Author name: CBCL

IBC Ordinance; Home Buyers to be Treated as Financial Creditors [Riya Goyal] The President has recently given his nod to promulgate an ordinance amending the insolvency law, recognising homebuyers as financial creditors to real estate developers. This settles a long drawn controversy created by various conflicting court decisions regarding the status of homebuyers as being financial or operational creditors, which was further deepened by the IBBI issuing a claim form for “creditors other than financial or operational creditors”[1] To understand the implications of this ordinance, it is pertinent to first understand the meaning of financial and operational creditors. Section 5(8) of the Code defines ‘financial debt’ to mean a debt along with interest, if any, which is disbursed against the consideration for the time value of money and inter alia includes money borrowed against payment of interest, etc., As per earlier interpretations of the definition, the contract between the real estate developer and the homebuyer were seen as simple sale and purchase agreements  and not as a ‘financial debt’. The only exception to this view was the  assured return scheme contract, in which there was an arrangement wherein it was agreed that the seller of the apartments would pay ‘assured returns’ to the home buyers till possession of property was given.[2] However such judgments were given considering the terms of the contracts between the home buyers and the seller and were fact specific, thus no consistency existed. Further Section 5(20) of the Code defines operational debt as “debt that may arise out of the provision of goods or services including dues on account of employment or a debt in respect of repayment of dues arising under any law for time being in force and payable to centre or local authority”. In relation to this the NCLT in Col. Vinod Awasthy v. AMR Infrastructure Ltd. (Principal Bench-Delhi)[3] had ruled that, notwithstanding the presence of an assured return clause, a purchaser of a flat cannot be treated as a provider of ‘goods’ or ‘services’ to the builder and therefore, does not qualify as an ‘Operational Creditor’ and cannot initiate Insolvency Process in that capacity. This Non-inclusion of home buyers within either the definition of ‘financial’ or ‘operational’ creditors may be a cause for worry since it deprives them of, first, the right to initiate the corporate insolvency resolution process (“CIRP”), second, the right to be on the committee of creditors (“CoC”) and third, the guarantee of receiving at least the liquidation value under the resolution plan.This puts into jeopardy the future of millions of homebuyers in a situation where Delay in completion of underconstruction apartments has become a common phenomenon. the records indicate that out of 782 construction projects in India monitored by the Ministry of Statistics and Programme Implementation, Government of India, a total of 215 projects are delayed with the time over-run ranging from 1 to 261 months.[4] To resolve this issue a committee was constituted under the Corporate Affairs Ministry to  review the various financial terms of agreements between home buyers and builders and the manner of utilisation of the disbursements made by home buyers to the builders,it was evident  that the amounts so raised are used as a means of financing the real and are thus in effect a tool for raising finance, and on failure of the project, money is repaid based on time value of money. This could be covered under Section 5(8)(f)of the Code, which is in the nature of residuary entry to cover debt transactions not covered under any other entry, and the essence of the entry is that “amount should have been raised under a transaction having the commercial effect of a borrowing.” An example has been mentioned in the entry itself i.e. forward sale or purchase agreement. Though a forward contract to sell product at the end of a specified period is not a financial contract. It is essentially a contract for sale of specified goods, however if they are structured as a tool or means for raising finance, there is no doubt that the amount raised may be classified as financial debt under section 5(8)(f)[5]. Drawing an analogy, in the case of home buyers, the amounts raised under the contracts of home buyers are in effect for the purposes of raising finance, and are a means of raising finance. Thus, the Committee deemed it prudent to clarify that such amounts raised under a real estate project from a home buyer fall within entry (f) of section 5(8). This demonstrates eminent common sense and appears to be a correct application of the concept of ‘time value of money’. It recognizes that a purchaser of a real estate unit is under no obligation to pay a substantial amount of money as down-payment if the possession of the unit is not likely to be handed over to him in the near future. In that scenario, the builder would have to arrange finance from independent sources for the