Allows Withdrawal of Insolvency Proceedings Before Constitution of Committee of Creditors: “NCLT Fell in Error,” Says Supreme Court
In a significant ruling, the Supreme Court of India has upheld the right to withdraw insolvency proceedings before the constitution of the Committee of Creditors (CoC). The Court emphasized that once a settlement has been reached between the parties prior to the formation of the CoC, the withdrawal application should be allowed immediately, rather than prolonging the process. The judgment, delivered by a bench comprising Justice B. R. Gavai and Justice Vikram Nath, rectified the error made by the National Company Law Tribunal (NCLT) in rejecting the withdrawal application and clarified the applicability of Regulation 30A of the Insolvency and Bankruptcy Board of India (IBBI) Regulations.
The Court stated, “Once the parties had settled the dispute even before the CoC had been constituted, the application ought to have been allowed then and there rather than await the other creditors to jump into the fray and allow the IRP to proceed further.”
The Court also addressed the plea of alternative remedy, stating that it is not an absolute bar unless specifically barred by statute. It noted that substantial time had passed since the Supreme Court entertained the Special Leave Petition (SLP) in 2021, and delaying the withdrawal of proceedings would frustrate the very objective of the Insolvency and Bankruptcy Code (IBC).
Regarding the violation of the moratorium, the Court clarified that even if a transaction took place from the account of the Corporate Debtor (CD) after the initiation of Corporate Insolvency Resolution Process (CIRP), it could be considered a wrongful transaction and recovered under Section 66 of the IBC in subsequent proceedings.
Addressing concerns about multiple claims of Operational Creditors (OCs), the Court affirmed that the rights of other creditors would not be affected if the settlement with the OC in question is accepted and the proceedings are allowed to be withdrawn.
The Court also examined the issue of expenses incurred by the Insolvency Resolution Professional (IRP), noting that such amounts can be recovered through the same proceedings under Clause 7 of Regulation 30A of the IBBI Regulations.
Furthermore, the Court held that Regulation 30A of the IBBI Regulations, which provides a mechanism for the disposal of withdrawal applications, is binding on the NCLT. It stated, “The NCLT committed an error in holding that Regulation 30A would have no binding effect. This would amount to defeating the very purpose of substituting Regulation 30A in IBBI Regulations.”
The judgment cited several previous cases, including Swiss Ribbons, Kamal K. Singh, and Ashok G. Rajani, to support its reasoning and emphasized the need for timely resolution of insolvency matters to uphold the objectives of the IBC.
The Supreme Court’s decision allows the withdrawal application to be allowed under Section 12A of the IBC, even before the constitution of the CoC. The Court directed the NCLT to take up the settlement application and decide it in accordance with the observations made in the judgment.
Date of Decision: March 28, 2023
ABHISHEK SINGH VS HUHTAMAKI PPL LTD. & ANR.
