Source: Supreme Court 

Why in News? 

Recently, the Supreme Court in the matter of Glas Trust Company Llc V. Byju Raveendran has held that the inherent powers of the National Company Law Tribunal (NCLT) cannot be used to circumvent the procedure to withdraw Corporate Insolvency Resolution Process (CIRP) under Section12A of the Insolvency & Bankruptcy Code, 2016(IBC) and Rule 30 A of CIRP Regulations. 

What was the Background of the Glas Trust Company Llc V. Byju Raveendran Case?  

• In this case Think earn Pvt. Ltd., 3rd respondent (Corporate Debtor), Byju Raveendran and his brother, Riju Raveendran are former directors of the Corporate Debtor (1st Respondent). 
• The Board of Control for Cricket in India (BCCI) (Operational creditor), the 2nd Respondent executed a ‘Team Sponsor Agreement’ with the Corporate Debtor, which relates to the sponsorship of the Insolvency & National Cricket Team. 
• The Appellant, GLAS Trust Company LLC, is the ‘Administrative Agent’ of all the lenders under this agreement and the ‘Collateral Agent’ for the secured parties 
• Under the terms of the Credit Agreement, the Corporate Debtor acted as a guarantor and issued a guarantee deed in favour of the appellant. 
• It was alleged that despite several efforts the default persisted in payment of the principal outstanding amount and the interest accrued under the Credit Agreement. 
• The appellant issued a notice of demand to the Corporate Debtor, invoking the guarantee deed and demanding that the Corporate Debtor pay the requisite amount. 
• The appellant alleged that the Corporate Debtor too defaulted in its capacity as the guarantor under the Credit Agreement. 
• The case was filed before the Delaware Court which imposed financial penalties of USD 10,000 per day on the 1st respondent, which was payable until the contempt was” purged by him”. 

Proceedings of Insolvency Against the 1st Respondent 

• The second respondent moved a petition under Section 9 of IBC in respect of an operational debt payable by the Corporate Debtor under the Team Sponsor Agreement. 
• The NCLT accepted the petition and initiated the CIRP and an Interim Resolution Professional (IRP) was appointed under Section 14 of IBC. 
• The appellant also filed for CIRP under Section 7 of IBC against the Corporate Debtor for which NCLT passed the order while disposing of application under Section 7 of IBC the liberty was granted to the appellant to file claims before the IRP. 

NCLT Proceedings 

• Appellant and the 1st respondent moved before the National Company Law Appellate Tribunal (NCLAT) based on the respective orders. 
• It was noted in the 1st respondent appeal that a settlement amount was forwarded to the 2nd respondent, and further transfers were also planned for the settlement purpose between them. 
• Based on the arguments NCLAT stayed the order for the constitution of the Committee of Creditors (CoC) 
• It was contented by the appellant that: 
  • Section 12A of the IBC and Regulation 30A of the CIRP Regulations 2016 deal with the settlement of claims after CIRP is initiated, both before and after the CoC is constituted. The first respondent should have, thus, approached the NCLT as mandated by Rule 30A instead of invoking the inherent powers of the NCLAT under Rule 11. 
  • NCLAT should not exercise its discretionary power under Rule 11 of the NCLAT Rules because the directors of the Corporate Debtor and its allied entities are fugitives, living abroad; have defaulted on government dues; Enforcement Directorate proceedings are pending, look out notices have been issued; and there has been a significant drop in the valuation of the Corporate Debtor; and 
  • The interests of all creditors must be considered while accepting a settlement, including the appellant who has a substantial interest with regard to the Corporate Debtor. 
• NCLAT held that  
  • The law regarding the settlement of disputes between the parties is in the process of evolution, and has approved the invocation of Rule 11 of the NCLAT Rules to allow such settlements. 
  • Appellant the liberty to revive its Section 7 petition, in case of any adverse developments in the appellate proceedings in the Section 9 petition and thus, the right of the applicant to enforce its claims was well protected. 
• Aggrieved by the decision of the NCLAT the present appeal has been filed by the appellant before the Supreme Court. 

What were the Court’s Observations? 

The Original Problem 

• When the IBC law was first made in 2016, it had a gap, If a company and its creditors reached a settlement after starting the insolvency process, there was no way to legally "take back" or withdraw the case 
• The supreme Court suggested that more authority should be given to the lower courts to avoid overburdening the Supreme Court. 

