Rule change urged to allow insolvency proceedings halt

By Deepak Biswas and Sneha Jaisingh, Bharucha & Partners
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The Insolvency and Bankruptcy Code, 2016, primarily aims to achieve reorganization and insolvency resolution in a time-bound manner for maximizing the value of assets of insolvents. The National Company Law Tribunal (NCLT), the adjudicating authority under the code, works to that end. However, being a creature of statute the NCLT must function strictly within the parameters of powers conferred upon it by the code and the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (I&B Rules). This poses a challenge which, for the moment, has been resolved by the Supreme Court.

Deepak BiswasPartnerBharucha & Partners
Deepak Biswas
Partner
Bharucha & Partners

While it is settled law that winding up and liquidation proceedings under the Companies Act regime are not a substitute for debt recovery proceedings, time and again creditors moved for winding up of companies in the hope that the threat of liquidation would compel the companies to pay up. The high courts (exercising jurisdiction under the Companies Act) permitted the companies concerned to pay off the debts claimed in instalments as agreed between the parties at the pre-admission stage. Liquidation orders were passed only if the companies failed to pay according to the agreed schedule. Where the liquidation petition had been admitted and the company yet was able to settle with creditors, the high courts would permit such settlements but only after issuing notice to and hearing creditors.

The regime under the code is different. A problem is created by rule 8 of the I&B Rules, which provides that the adjudicating authority “may permit withdrawal of the application made under rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission”. On the plain language of rule 8 the NCLT could permit withdrawal of insolvency resolution proceedings before admission but not once the proceedings have been admitted.

Several benches of the NCLT, adopting the literal construction of rule 8, rejected withdrawal applications. The Kolkata bench, in Parker Hannifin India Private Limited v Prowess International Private Limited, observed that insolvency proceedings, once admitted, ceased to be bilateral proceedings between the operational or financial creditor and the corporate debtor.

Sneha JaisinghSenior associateBharucha & Partners
Sneha Jaisingh
Senior associate
Bharucha & Partners

In Nisus Finance and Investment Managers LLP v Lokhandwala Kataria Construction Private Limited, the Mumbai bench admitted an application for initiation of insolvency resolution proceedings. Post admission, the parties filed an appeal, seeking to withdraw the petition on the basis of settlement of dispute. The National Company Law Appellate Tribunal (NCLAT) confirmed the NCLT’s order, rejecting the contention that the NCLT, in exercise of its inherent powers, could permit withdrawal at the post-admission stage.

Rule 11 of the NCLAT Rules, 2016, expressly preserves the NCLAT’s inherent powers to make orders necessary to meet the ends of justice or to prevent abuse. The NCLAT’s rationale was that inherent powers would be available only where the I&B Rules had made no provisions. That was not the case having regard to rule 8 of the I&B Rules.

In this situation the Supreme Court had to intervene in Lokhandwala Kataria Construction Private Limited v Nisus Finance and Investment Managers LLP. The Supreme Court observed that prima facie the view taken by the NCLAT was correct. Yet to secure the ends of justice the court exercised powers under article 142 of India’s constitution and allowed withdrawal of the insolvency proceedings at the post-admission stage.

Similar orders were passed by the Supreme Court in Mothers Pride Dairy India Private Limited v Portrait Advertising and Marketing Private Limited and in Uttara Foods and Feeds Private Limited v Mona Pharmachem. In the latter, the Supreme Court observed that “the relevant Rules [should] be amended by the competent authority so as to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached.”

The court’s observation makes eminent sense. Insolvency proceedings, like other judicial proceedings, should be capable of being settled if parties have so agreed. Safeguards are needed since insolvency proceedings, unlike civil disputes, are not bilateral. Settlement and withdrawal of insolvency proceedings are capable of abuse such as by preferring the petitioning creditor as against other creditors. This potential abuse can easily be curbed by the NCLT, like the high courts under the previous regime, permitting withdrawal only after notice to and hearing all creditors. Hopefully the central government, which has the power to make rules under the code, will move quickly now.

Deepak Biswas is a partner and Sneha Jaisingh is a senior associate at Bharucha & Partners.

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