Out of Court Settlement of Claims after Commencement of Insolvency Process under IBC, 2016

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-

  1. any application or proceedings by or against the corporate debtor or corporate person;
  2. 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
  3. 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.

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