Further Development 

• Government's Response to Judicial Concern 
  • Pursuant to the Supreme Court's observations, Ministry of Corporate Affairs constituted the Insolvency Law Committee (ILC) 
  • Primary mandate: To address the legislative lacunae regarding withdrawal of CIRP applications post-admission  
• Committee's Fundamental Observations on CIRP Nature: 
  • Collective Nature of Proceedings: 
    • CIRP, once initiated, transcends beyond bilateral proceedings 
    • It transforms into a collective proceeding involving all creditors 
    • Individual enforcement actions are discouraged in favor of collective benefit 
  • Legislative Intent Analysis: 
    • The Code's primary objective is to discourage individual enforcement actions 
    • Emphasis on collective resolution over individual settlements 
    • Protection of general creditor interests paramount 

Key Recommendations of the Committee: 

• Recommended incorporation of withdrawal provisions post-admission 
• Prescribed specific threshold i.e. 90% voting share approval by CoC 
• Mandatory CoC approval ensures protection of all stakeholders' interests 
• Report against adoption of Rule 11 of NCLT Rules, 2016 
• Recommended specific amendment to Rule 8 of CIRP Rule. 
• Emphasized need for specialized withdrawal provisions within IBC framework 
• Suggested stakeholders protections 

Developments in the withdrawal mechanism under IBC 

• Legislative Framework: Section 12A of IBC, introduced via the 2018 Amendment Act, read with Regulation 30A of CIRP Regulations, provides a comprehensive framework for withdrawal of applications under Sections 7, 9, or 10 of the IBC, subject to requisite approvals. 
• Threshold Requirement: The statutory mandate necessitates a 90% voting share approval from the Committee of Creditors for withdrawal of CIRP applications, predicated upon the principle of protecting collective creditor interests over individual settlements. 
• Pre-CoC Scenario: Where the CoC is not yet constituted, the Adjudicating Authority may exercise its inherent powers under Rule 11 of NCLT Rules, 2016, to adjudicate upon withdrawal applications. 
• Current Position:  
  • Post amendments to Regulation 30A, withdrawal is permissible at various stages of CIRP: 
    • Pre-CoC constitution: Direct NCLT approach 
    • Post-CoC constitution: 90% CoC approval mandatory 
    • Procedural Compliance: "The amended framework mandates time-bound consideration by CoC within 7 days, followed by NCLT approval, ensuring expeditious disposal while maintaining necessary safeguards for stakeholder interests. 

The Supreme Court Summarized the Above Discussion as: 

• Pre-Admission Withdrawal: 
  • At the pre-admission stage, the proceedings being in personam, Rule 8 of NCLT Rules governs the withdrawal mechanism.  
  • The Adjudicating Authority may permit withdrawal upon direct application, limiting its inquiry to the applicant creditor and corporate debtor, as other creditors are not stakeholders at this juncture. 
• Post-Admission, Pre-CoC Stage: 
  • Post admission but prior to CoC constitution, pursuant to Swiss Ribbons and amended Regulation 30A, withdrawal application must be routed through IRP to NCLT.  
  • The proceedings having acquired in rem character, the Adjudicating Authority must exercise judicial discretion after hearing concerned parties." 
• Post-CoC, Pre-EOI (Expression of Interest) Stage: 
  • Section 12A read conjointly with Regulation 30A mandates that withdrawal applications be submitted through IRP/RP, requiring: 
    • Initial placement before CoC 
    • Approval by 90% voting share 
    • Subsequent submission to NCLT by RP 
• Post-EOI Stage: 
  • The procedure remains identical to the pre-EOI stage with an additional requirement under CIRP Regulation 30A(1) proviso mandating justification for belated withdrawal. 
• Court's Ruling on Inherent Powers: 
  • The NCLAT's exercise of inherent powers under Rule 11 of NCLT for permitting withdrawal was held legally untenable.  
  • The Court emphasized that established procedures under Section 12A of IBC and CIRP Regulation 30A cannot be circumvented through invocation of inherent powers. 
  • Based on the above observations the Supreme Court set aside the order of NCLAT. 

Landmark Judgements 

• Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers (2018) 
  • In this case the Supreme Court prima facie affirmed that Rule 8 of CIRP Rules is a complete code in itself and NCLAT cannot invoke Rule 11's inherent powers also post-admission withdrawal/settlement through Rule 11 is impermissible. 
• Swiss Ribbons (P) Ltd. v. Union of India (2019): 
  • The constitutional validity of Section 12A of IBC was upheld, with the Court affirming that the high threshold of 90% CoC approval was justified considering the necessity of an omnibus settlement protecting all creditors' interests. 
• Brilliant Alloy Private Limited vs S Rajagopal and Ors (2022):  
  • The Supreme Court held that the temporal restriction in Regulation 30A regarding pre-EOI withdrawal was directory in nature and must be harmoniously construed with Section 12A of IBC which prescribes no such limitation.