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Bhaskar Biswas v. Devi Trading & Holding Pvt. Ltd. And Another
Factual and Procedural Background
The Appellant, on behalf of the Corporate Debtor, settled the matter with the 1st Respondent, Devi Trading & Holding Pvt. Ltd., and the Financial Creditor before the constitution of the Committee of Creditors. Subsequently, the Appellant filed an application under Rule 11 of the NCLT Rules, 2016, seeking withdrawal of the insolvency petition. The Adjudicating Authority, however, refused to invoke its inherent power under Rule 11 to allow withdrawal, taking into account the opposition from several allottees (home buyers) who claimed their dues had been settled by the Corporate Debtor. The Adjudicating Authority referred to the Supreme Court decision in Swiss Ribbons Pvt. Ltd. Vs. Union of India while passing the impugned order dated 5th July, 2019. The Appellant challenged this refusal before the Appellate Tribunal.
Legal Issues Presented
- Whether the Adjudicating Authority can exercise its inherent power under Rule 11 of the NCLT Rules, 2016, to allow withdrawal of an insolvency application filed under Sections 7 or 9 of the Insolvency and Bankruptcy Code (I&B Code) before the constitution of the Committee of Creditors.
- Whether the opposition by allottees (home buyers) can justify refusal to allow settlement and withdrawal of the insolvency application.
- What procedural safeguards and conditions should be observed when considering an application for withdrawal or settlement prior to constitution of the Committee of Creditors.
Arguments of the Parties
Appellant's Arguments
- The Appellant submitted that the matter was settled on behalf of the Corporate Debtor with the Financial Creditor and 1st Respondent prior to the constitution of the Committee of Creditors.
- Relying on the Supreme Court's decision in Swiss Ribbons Pvt. Ltd. Vs. Union of India, the Appellant contended that the Adjudicating Authority has inherent power under Rule 11 of the NCLT Rules, 2016, to allow withdrawal or settlement before the Committee of Creditors is constituted.
Respondents' Arguments
- A number of allottees (home buyers) appeared before the Adjudicating Authority opposing the withdrawal application on the ground that their claims had been settled by the Corporate Debtor, implying that withdrawal should not be allowed.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Swiss Ribbons Pvt. Ltd. Vs. Union of India | Clarification that before constitution of Committee of Creditors, the Adjudicating Authority may exercise inherent powers under Rule 11 of the NCLT Rules, 2016, to allow or disallow withdrawal or settlement applications. | The Court relied on this precedent to acknowledge the Adjudicating Authority’s jurisdiction to entertain withdrawal applications before the Committee of Creditors is formed but recognized that such power should be exercised cautiously considering all affected parties. |
Court's Reasoning and Analysis
The Court analyzed the scope of Rule 11 of the NCLT Rules, 2016, in light of the Supreme Court’s observations in Swiss Ribbons Pvt. Ltd. Vs. Union of India. It recognized that while the Adjudicating Authority has inherent power to allow withdrawal or settlement applications before the Committee of Creditors is constituted, this power is not absolute. The insolvency proceeding is a collective proceeding in rem, requiring consultation with the Committee of Creditors once formed. The Court noted that allowing withdrawal under Rule 11 could trigger multiple cases if not exercised prudently, especially where multiple creditors, including financial creditors and allottees, are involved. Considering the opposition by allottees and the risk of multiple triggered proceedings, the Court found no reason to interfere with the Adjudicating Authority’s refusal to allow withdrawal. However, it permitted the Appellant or shareholders to move an application under Section 12A of the I&B Code for settling claims of all creditors, including allottees, with the Committee of Creditors having the authority to approve such settlement if it meets viability and feasibility criteria.
The Court further emphasized that the Corporate Insolvency Resolution Process (CIRP) continues and the Resolution Professional and Committee of Creditors must proceed according to law, ensuring the Corporate Debtor remains a going concern. The Appellant and promoters are directed to cooperate fully, including handing over records and assets if not already done.
Holding and Implications
The Court upheld the impugned order dated 5th July, 2019 refusing to allow withdrawal of the insolvency application under Rule 11 of the NCLT Rules, 2016, in the present circumstances.
