A RELIEF TO COMPANIES UNDER INSOLVENCY PROCEEDINGS

3rd Aug - A RELIEF TO COMPANIES UNDER INSOLVENCY PROCEEDINGSIn a decision that may aid corporate debtors under insolvency proceedings to reach mutual settlements, the Supreme Court used its extraordinary powers in a case that came before it to permit two companies to withdraw insolvency proceedings and settle their loan dispute amongst themselves. The Court used its extraordinary constitutional powers u/Art. 142 to grant the relief to the appellant companies since the matter was already under the consideration of NCLT (National Company Law Tribunal), and on appeal the NCLAT (National Company Law Appellate Tribunal) had passed a decision on 13th July 2017 to the effect that the proceedings under the Insolvency and Bankruptcy Code of 2016 cannot be withdrawn even if the parties decide to settle the dispute. The Court used the provision to do “complete justice” under Art. 142 to allow the parties to settle the matter in terms of the agreement arrived at between the parties, despite the matter being under consideration of the NCLT.

The Prologue

The matter came before the NCLT by way of an application filed by the financial creditor Nisus Finance & Investment Manager LLP (Respondent in the Appeals) against the debtor Lokhandwala Kataria Construction Pvt. Ltd. (Appellant before the NCLAT and the Supreme Court) under the Insolvency and Bankruptcy Code after the first cheque issued for redemption of the part of the debenture was dishonored. The NCLT admitted the application and ruled to initiate corporate insolvency proceedings if the debtor company failed to fulfill its obligations. But both the parties submitted later before the NCLAT that they had arrived at a settlement and part of the amount had already been paid. The NCLAT however observed that “even the Financial Creditor cannot be allowed to withdraw the application once admitted, and matter cannot be closed till claim of all the creditors are satisfied by the corporate debtor”. The NCLT laid emphasis of consideration on the claims of other creditors, even if a settlement has been arrived at between the parties of the present dispute, and refused to stall the insolvency application in view of the settlement between the parties, and dismissed the Appeal. The Debtor thereafter approached the Supreme Court under second Appeal to consider the matter, which is where the said decision has been passed by the Court.

The Decision and its possible Effects

The Supreme Court, while allowing the parties settle, did not question the law on which the NCLAT decided against the settlement, and clarified that prima facie the position taken by the Tribunal that withdrawal cannot be allowed is correct. However, the Court used its extraordinary powers to allow the parties to settle the dispute in terms of the agreement between them.

While the decision does not in any way alter the position of the law on insolvency or the provisions under the IBC 2016, it certainly comes as an auxiliary relief to insolvent companies. The Court may use its powers to do justice to the parties even when the stringent interpretations of the provisions of law are unfavorable to them. It gives the defaulters a second chance to amicably settle their financial disputes, and promotes a win-win scenario where the creditor receives the payment; while the debtor does not necessarily have to face insolvency proceedings despite the applicant (creditor) himself being willing to withdraw the application before NCLT.

 

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