, whether the adjudicating authority can invoke its inherent powers under Rule 11 to address the aforesaid lacunae and order withdrawal of the application even after the admission of the application. However, in Lokhandwala Kataria Construction Pvt. Ltd. vs Nisus Finance and Investment Manager LLP2(2018) 15 SCC 589, the Supreme Court permitted withdrawal of the application by invoking power under Article 142 of the constatation pursuant to settlement reached between the parties after the admission of the application and while doing so, prima facie, observed that in view of Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, the NCLAT cannot use its inherent powers under Rule 11 of the NCLAT Rules 2016 to allow a settlement or withdrawal after the admission of the application. The above decision was followed by the Supreme Court in Uttara Foods & Feeds Pvt. Ltd. vs Mona Pharmachem3(2018) 15 SCC 587 wherein the Supreme Court again invoked powers under Article 142 to permit withdrawal of the application after the admission. However, on this occasion the Supreme Court observed that the relevant rules be amended by the competent authority for permitting withdrawal of applications after admission so as to obviate such issues from reaching the top court. The Legislature thereafter introduced Section 12A to IBC by way of Insolvency and Bankruptcy (Second Amendment) Act, 2018, as follows-
“12A. Withdrawal of application admitted under Section 7,9, or 10– The Adjudicating Authority may allow the withdrawal of application admitted under Section 7 or Section 9 or Section 10, on an application made by the applicant with approval of ninety per cent voting share of the committee of creditors, in such manner as may be specified.”
It is pertinent to note that the threshold for withdrawal of an application is much higher i.e. it requires 90% voting of the CoC, as opposed to approval of a Resolution Plain u/s 30(4) , which requires approval of only 66% Creditors. This, evidently, is to safeguard the interests of all the creditors and keep a mischievous and fraudulent withdrawal of the application, prejudicial to the rights and claims of other creditors, at bay.
Another aspect which is to be noted is that Section 12A, at the time of its introduction, only allowed withdrawal of the Application after the constitution of CoC (approval of 90% Creditors) and was completely silent on whether a withdrawal can be sought after the admission of the application but before the CoC is constituted by the IRP. Upon the admission of the Application, the IRP constitutes the CoC only after collation of all the claims received against the Corporate Debtor pursuant to which he files a report before the adjudicating authority under Regulation 17 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 [“CIRP Regulations”] within 2 days of verification of claims, certifying the constitution of CoC. Regulation 17(2) states that the IRP shall convene the first meeting of the committee of creditors within 7 days of filing of the report under Regulation 17(1). The CIRP Regulations or the IBC does not conspicuously state in how many days the CoC is to be constituted. However, the Insolvency and Bankruptcy Board of India, vide a publication of FAQs, in answer to Q.59, clarified that the first meeting of CoC shall be held within 30 days from the Insolvency Commencement Date, which as per Section 5(12) of IBC, is the date of admission of an application filed u/s 7,9 or 10 of IBC.
Whether an Application filed u/s 7,9,or 10 can be withdrawn after admission but before the constitution of CoC?
In Swiss Ribbons (supra) amongst other provisions of the code, the constitutional validity of Section 12A was challenged and one of the questions that arose was whether withdrawal of an application can be sought after admission of the application but before the constitution of CoC. The Supreme Court expounded upon the nature of proceedings turning into proceedings in rem after the admission of the application. Recognizing that there was a lacuna in relation to cases where the CoC had not been formed, the Supreme Court held that, in such an event, the party can approach the NCLT directly and the NCLT may exercise its inherent powers under Rule 11 to allow or disallow the application for settlement/withdrawal. The relevant para is as follows-
“82…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 the NCLT Rules 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case.”
Pursuant to the aforesaid observation by the Supreme Court, the legislature amended Regulation 30A of the CIRP Regulations vide Notification dated 25.07.2019. Regulation 30A of the CIRP Regulations, as it stands today allows withdrawal of an application before and after the admission of the application, by making an application to the adjudicating authority and subject to the approval of 90% of creditors in terms of Section 12A.
Application filed u/s 7,9 or 10 of IBC can be withdrawn at four stages
Therefore, it transpires that Section 12A of IBC read with Regulation 30A of the CIRP Regulations, provides an exhaustive framework for withdrawal of an application at the following four stages viz.-
i. Before the Application under Section 7, 9 or 10 is admitted by the NCLT
The aforesaid stage is squarely covered by Rule 8 of the NCLT Rules which requires the applicant to approach the adjudicating authority for withdrawal of the application. At this stage, as the proceedings are in personam, the CoC is not constituted, therefore, the NCLT’s enquiry is only restricted to the applicant creditor and the Corporate Debtor.
ii. After an application u/s 7,9, or 10 is admitted but before the CoC has been constituted
This scenario is covered by Regulation 30A(a) of the CoC Regulations which states that an application for withdrawal can be filed before the constitution of CoC by the Applicant through the IRP/RP before the Adjudicating Authority.
iii. After an application under Section 7,8 or 10 is admitted and the CoC has been constituted.