It allowed the Appellant or shareholders to file an application under Section 12A to propose a settlement with all creditors, including allottees, for consideration and approval by the Committee of Creditors holding at least 90% of voting shares. This approach preserves the collective nature of insolvency proceedings and safeguards the interests of all creditors.
The decision directly affects the parties by maintaining the continuation of the insolvency process while providing a procedural mechanism for settlement before the Committee of Creditors. No new precedent beyond the application of existing law was established.
29.08.2019 - Learned Counsel for the Appellant submits that the Appellant settled the matter on behalf of the Corporate Debtor with 1st Respondent Devi Trading & Holding Pvt. Ltd. and Financial Creditor prior to the constitution of the Committee of Creditors and filed application under Rule 11 of the NCLT Rules, 2016.
2. The Adjudicating Authority taking into consideration the fact that at the time of hearing of the application a number of allottees (home buyers of the Company Appeal (AT) (Insolvency)No. 823 of 2019 2 Corporate Debtor) appeared before the Adjudicating Authority and opposed the prayer for withdrawal on the ground that their claim is settled by the Corporate Debtor, the Infrastructure Company / builder. In view of the same, the Adjudicating Authority referred to the decision of Honble Supreme Court in Swiss Ribbons Pvt. Ltd. Vs. Union of India refused to invoke the inherent power under Rule 11 of the NCLT Rules, 2016 by impugned order dated 5th July, 2019.
3. The Honble Supreme Court in Swiss Ribbons Pvt. Ltd. Vs. Union of India held that the Directors or the shareholders of the Corporate Debtor may settle before the constitution of the Committee of Creditors and it was observed that in such case, it was open to the Adjudicating Authority to exercise its inherent jurisdiction under Rule 11 of the NCLT Rules, 2016. The relevant observation of Honble Supreme Court is quoted below:-
79. It is clear that once the Code gets triggered by admission of a creditors petition under Sections 7 to 9, the proceeding that is before the Adjudicating Authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee Company Appeal (AT) (Insolvency)No. 823 of 2019 3 the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim. A question arises as to what is to happen before a committee of creditors is constituted (as per the timelines that are specified, a committee of creditors can be appointed at any time within
30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the concerned Company Appeal (AT) (Insolvency)No. 823 of 2019 4 parties and considering all relevant factors on the facts of each case.
4. Normally, before the constitution of Committee of Creditors if on behalf of the Corporate Debtor a shareholder or Director settles the claim of the Applicant who files an application u/s 7 or 9 of the I&B Code, the Adjudicating Authority in normal course can exercise its inherent power under Rule 11 of the NCLT Rules, 2016. However, it is seen that when allowing an application under Rule
11 of the NCLT Rules, 2016 may result into triggering a large number of cases as a number of creditors, including the Financial Creditors (allottees) are also in the queue to trigger the process against the Corporate Debtor, it is open to the Adjudicating Authority to refuse to exercise its inherent power under Rule
11 of the NCLT Rules, 2016 otherwise it may result into triggering number of cases.
5. For the reasons aforesaid, we are not inclined to interfere with the impugned order dated 5th July, 2019, however we allow the Appellant or shareholders on behalf of the Corporate Debtor to move an application u/s 12A for settling the claim of all the Creditors particularly the allottees stating how they will take care of the allottees and other lenders and in such cases the Committee of Creditors uninfluenced by the order passed by the Adjudicating Authority and this Appellate Tribunal may consider the same and if it is feasible and viable may approve 90% of its voting shares u/s 12A to enable the Applicant Company Appeal (AT) (Insolvency)No. 823 of 2019 5 - Devi Trading & Holding Pvt. Ltd. to withdraw the application u/s 7 of the I&B Code through the Resolution Professional.
6. We make it clear that we have not stayed the Corporate Insolvency Resolution Process and the Resolution Professional as also the Committee of Creditors are required to proceed in accordance with law. The Resolution Professional will ensure that the Company (Corporate Debtor) remains a going concern. In case the records and projects / assets have not been handed over to the IRP / RP, the Appellant and other Promoters will hand over the same immediately and co-operate with the Resolution Professional. The appeal stands disposed of. No costs. [Justice S. J. Mukhopadhaya] Chairperson [Justice A. I. S. Cheema] Member (Judicial) [Kanthi Narahari] Member (Technical) ss/gc
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