Court’s Decision: The Supreme Court of India deliberated on whether the National Company Law Appellate Tribunal (NCLAT) had erred in invoking its inherent powers under Rule 11 of the NCLAT Rules, 2016 to approve a settlement between a corporate debtor and an operational creditor after the initiation of the Corporate Insolvency Resolution Process (CIRP), without consulting the Committee of Creditors (CoC). The apex court issued an interim stay on the NCLAT’s judgment, highlighting the importance of protecting the rights of all creditors under the Insolvency and Bankruptcy Code (IBC), particularly in collective proceedings where multiple creditors are involved.
Facts: The case arose from a dispute between the operational creditor (BCCI) and the corporate debtor (Byju’s) over an unpaid operational debt of INR 158 crores. The National Company Law Tribunal (NCLT), Bengaluru, admitted the application for CIRP against Byju’s under Section 9 of the IBC, initiating insolvency proceedings. In parallel, a financial creditor (GLAS Trust Company LLC) had also filed a Section 7 petition for a much larger debt. However, a settlement between the operational creditor and the debtor was reached, with payments made in three tranches. NCLAT approved this settlement under Rule 11, despite objections raised by the financial creditor, who questioned the legality and source of funds used for the settlement.
Issues:
- Whether the financial creditor, who was not a party to the settlement, had locus in the proceedings before the Supreme Court.
- Whether NCLAT’s invocation of its inherent powers under Rule 11 was appropriate in light of the statutory framework provided under Section 12A of the IBC and Regulation 30A of the CIRP Regulations.
- Whether the objections raised by the financial creditor regarding the source of funds used for the settlement and the conduct of the debtor’s management were adequately addressed by the NCLAT.
Petitioner’s Arguments: The petitioner (financial creditor) contended that:
- NCLAT should not have invoked its discretionary power under Rule 11 when a prescribed procedure for withdrawal and settlement under Section 12A of the IBC was available.
- The interests of all creditors, including financial creditors with substantial claims, must be considered before any settlement is approved.
- NCLAT failed to address concerns about the fraudulent transfer of funds to a hedge fund in the U.S. and ongoing investigations, which cast doubt on the legitimacy of the funds used for the settlement.
- The settlement might lead to preferential treatment of one creditor at the expense of others.
Respondent’s Arguments: The respondents (debtor and operational creditor) argued that:
- The NCLAT has the inherent power under Rule 11 to permit the withdrawal of CIRP proceedings, even in the absence of CoC approval, as the CoC had not yet been constituted.
- The financial creditor’s objections were irrelevant, as the settlement was between the debtor and the operational creditor, and the financial creditor had failed to revive its own Section 7 petition.
- The corporate debtor remained a viable, operational company with substantial business interests and that insolvency proceedings would harm its operations.
Analysis of the Law: The court analyzed the legal framework under Section 12A of the IBC and Regulation 30A of the CIRP Regulations, which governs the withdrawal of insolvency applications after admission. It noted that the law provides that the CoC must approve any settlement after admission by a 90% vote, emphasizing the collective nature of insolvency proceedings under the IBC. The court further noted that in situations where the CoC has not been constituted, the NCLT or NCLAT may exercise its inherent powers under Rule 11, but only after considering all relevant factors and hearing all affected parties.
Precedent Analysis: The court referred to earlier judgments such as Swiss Ribbons (P) Ltd. v. Union of India and Brilliant Alloys Pvt. Ltd. v. S Rajagopal & Ors., where the courts upheld the collective nature of insolvency proceedings and the high threshold for withdrawal of CIRP to protect the interests of all stakeholders.
Court’s Reasoning: The Supreme Court reasoned that since the proceedings under the IBC become a collective proceeding once admitted, the rights of all creditors must be protected. The court observed that while NCLAT has inherent powers under Rule 11, these powers should be used sparingly and in cases where the interests of all creditors are considered. The court expressed concerns that NCLAT did not adequately address the financial creditor’s objections, especially concerning the alleged fraudulent transfer of funds and the possibility of preferential treatment of one creditor over others.
Conclusion: The Supreme Court stayed the operation of the NCLAT’s judgment and directed that the sum of INR 158 crores, realized from the settlement, be maintained in an escrow account pending further orders. The case was reserved for final judgment, with directions for maintaining the status quo concerning the insolvency proceedings.
Implications: This case reaffirms the importance of safeguarding the collective rights of creditors in insolvency proceedings. The Supreme Court’s intervention highlights the need for tribunals to exercise caution when invoking inherent powers, ensuring that the statutory framework under the IBC is followed, particularly in protecting the interests of all stakeholders in the insolvency process.
