The Supreme Court in GLAS Trust Company LLC vs. Byju Raveendran & Ors, has clarified the law on the procedure for the withdrawal of an admitted petition filed under Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code (IBC). This judgement has emphasised that the interests of all stakeholders are to be taken into account and not just that of the corporate debtor. This is a welcome ruling that is in line with the IBC’s intent of being a beneficial legislation that attempts to put the corporate debtor back on its feet and is not merely a recovery tool for individual creditors.
The IBC as originally enacted contained no provisions for the settlement of disputes post admission of petitions filed for insolvency. Once a corporate debtor is admitted into insolvency, the proceedings become in rem, the management of the corporate debtor is suspended, and its administration is taken over by a resolution professional. There have been instances where at this stage, the suspended directors/ promoters have sought to settle with the original applicant who initiated the insolvency proceedings. Since the IBC only provided for the withdrawal of cases pre-admission under Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority), Rules 2016, the adjudicating authorities/ appellate adjudicating authority did not have the power to act on such settlements and permit the withdrawal of these insolvency petitions.
This led to parties approaching the Supreme Court requesting it to exercise its powers under Article 142 to permit settlement. The Supreme Court, recognising this lacuna, observed in Uttara Foods that the relevant rules should be amended by the competent authority to allow a compromise to take effect after the admission of an insolvency petition.
Having been nudged by the Supreme Court, the Insolvency Law Committee, set up by the Ministry of Corporate Affairs, submitted its report on March 26, 2018 recommending an amendment to the relevant rules to provide for withdrawal post admission, if approved by 90 per cent of the Committee of Creditors (CoC).
Accepting these recommendations, Section 12A of the IBC was introduced by the Insolvency and Bankruptcy (Second Amendment) Act, 2018, with effect from June 6, 2018 and so was Regulation 30-A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2018, with effect from July 4, 2018. Both Section 12A and the originally enacted Regulation 30-A provided for the withdrawal of an insolvency petition, after admission, with the approval of 90 per cent of the CoC.
Section 12A is more stringent in comparison to Section 30(4) of the IBC (which requires only 66 per cent of the voting share of the CoC to approve a resolution plan). The high threshold has been explained in the ILC Report, which reasoned that "all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into." This Section, however, is silent about the withdrawal of an application after its admission to insolvency proceedings but prior to the formation of the CoC.
This lacuna was addressed by the Supreme Court in Swiss Ribbons, wherein Section 12A, among other provisions of the IBC, was challenged and upheld by the Supreme Court. The Court observed in para 82, that being a proceeding in rem, it is necessary that the CoC must be consulted before any individual corporate debtor is allowed to settle its claim. The Supreme Court thereafter noted that at a stage after the admission of an insolvency petition, but prior to formation of the CoC, a party could approach the NCLT directly in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016. Such an application would have to be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case. This was one step ahead of Lokhandwala Kataria where the Supreme Court had, without going into merits of the matter, made a prima facie observation that the inherent powers of the NCLT under Rule 11 did not seem like it could be utilised to approve settlements post the admission of insolvency petitions.
As mentioned above, Regulation 30-A in its original form did not contemplate the withdrawal of admitted petitions where the CoC was yet to be constituted. This was amended with effect from July 25, 2019 to accommodate the withdrawal under Section12A prior to the constitution of the CoC. This change was a consequence of Swiss Ribbons.
In the instant case, Think & Learn Pvt. Ltd., (T&L) (which operates under the name Byju’s) was admitted into insolvency on July 16, 2024 by the adjudicating authority (NCLT Bangalore) in an application filed by the Board of Control of Cricket (BCCI) under Section 9 of the IBC for a default of ₹158 crores.
Byju Raveendran, the suspended director of T&L, filed an appeal before the NCLAT, Chennai, challenging the admission order. Thereafter, BCCI and the suspended director entered into a settlement and by invoking the inherent powers of the NCLAT under Rule 11 of the NCLAT Rules, an application was filed seeking for withdrawal of the insolvency petition. This settlement was approved by the NCLAT on August 2, 2024, setting aside the admission order of the NCLT Bangalore, and permitting the BCCI to withdraw its insolvency petition.
