Just seven months after the operationalization of the Insolvency and Bankruptcy Code (IBC), it has been tested by the apex court.
The Supreme Court has used special powers to allow a company to withdraw from insolvency proceedings after both parties, the borrower and the creditor, arrived at a mutual settlement on the loan.
It was hearing a case concerning corporate debtor Lokhandwala Kataria Construction Pvt. Ltd on an application filed by financial creditor Nisus Finance and Investment Manager LLP.
The Mumbai bench of the National Company Law Tribunal (NCLT) on 15 June initiated a corporate insolvency resolution process against the debtor. Later, the company and the creditor approached the National Company Law Appellate Tribunal (NCLAT) saying that the two had settled the dispute and that some of the dues had already been paid.
NCLAT said on 13 July that under the IBC 2016, the adjudicating authority can permit withdrawal of the application for insolvency proceedings on the request made by the applicant before the case is admitted, and not after that.
The parties then filed a plea with the Supreme Court, which allowed a settlement to be considered under article 142 of the Indian constitution.
A bench of justices Rohinton Nariman and Sanjay Kishan Kaul on July 23 exercised special powers of the Constitution to record consent terms between the two parties even after the case was admitted by the NCLT, thereby allowing the applicant to withdraw the case after it was admitted.
Article 142 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 policy underlying IBC shifts the incentive of the parties from individual recovery actions to collective action. In that context, after a petition has been filed in NCLT, allowing out-of-court bilateral settlement between the borrower and one creditor may contradict that basic objective of collective action,” said Pratik Datta, a researcher at the National Institute of Public Finance and Policy, New Delhi.
However, Article 142 may not act as a precedent for the NCLT or NCLAT to allow an out-of-court settlement in every insolvency case, thereby restricts to facts of a particular case. SC also observed that NCLT and NCLAT do not have inherent powers and will be ruled by provisions of IBC.
“Since this order is under Article 142, it should be treated on the facts of that particular case and not as a precedent of general applicability,” added Datta. “It is not disturbing the basic pillars or edifices of IBC. However, we might see some more cases of similar nature come up and process would need to mature accordingly. The government may also consider amending the IBC to make provisions for settlement of insolvency proceedings once a plea is admitted,” said Rakesh Nangia, managing partner, Nangia and Co. Llp, which does some insolvency work.