development of the project. This would not only require collateral/security but involve imposition of extremely onerous conditions, including but not limited to a relatively exorbitant rate of ‘interest’. Simply put, a bank lending money to the builder, needless to state, would qualify as a ‘Financial Creditor’ and entitled to all the rights emanating from such an arrangement under IBC, including the right to initiate insolvency process under IBC, in case of a default in repayment of debt. From that viewpoint, if the builder succeeds in inviting funds from an individual purchaser, as opposed to a Bank, on much more favorable terms, in that case – it does not stand to reason as to why that individual purchaser should not be entitled to similar protection as a Bank, when it is essentially serving the same purpose. Any other view discriminates between an individual purchaser of a real estate unit and the Bank, and to the former’s detriment. It also needs to remembered that the purchaser of a real estate unit under such an arrangement is parting with a huge amount

Reconciling Stock Exchange Regulations with Insolvency and Bankruptcy Code, 2016: Analysis of Amendments in SAST Regulations and Delisting Requirements. [Ishaan Chopra] Ishaan Chopra is a 3rd year B.A.LLB. (Hons.) student at NLIU, Bhopal Section 30(2)(e) of the Insolvency and Bankruptcy Code stipulates that the resolution plan should be compliant with all the existing provisions of law. Accordingly, the regulations prescribed by Security and Exchange Board Of India (SEBI) need to be adhered to while contemplating and implementing a resolution plan. Where the corporate debtor is a listed entity, certain regulations of SEBI might impose cumbersome obligations upon newly reconstituted entity. The expenses and the time spent in fulfilling such obligations often render the stressed assets investments as economically unviable. This post seeks to analyze the recent amendments in SEBI regulations to make the implementation of resolution plan investor friendly and also suggests further changes in the existing framework to prevent burden upon the restructured entity. Relaxation of Open Offer Requirements Regulation 3 of SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 2011 provides that an entity which intends to acquire any number of shares, which make the entities shareholding 25% or more in the target company, is obligated to make an open offer. Open offer refers to the statutory requirement whereby an acquirer makes an offer for at least additional 26% of the public shareholding. The purpose of SAST regulations is to ensure that substantial acquisitions of shareholdings do not jeopardize the interests of minority shareholders. Accordingly, the regulation seeks to provide a fair exit price to the minority shareholders. For a company facing ‘Corporate Insolvency Resolution Process (CIRP), the shareholders are the bottom of the waterfall prescribed by the IBC for payment preference. Accordingly, the liquidation value due to equity shareholders is less or in most cases nil. This can be portrayed through the recent Electrosteel resolution plan. Vedanta Ltd  invested Rs1,805 crore to get a 90% equity stake in Electrosteel. This results in a valuation of remaining 10% public equity at Rs. 200 crore, less than a third of the company’s existing market capitalization of Rs. 653 crore. SEBI in its discussion paper has noted that the investors acquiring stressed assets would not want to use up capital to buy back from existing shareholders. However, SAST Regulation 3 required a public announcement of open offer of at least 26% of capital when the resolution applicant intended to buy any quantum of shareholding which triggered the 25% threshold. The resolution plan will be compliant with SAST, when payment to all shareholders of target company who have tendered their shares have been made. The capital, which has out flown due to buying back existing shareholdings, could have been effectively used to revive the stressed assets of the reconstituted entity. SEBI via Circular SEBI/LAD NRO/GN/2018/20 [1] has now amended ‘Regulation 3’ of SAST. The amendment provides that any acquisition pursuant to a ‘Resolution Plan’ under section 31 of the IBC will be exempt from the open offer requirements. This gives a lot of flexibility to the resolution applicants/bidders in structuring their resolution plans to take over companies undergoing CIRP. The move is expected to make stressed investments more attractive. Delisting Requirement Prior to the latest amendment an entity which was proposed to be delisted pursuant to a resolution plan approved under IBC, the provisions of SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”) needed to be complied with. SEBI’s delisting regulations require price discovery via reverse book building and impose other conditions such as shareholder approval. Reverse book building is the process by which a company that wants to delist decides on the price that needs to be