This scenario is covered by Regulation 30A(b) of the CIRP Regulations which states that an application for withdrawal can be filed after the constitution of CoC by the Applicant through the IRP/RP before the Adjudicating Authority. In this case, as the CoC has been constituted, therefore, CoC must approve the withdrawal with 90% votes in terms of Section 12A of IBC.
iv. After an application under Section 7,8 or 10 is admitted, the CoC has been constituted and the invitation for expression of interest has been issued.
This scenario is also covered by Regulation 30A(b) of the CIRP Regulations which states that an application for withdrawal can be filed after the constitution of CoC by the Applicant through the IRP/RP before the Adjudicating Authority subject to approval of 90% creditors in terms of Section 12A of IBC. However, in this case there is an added step, the proviso to Regulation 30(b) provides that where an expression of interest under Regulation 36 A is issued then the applicant shall state the reasons justifying withdrawal after issue of such invitation.
Therefore, the IBC provides an exhaustive framework for withdrawal of an application at various stages stretching from its filing before the adjudicating authority till the issuance of an expression of interest under Regulation 36A of the CIRP Regulations, after the constitution of CoC. Such an exhaustive framework also reduces the burden upon the Supreme Court which was earlier burdened with invocation of powers under Article 142 of the Constitution to permit withdrawal of an application after the admission but before the constitution of CoC. In view of the aforesaid exhaustive procedure, the need for invocation of inherent powers of the NCLT/NCLAT also does not arise.
Case Law- Glas Trust Company LLC vs BYJU Raveendran & Ors.4Civil Appeal No. 9986 of 2024
The case pertained to invocation of inherent powers by the NCLAT, Chennai to approve the settlement reached between the applicant creditor and the corporate debtor, before the constitution of CoC. The Appellant, Glas Trust, was the administrative agent of all the lenders under the loan facility obtained by Byju Alpha Inc, a company incorporated in the USA which is the subsidiary of the Respondent No. 3 Corporate Debtor i.e. Think and Learn Pvt. Ltd who acted as the guarantor under the loan facility agreement. Byju Alpha Inc committed default in repayment of the loan amount and allegedly transferred USD 533 million to a hedge fund based in the USA at the behest of the Corporate Debtor Respondent No. 3. The Appellant obtained an injunction from the Delaware Court, USA restraining all the parties concerned from using the said transferred money in any manner. Meanwhile in India, the Respondent No. 2 i.e. BCCI initiated insolvency proceedings against the Respondent No. 3 by filing a Section 9 application in respect of an operational debt of Rs 158 Crores which came to be admitted by the NCLT on 16.07.2024. Vide the said order, the NCLT also disposed of the Section 7 Petition filed by the Appellant in view of the admission of Section 9 Application. Pursuant to announcement made by the IRP for submission of claims, the Appellant submitted its claim on 25.07.2024. It is pertinent to note that the CoC had not been constituted by now.
Against the Order of admission of Section 9 application passed by the NCLT, the Respondent No. 1 i.e. Directors of the Corporate Debtor and the Appellant filed appeals before the NCLAT, Chennai. A settlement was placed on record reached between the Respondent No. 1 and the Respondent No. 2 BCCI which was vehemently objected by the Appellant inter alia stating that the payment being made by the Respondent No.1 Directors of C.D. was from the funds of USD 533 million on which the Appellant had obtained injunction from Delaware Court, USA. However, the NCLAT vide its judgment dated 02.08.2024 invoked its inherent powers under Rule 11 of the NCLAT Rules to approve the settlement reached between the Respondent No.1 the Director of the Corporate Debtor and the Respondent No. 2 BCCI, resulting in setting aside of the Section 9 admission order passed by the NCLT. The Appellant filed Appeal before Supreme Court impugning this judgment of NCLAT, Chennai.
Court Held
The Court observed that the invocation of inherent powers by the NCLAT to approve the settlement was in stark derogation of the express and exhaustive procedure laid down in the CIRP rules for withdrawal of the Application. The NCLAT ought to have enforced Regulation 30A(a) which categorically states that in case of non-constitution of CoC after the admission of application, the applicant, through the IRP/RP can directly approach the NCLT for withdrawal of the application. The Court also expounded upon the principle that inherent powers can only be exercised when there is no express provision. Such powers cannot be exercised in contravention of, conflict with or in ignorance of express provision of law. The Court observed as follows-
“70.When a procedure has been prescribed for a particular purpose exhaustively, no power shall be exercised otherwise than in the manner prescribed by the said provisions. In such cases, the court must be circumspect in invoking its inherent powers to deviate from the prescribed procedure. If such deviation is made, the court must justify why this was necessary to prevent the abuse of the process of the Court.”
The Supreme Court in the above terms set aside the judgment passed by the NCLAT and directed the parties to seek withdrawal of the application in compliance with the provisions and regulations of the IBC.
Conclusion
The inherent powers of the NCLT/NCLAT cannot be routinely invoked especially when the IBC or its allied rules and regulations expressly and exhaustively provides a procedure to be followed. If the facts and circumstances still require the adjudicating authority to invoke its inherent powers, then the adjudicating authority must provide reasons as to why the invocation of inherent powers was imperative in derogation of an express procedure provided in the IBC or its rules and regulations.
