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Supreme Court allows case settlement after insolvency proceedings begin

LiveMint logoLiveMint 26-07-2017 Jayshree P. Upadhyay

Mumbai: Just seven months after the operationalization of the Insolvency and Bankruptcy Code (IBC), it has been tested by the apex court. 

The Supreme Court on Monday ruled that a settlement can be considered and a case can be withdrawn after insolvency proceedings have started against a company. 

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. 

Also Read: NCLT allows insolvency proceedings against Bhushan Steel, Bhushan Power

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NCLAT said on 13 July that under the IBC 2016, a case can be withdrawn before the admission of an insolvency case, and not after that.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. 

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.

After the admission of the petition, it acquires the character of representative suit and through publication in newspapers, other creditors get a right to participate in the insolvency resolution process and therefore IBC does not allow the petition to be dismissed on the basis of a compromise between the operational creditor and corporate debtor. 

To be sure, Article 142 is restricted to facts of a particular case and may not act as a precedent for the NCLT or NCLAT to allow an out-of-court settlement in every insolvency case. In the order, Supreme Court 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.

“A preferential treatment has been given to creditor (in terms of settling its dues) who has filed the plea. If this were to continue then the creditor who files the case will always get a preferential treatment and the other creditors of the company would be left in a lurch,” said Mamta Binani, an insolvency resolution professional.

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