paid to public shareholders to buy back shares. In this process, the tender price by the shareholder needs to be equal or above the floor price notified by the company. The final buy back price is determined by aggregating all the prices received from the shareholder. The latest amendment via circular number SEBI/LADNRO/GN/2018/23 [2] exempts the NCLT approved resolution plans from such delisting requirements. However, the caveat is that the resolution plan should provide either any specific procedure to complete delisting of shares or provide an exit option to existing public shareholders at a price specified in the resolution plan. According to the notification, the exit price will be liquidation value minus the dues that need to be paid as per the priority laid down under the insolvency code. The liquidation value is to be determined as per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the order of priority enunciated in Section 53 of the IBC Code is to be followed. As equity shareholders are at the bottom of hierarchy in terms of priority, in most cases the liquidation value due to them will nil. But if the existing promoters or any other shareholders are given an opportunity to exit at a price, that is higher than the price derived from the liquidation value due, it will apply to public shareholders as well. The intention to delist an insolvent company, along with the justification for exit price, will need to be disclosed to the stock exchanges within one day of the resolution plan being approved. Exemption from the cumbersome delisting obligations will make stressed assets investments more viable for investors. The aforementioned amendments have dealt with certain pertinent issues that were raised in the SEBI discussion paper. However, SEBI has not clarified its position on the trading of stocks of the companies undergoing CIRP. Further, the status of reclassified shares for the purpose of restructuring has not been discussed. The following are some suggestions for further reconciliation of the stock market regulations for enhancing resolution of stressed assets. Permitting Stock Exchange Trading SEBI in a recent working paper called for public comments on continuation of trading of entities undergoing CIRP .Continuation of trading in of listed corporate debtor would facilitate transparency and better price discovery and would, therefore, be in the interest of investors. Equity

Breaking Down the Process of Securitization & Asset Reconstruction. [Deepanshu Guwalani] The author is a 5th year B.A.LLB (Hons.) student of ILS Law College, Pune. Introduction To facilitate the early resolution of Non-Performing Assets (NPAs) of banks and financial institutions, the government of India enacted Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 for the extensive use of Securitisation Companies (SCs) or Asset Reconstruction Companies (ARCs). Securitization Securitisation is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, education loans etc. which generate receivables and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). The sellers here are called Originators. Securitisation thus follows a two stage process. In the first stage there is sale of single asset or pooling and sale of pool of assets to a ‘bankruptcy remote’ special purpose vehicle (SPV), in return for an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradeable debt securities. The SPV needs to be ‘bankruptcy remote’ which means that the bankruptcy of the Originator will not have any bearing on the financial obligations of the SPV. For example, in 1991, Citibank[1] sold its car loan portfolio comprising of 1,358 cars to a Special Purpose Vehicle (SPV).  Debentures carrying a coupon rate of 15.5 per cent per annum worth around INR 20 crores were issued by the SPV named as Peoples Financial Services Limited.  These debentures were backed by the car loan portfolio of Citibank.  Several institutional investors and mutual funds picked up these debentures. The SPV made monthly payments to debenture holders out of the inflows from the car loan portfolio.  The payments to these debenture holders included both interest and the principal component. At the end of 27 months the debentures extinguished and by then the SPV had paid out the entire principal and interest. These debentures were also tradeable on National Stock Exchange. Process of Securitization Step 1: The originator i.e. a bank, financial institution or an NBFC sells or assigns its assets which are in the form of receivables, housing loans, leases etc., to a SC/ARC. The sale must be a true sale as defined under RBI guidelines.[2] Step 2: The SC/ARC, which needs to be mandatorily registered with RBI and needs to have securitisation / asset reconstruction as its objective in its Memorandum of Association respectively, buys these assets by incorporating a SPV in the form of a private trust of which it is a trustee. Different SPVs are formed for different categories of assets or under different schemes by the same SC for smoothing the process of returns. The SPVs also need to be in compliance with the RBI guidelines issued in this regard.