This order of the NCLAT permitting withdrawal of the insolvency petition was challenged by GLAS Trust, a financial creditor of T&L, before the Supreme Court.
One of the questions that the Supreme Court looked into was whether the NCLAT erred in invoking its inherent powers under Rule 11 of the NCLAT Rules in the presence of a prescribed procedure for the withdrawal of CIRP and the settlement of claims between parties.
The Court after thoroughly tracing the history of Section 12A, has ruled that:
(a) When there is an exhaustive procedure prescribed for a particular purpose, it must be followed and powers cannot be exercised in any manner otherwise. Therefore, such applications for withdrawal post-admission need to be filed before the Adjudicating Authority under Section 12A read with Regulation 30-A, through the IRP. Not only does this clarify that these applications can be entertained only when filed under Section12A, it also gives quietus to the confusion of who should file the application as several applications under Section 12A have been filed directly by the directors / promoters and not through the IRP.
(b) Admission of an insolvency proceeding changes its character from a proceeding that was in personam, to one that is in rem. Therefore, once admitted, such proceedings are no longer limited to the applicant. Rather, the corporate debtor and even creditors who were not original applicants become necessary stakeholders. Accordingly, they can have a say in the withdrawal. This is evident from Sections 61 and 62 of the IBC which deal with appeals to the NCLAT and the Supreme Court respectively, as they read, ‘any person' aggrieved by an order, indicating no rigid locus requirement.
(c) When considering applications for withdrawal, the NCLT cannot act like a post-office that merely puts a stamp on the withdrawal application submitted by the IRP, without any application of judicial mind.
The Supreme Court also held that its decisions in Kamal K. Singh v. Dinesh Gupta and Ashok G. Rajani v. Beacon Trusteeship Ltd. are per incuriam as they accept withdrawals under Rule 11 without even accounting for the existing legal framework under Regulation 30-A.
Although the Supreme Court does not lay down a comprehensive test to be considered while deciding an application under Section 12A, the Court has made it clear that the NCLT cannot merely act like a post-office. This ruling, at first blush, may appear contrary to the ruling of the Division Bench of the Supreme Court in Vallal RCK v. Siva Industries (where the Supreme Court has opined that the adjudicating authority cannot sit in appeal over the commercial wisdom of the CoC). Vallal RCK was a case where a settlement entered into with 90 per cent approval of the CoC was dismissed by the NCLT. The Supreme Court in the Vallal RCK case observed that dismissal of the application under Section 12A by the adjudicating authority was only warranted ‘when the decision of the CoC is found to be wholly capricious, arbitrary, irrational and dehors the provisions of the statute or the Rules.’
While Vallal RCK dealt with a Section12A application filed with more than 90 per cent approval of the CoC, GLAS Trust dealt with a Section 12A application filed prior to the CoC being constituted. Both these decisions are in harmony as they both further the protection of the interests of all stakeholders in the insolvency of a corporate debtor – Vallal RCK by respecting the commercial wisdom of the CoC and GLAS by providing for a flexible understanding of locus of any aggrieved person challenging a settlement arrived at before constitution of the CoC, as well as directing the NCLT to apply judicial mind to Section 12A applications before it.
The Supreme Court’s ruling that the interests of all stakeholders is to be taken into account while deciding an application under Section 12A, and that any person aggrieved may challenge such order, further ensures insolvency proceedings are not used as a mere recovery legislation for individual creditors. The judgement though does not go into how the interests of all the stakeholders are to be balanced. Will the adjudicating authority be required to reject an application under Section 12A in case a creditor objects to it? These questions will hopefully be answered in the near future.
The judgement is a step in the right direction and is in keeping with the spirit of the IBC. It also furthers the idea that the IBC is not to be used as an arm-twisting tool or as a mode of recovering money. This judgement will play an important role in ensuring that only genuine cases for insolvency are brought by creditors before the adjudicating authority.
About the authors: Y Sankeerth Vittal is a Principal Associate and Rose Joy is a Senior Associate at Keystone Partners.