Supreme Court Clarifies Limits of NCLT and NCLAT Inherent Powers in Withdrawal of CIRP Proceedings

The Supreme Court holds that ‘inherent powers’ of the National Company Law Tribunal and the National Company Law Appellate Tribunal cannot be invoked to deviate from the exhaustive legal provisions available under the Insolvency and Bankruptcy Code for withdrawal of proceedings. 

The Supreme Court, in a recent landmark decision dated 23 October 2024, set aside an order of the National Company Law Appellate Tribunal (“Appellate Tribunal”) by which the Appellate Tribunal had approved a settlement of INR 158 crore between the ed-tech company Think & Learn Pvt Ltd. (“Byju’s”), and one of its operational creditors i.e. the Board of Control for Cricket in India (“BCCI”).

Key Findings:

1. The Supreme Court identified four scenarios in which withdrawal applications / settlements between the applicant-creditor and the corporate debtor may come up for consideration under the Insolvency and Bankruptcy Code, 2016 (“IBC”):

1. Prior to admission of the Corporate Debtor into CIRP:  The NCLT can permit the withdrawal after hearing only the applicant-creditor and the corporate debtor, since the proceedings at this stage are only between the two parties and have not yet affected other stakeholders.

2. After commencement of CIRP, but before the constitution of the committee of creditors (“CoC”): An application can be made to the NCLT in the prescribed format through the Interim Resolution Professional ("IRP"), and the NCLT may pass an order permitting or rejecting the application. As the said proceedings will be in rem, NCLT must hear the concerned parties and consider all relevant factors before approving or rejecting application.

3. After commencement of CIRP, and after the constitution of the CoC, but before the invitation for expression of interest^[1] has been issued: The approval of 90% of voting share of the CoC has to be obtained, and thereafter an application has to be placed before the NCLT through the IRP/Resolution Professional ("RP").

4. After commencement of CIRP, and after the constitution of the CoC, and after the invitation for expression of interest has been issued: The procedure will broadly be the same as set forth in Para (c) above, with an additional requirement stemming from Regulation 30A(1) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) that the applicant must state reasons for withdrawal at this belated stage.

1. In view of the detailed procedure already laid down in the IBC read with the CIRP Regulation, for withdrawal of CIRP, there is no occasion to invoke ‘inherent powers’ under Rule 11 of NCLT Rules, 2016 or Rule 11 of NCLAT Rules, 2016 for allowing withdrawal of proceedings.

1. Once Byju’s was admitted into CIRP all the creditors of Byju’s became stakeholders, and the objections of the financial creditors ought to have been considered while approving any settlement and withdrawal (although the CoC which comprises all the financial creditors was not constituted when the settlement was entered into and the approval for withdrawal was sought).

Key Takeaways:

This decision of the Supreme Court underscores the importance of strict compliance with the procedure laid down under the IBC and its Regulations for settlement and withdrawal of claims and CIRP. Stakeholders may be well advised to keep in mind that all applications for withdrawal must be made before the NCLT and not the Appellate Tribunal, or even the Supreme Court. All such applications for withdrawal preferred after the CIRP admission order is passed, must necessarily be made through the IRP/RP and cannot be made directly by creditor or the former management of the corporate debtor.

Following the Byju’s decision, the NCLTs will have to hear the concerned objectors / consider the interests of other creditors and objectors, on such proposed settlements and withdrawals irrespective of whether the CoC is constituted or not. This approach is in keeping with the aim and object of the IBC to protect the interests of all stakeholders. However, the likelihood of such an approach delaying the implementation of settlements and withdrawals, while placing the revival of the corporate debtor at further risk till all objections are heard and decided, may be an inevitable outcome which all stakeholders may need to grapple with, in the aftermath of this decision.

This update provides an overview of the Supreme Court’s decision and its implications, a detailed analysis of the judgment can be accessed at the following link.
 

[1] Invitation for expression of interest is issued by the IRP/RP, inviting interested and eligible prospective resolution applicants to submit the resolution plans for the ongoing insolvency of the corporate debtor.