[3] Step 3: The SC/ARC (through the trust) raises funds, by issuing different classes of Security Receipts (SRs), to buy the aforementioned assets, only from Qualified Institutional Buyers (QIBs) i.e. insurance companies, Mutual Funds and Banks, etc. as they have the skill and expertise to assess risk in such a volatile market. The issue is through private placement only to protect naive retail investors and transfer or assignment of such SRs shall be in favour of other QIBs only. QIBs are issued SRs which are securities under Securities Contract (Regulation) Act. The trust shall hold and administer the financial assets for the benefit of the QIBs. Every SC/ARC needs to adhere to RBI guidelines[4] issued under the SARFAESI Act and also to revised guidelines (w.r.t. banks[5] and NBFCs[6]) issued by RBI regarding assets eligible for securitisation, Minimum Holding Period (MHP), Minimum Retention Requirement (MRR) etc.The SRs are usually in the form of Pass Through Certificates (PTCs) which can be compared to securities like bonds and debentures. The only difference being that they are issued against underlying securities. The interest that is paid to the issuer (SC/ARC) on these securities is directly passed to the investor (QIBs) in the form of a fixed income. It is different from Pay Through Securities wherein the SPV invests the receivables somewhere else for the benefit of the QIBs. Step 4: Administrative functions relating to the cash flows of the underlying assets (collection of principal and interest payments on the loans in the underlying pool of assets) are carried out by Service Providers (usually banks or originators) on behalf of the SCs/ARCs. Banks also provide credit enhancements (extra securities or guarantees to protect QIBs) and can also act as underwriters for the issue of SRs by the SCs/ARCs. Step 5: As cash flow arise on the assets, these are used by the SPV (SC/ARC) to repay funds to the QIBs. Asset Reconstruction In 1998, the 2nd Narasimham Committee Report highlighted that the huge backlog of NPAs was continuing to exert pressure on the banking sector and had severely impacted profitability. The report also recommended the creation of an asset recovery fund which would acquire and recover stressed assets and enable banks to focus on their core business. Pursuant to this and the enactment of the SARFAESI Act, many ARCs were formed in India, with ARCIL being the first. These ARCS were set up as private entities, mostly with the support of banks and as on November 2017, there were 24 operating ARCs.[7] According to s. 2(1)(b), asset reconstruction means acquisition by any SC/ARC of any rights or interests of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance. Therefore, asset reconstruction is much broader term than Securitization. Assets are classified into the following:[8] Standard Assets; NPAs; NPAs are further classified into the following: Substandard Asset; Doubtful Asset; Loss Asset; ARCs usually deal with the second type of assets and acquire them through securitisation post which the process of asset reconstruction is carried out. SARFAESI Act provides some measures

The Insolvency and Bankruptcy (Amendment) Ordinance, 2018: A Practitioner’s Perspective. [Mr. Anshul Jain] The author, Partner at Luthra & Luthra Law Offices in the General Corporate and Regulatory Practice group identifies in this update the key changes and briefly comments wherever appropriate from a practitioner’s perspective. On 06 June 2018, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“Ordinance”) was promulgated by the President exercising his powers under Article 123 (1) of the Constitution of India. The need for the Ordinance was felt, as the gazette noted, to “balance the interests of various stakeholders … especially interests of home buyers and micro and small and medium enterprises, promoting resolution over liquidation of corporate debtor by lowering the voting threshold of committee of creditors and streamlining provisions relating to eligibility of resolution applicants”. Home buyers/ Allottees under a real estate project A “financial creditor” means any person to whim a financial debt is owed. Section 5 (8) of the IBC defines “financial debt”. This includes, per sub-clause (f) of section 5 (8), “any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing”.  The Ordinance inserts an explanation to this sub-clause providing that “any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing”. This is intended to cover home buyers/allottees under a “real estate project” [as defined by the Real Estate (Regulations and Development) Act, 2016]. This amendment does not clarify if the customers of a real estate project will be treated as secured or un-secured creditors. Even if they are provided a voice in the Committee of Creditors (“CoC”), it would hardly provide any benefit to them as they would be one of many creditors sitting in the CoC and their impact would be limited only to the extent of their claim out of the total claim of financial creditors against the company. Depending on the value of their claim, they can easily be voted out by other secured financial creditors. Even if they are heard, the secured creditors can easily assert that they have a higher claim and thus should be paid first and whatever is left after them getting repaid can then be distributed to unsecured creditors. Furthermore, this amendment does not deal with the means to fully protect their investment in the real estate project. At best, the amendment’s impact would be to provide them some amount of recovery on their claim against the company. What the customers really want is either the money or the homes/units back. This is presently not addressed. A more effective way to tackle the problem could have been to (i) put the home buyers in the waterfall structure prior to the financial creditors, or (ii) inserting a specific obligation on the incoming resolution applicant to build and deliver the units. One may also witness situations where no resolution plan is approved and the company goes for liquidation, and in which case the secured creditors can easily use Section 52 of IBC and seek a specific enforcement of their security interest. In a real estate company, the main security interest offered to lenders is the underlying land. So if the secured lenders choose to specifically enforce their security and take away the land from the liquidation waterfall, the customers will be left with nothing to realise from the CIRP. These concerns will, hopefully, soon be addressed in the impeding CIRP Regulations. CIRP period Extension: The CIRP period can be extended from initial 180 days by obtaining 66% of voting shares of the CoC (instead of earlier 75% of voting shares) Withdrawal: The Adjudicating Authority may allow the withdrawal of application filed for CIRP by approval of 90% voting share of CoC. It would be interesting to see if the CIRP regulations define the ‘applicant’ as the one who originally filed the CIRP application or anyone who of 90% votes in the CoC. It would also be interesting to see how, in a case where the CIRP application was filed by him, an operational creditor would be bound by the decision of the CoC unless his claim is been settled. Moratorium: The principle of ‘moratorium’ shall not apply to a surety in a contract of guarantee to a corporate debtor. This is a huge relief to the lenders who were earlier barred by latest NCLAT order in the matter of SBI v. V. Ramakrishnan and Vessons Energy Systems [Company Appeal (AT) (Insolvency No. 213 of 2017] to invoke guarantee giving by the promoters to secure the loans. With this amendment, the concept of moratorium shall not apply to contracts of guarantee provided to a corporate debtor. This is now in line with the recommendations of Eradi Committee as well. Compliance during CIRP: The IRP/RP shall now be responsible for complying with the requirements under any law for the time being in force on corporate debtor. This amendment now makes it amply clear that IRP/RP is required to comply with all applicable laws including but not limited to compliances under the Companies Act and the SEBI (Listing Obligations and Disclosure Requirements). A mere plea that the company is under CIRP and thus no compliances are necessary will not be tenable hereon. This is also line with the amendments brought by the SEBI a few days before the Ordinance. Representation in the CoC and related party: A new proviso has been inserted under section 21(2) which exempts the financial creditor, which is regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to insolvency commencement date. This provides relief to banks, ARCs, NBFCs, etc. who were otherwise considered as related parties due to their shareholding in the corporate debtor. Representation in the CoC—other aspects: A new sub-section 6A has also been inserted u/s 21 to

Cross-Border Insolvency under the Insolvency and Bankruptcy Code 2016: Opportunities and Challenges. [Ishita Das] The author is an LL.M. Candidate at the West Bengal National University of Juridical Sciences, Kolkata Introduction Increasing international trade and commerce is one of the results of globalization where countries are dependent on one another for several goods and services. Therefore, in a scenario where a multinational corporation undergoes insolvency, such proceedings will naturally have ramifications in several jurisdictions, involving stakeholders such as foreign creditors. There are three situations broadly associated with cross-border insolvency: (a) where foreign creditors have claims over the assets of the corporate debtor in another jurisdiction and the insolvency proceedings have been initiated there; (b) where the corporate debtor has multiple branches or places of business and as a result, different assets in jurisdictions apart from the place where the insolvency proceedings have been initiated; and (c) where the corporate debtor is subjected to multiple proceedings in concurrent jurisdictions. In this regard, it is crucial to underscore the rights and claims of the foreign creditors vis-à-vis that of the domestic creditors.[i] Recognition and enforcement of insolvency proceedings are extremely crucial. There are three schools of thought in this regard, globally. First, territorialism, wherein the effect of insolvency is limited to the jurisdiction where it has been initiated. Second, universalism, wherein there is recognition of a single insolvency proceeding in all relevant countries. Third, modified universalism, wherein a court takes the ‘main’ lead in the insolvency proceedings and the other ‘non-main’ courts provide cooperation and assistance.[ii] The Model Law drafted by the United Nations Commission on International Trade Law (“UNCITRAL Model Law”) embodies the third school of thought. With regard to India, the Insolvency and Bankruptcy Code, 2016 (“IBC”) is touted to be a major step towards improving the system of financial laws and enhancing the ease of doing business in the country. Further, as evidenced by the recent World Bank rankings, wherein India jumped from 130 in 2016 to within 100 in 2017, it seems to be a move in the right direction.[iii] However, as pointed out by ASSOCHAM-EY in their joint study, the Code does not maintain any distinction between the domestic and foreign creditors, therefore, leading to the assumption that the two categories of creditors would be treated in an equivalent manner.[iv] The two sections that deal with cross-border insolvency under the IBC are inadequate and do not lay down a comprehensive framework to deal with the problems arising from transnational proceedings. According to a recent Economic Times report, cross border insolvency is on the agenda for the Insolvency and Bankruptcy Board of India (“IBBI”) and expansion of the IBC to cover the transnational insolvency proceedings might be a reality very soon.[v] The report of the Bankruptcy Law Reforms Committee (“BLRC”) while dealing with the need for an effective domestic framework highlighted the need for adopting provisions dealing with the issue of cross-border insolvency in their report.[vi] The Joint Parliamentary Committee on the Code then incorporated two enabling sections in the IBC to ensure that the code was not incomplete.[vii] Sections 234 and 235 embody the opportunities for the inclusion of a detailed cross-border insolvency regime under the new Code. However, there are several challenges that need to be addressed urgently. Cross-border Insolvency under the IBC and the Challenges Section 234 of the IBC deals with agreements entered into with foreign countries. It provides that the Indian government may enter into an agreement with a government of another country for enforcing the provisions of the Code. The Indian government may direct that the application of the provisions of the IBC, as regards the assets of the corporate debtor or debtor, located in a country outside India with which reciprocal arrangements have been made, shall be subject to the conditions as may be specified from time to time.[viii] The IBC, therefore, emphasizes on reciprocity as observed in the insolvency regimes of countries such as South Africa. However, there are certain problems associated with this provision. First, as the Indian government needs to enter into bilateral agreements with different countries, it may not be practically feasible to negotiate such agreements which could be long-drawn and time-consuming. Second, there is a possibility that each country may choose to incorporate different provisions in their bilateral instruments, which would only lead to fragmentation of India’s cross-border insolvency regime. Last, this could lead to multiplicity of litigations in cases where a corporate debtor has assets in more than one foreign jurisdiction, wherein the countries would fall back on their separate bilateral agreements to raise claims in connection with the insolvency proceeding. At the same time on contrary, a one-size-fits-all approach, where a model bilateral insolvency agreement (on the lines of the model bilateral investment treaty brought by India) is favoured by India might prove to be counterproductive for a variety of reasons. First, there could be a high possibility that countries will not agree to such a uniform agreement, and second, any such mechanism which paints different canvases with the same brush i.e. tries to harmonize different examples and situations unique to each jurisdiction, tends to be flimsy and hardly effective. The best way out of this mess could be a model insolvency agreement, built on the lines of the Model Law; in which the contentious issues can be deliberated and modified by countries according to their unique requirements – thereby retaining the best of both methods. While the IBC has provisions for imposing moratorium on all suits and proceedings against the corporate debtor in India during the insolvency resolution period, a creditor or contract counterparty can initiate proceedings in another jurisdiction. Further, even though Section 234 of the IBC has been already notified, no such bilateral agreement has been entered into by India yet. Section 235 of the IBC deals with letter of request to a country situated outside India in certain cases. It lays down that if during the pendency of the insolvency resolution process, or liquidation, or bankruptcy proceeding, the resolution professional,

Out of Court Settlement of Claims after Commencement of Insolvency Process under IBC, 2016. [Kunal Dey] The author is an Advocate practicing in the Calcutta High Court.. A plea for settlement of claims after commencement of insolvency process has now become a key strategy for many corporate debtors since they feel that they would be left in a better position to continue their business post settlement rather than after the completion of the insolvency process. The rationale behind the same lies in the fact that the corporate insolvency resolution process is predominated by the creditors and enumerates a limited role on the part of the corporate debtor in the Committee of Creditors. Thus, a settlement being a mutual decision is much more favourable to both the parties in cases where they regard the same to be feasible and permissible. The intention of the Hon`ble Supreme Court to allow for out-of-court settlements to take effect even after the commencement of insolvency process can be traced back to the case of Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP,[1] where the Hon`ble Supreme Court while exercising its special powers under Article 142 of the Constitution of India, allowed the out-of-court settlement of disputes between the parties. This line of decision-making was reiterated by the Hon`ble Supreme Court in the case of M/s Sysco Industries Ltd. v. M/s Ecoplast Ltd.[2] However, the decision of the Hon`ble Supreme Court in the above two cases lies in stark contrast to its decision in the case of Uttara Foods and Feeds Private Limited v. Mona Pharmachem,[3] where the Hon`ble Supreme Court has observed that since Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, does not provide an option to prima facie invoke the inherent powers of the National Company Law Tribunal (NCLT) under Rule 11 of the NCLT Rules, 2016, the relevant Rules must be amended by the Competent Authority in order to incorporate such inherent powers. The Hon`ble Supreme Court had also opined that such a measure was necessary in order to prevent unnecessary appeals from being filed before the Apex Court against any out-of-court settlement or comprises amongst/between the parties. This decision therefore warrants an observation of Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) which states that:- “(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company law Tribunal shall have jurisdiction to entertain or dispose of- any application or proceedings by or against the corporate debtor or corporate person; any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.” The intention of the Legislature to provide a larger scope to the powers of the National Company Law Tribunal is also evident from the perusal of Section 31 of IBC which states that:- “(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. (2) Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order, reject the resolution plan.” The different use of terminology by the Legislature in the two above-mentioned provisions indicate that the National Company Law Tribunal can exercise its powers which has been conferred upon it by the Legislature under the NCLT Rules, 2016 and it must not be restricted to only the powers which has been provided to it by under the Code including through the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 while determining any application pertaining to the out-of-court settlement of insolvency process unlike that of determining the authenticity of a resolution plan. Therefore, even though Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, does not provide an option to prima facie invoke the inherent powers of the NCLT under Rule 11 of the NCLT Rules, 2016, the IBC, itself provides for an alternate route for invoking the same. The issue for allowing out-of-court settlement of insolvency matters once the proceedings have commenced before the ‘Adjudicating Authority’[4] is therefore a persisting one since neither the Code nor its Rules clearly specify the procedure for executing it which manifests the need of an amendment in the Code and its Rules to incorporate the same in accordance with the decision of the Hon`ble Supreme Court in Uttara Foods and Feeds Private Limited v. Mona Pharmachem.[5] [1]http://www.ibbi.gov.in/LokhandwalaKatariaConstruction9279of2017.pdf [2] https://indiankanoon.org/doc/58757679/ [3] https://indiankanoon.org/doc/80652506/ [4] Section 5(1) of the IBC. [5] Supra note 3.