NCLAT allows restoration of IBC case despite absence of revival clause in settlement
Table of Contents
The Insolvency and Bankruptcy Code, 2016 (“the IBC”) is a comprehensive law in India, enacted to provide a time-bound process for resolving insolvency and bankruptcy, while maximizing the value of assets and ensuring timely recovery for creditors. Section 12A, introduced through the IBC (Second Amendment) Act, 2018, allows for the withdrawal of an insolvency application after it has been admitted under sections 7, 9, or 10, provided the applicant obtains the approval of at least 90% of the voting share of the Committee of Creditors (CoC). In a recent ruling, the National Company Law Appellate Tribunal (NCLAT) in Dnyaneshwar Shankar Unde vs. Shukla Dairy Pvt. Ltd. affirmed that the main petition can be NCLAT allows restoration of IBC for an applicant if the corporate debtor breaches the settlement agreement, especially when the initial tribunal had already granted the liberty for revival.
Background of the Case
Dnyaneshwar Shankar Unde filed an application under section 9 of the IBC, for the resolution of Rs. 1.49 crores against Shukla Dairy Pvt. Ltd. The pirates reached a settlement, which resulted in the disposal of the main petition of February 16, 2021. The Tribunal’s order explicitly stated that the application could be revived if the settlement failed. According to the appellant, the respondent committed a breach of the terms of the settlement agreement, the Memorandum of Understanding (MoU), dated November 6, 2020. The appellant claimed that only Rs. 39, 40, 000 had been paid, and Rs. 1, 10, 22, 721 was still outstanding. The main issue of this cas was the absence of a revival clause in the settlement agreement.
Read more : Fourth amendment to IBBI CIRP Regulations, 2016
Legal Questions Before NCLAT
The main questions before the NCLAT are:
- Can an insolvency case be NCLAT allows restoration of IBC if a settlement fails, despite no explicit revival clause?
- Whether NCLT or NCLAT can exercise inherent powers under Rule 11 of NCLAT Rules to revive proceedings?
NCLAT’s Observations
- The NCLAT’s observations that a settlement failure defeats the objective of section 12A highlights that bypassing the CoC approval process undermines the IBC’s goal of collective creditor resolution.
- The tribunal’s focus on substance over form ensures that the underlying purpose of the insolvency process is not compromised by procedural technicalities. Thus, justice prevails over technicalities when the NCLAT’s inherent powers are used to ensure fairness but only within the bounds of the statutory framework.
- The use of inherent powers to ensure fairness and uphold creditor rights is permissible only when it aligns with the IBC’s procedural mandates, not to circumvent them.
Key Findings of the NCLAT
The NCLAT set aside the impinged order of the tribunal dated May 10, 2024, and allowed the NCLAT allows restoration of IBC The NCLAT findings are:
- Restoration permissible even without a revival clause
- NCLAT has inherent jurisdiction to revive CIRP where settlement defaults
- Prevents misuse of IBC withdrawals to escape liability
- Balances both debtor’s and creditor’s interests
Relevant Legal Provisions
- Section 12A of the IBC facilitates the settlements between the corporate debtor and creditors, enabling the resolution process to be withdrawn early, even before the CoC is constituted, thereby prompting business revival, reducing costs, and preserving assets.
- Rule 11 of NCLAT Rules grants the Tribunal inherent powers to make such orders or give directions as may be necessary for meeting the ends of justice or to prevent the abuse of the process of the Tribunal.
Precedents & Judicial References
In Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court upheld the constitutionality of section 12A, affirming that the withdrawal of an insolvency application requires the approval of 90% of the CoC, a threshold justified to ensure genuine settlements and prevent frivolous withdrawals. The court also recognised the NCLT inherent powers under Rule 11 to allow withdrawal before the CoC is constituted, providing the procedural flexibility. Further, in Brilliant Allows (P) Ltd. v. S. Rajagopal, the court held that an application for withdrawal under Regulation 30- A of the IBBI ( Insolvency Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) can be made even after the public invitation for claims has been issued, interpreting the word “shall” as “may” and thus rendering the provision directory rather than mandatory. This decision expanded the scope of section 12A, allowing for withdrawal at later stages of the CIRP if the CoC approves the proposal. The NCLAT in Dinkar T. Venkatasubramanian v. Chemizol Additives, ruled that a settlement proposal, even if it lapsed due to procedural delays, could still be revived if the corporate debtor demonstrated a genuine intent to settle and the creditors’ interests were protected, emphasizing the importance of fairness and the spirit of the IBC over strict procedural adherence.
Implications of the Judgment
- This judgement strengthens the protections of creditor rights by mandating that settlements must adhere to the procedural requirements of section 12A of the IBC.
- It discourages debtors from defaulting post-settlement by reinforcing that the insolvency process is a collective mechanism, and any attempt to resolve insolvency through private settlements is invalid.
- The ruling clarifies the Tribunal’s authority to ensure justice under the IBC by affirming that it is a self-contained statute, and its procedural framework cannot be circumvented by inherent judicial powers.
- It encourages fair settlements with built-in enforcement mechanisms by establishing the settlements must comply with the IBC’s formal processes, thereby promoting transparency and accountability in insolvency.
Practical Takeaways for Insolvency Professionals
- Based on the NCLAT order, IPs dealing with such matters is to ensure that any settlement order explicitly includes a clause allowing for the revival of the original application if the settlement terms are not met.
- Maintain comprehensive documentary evidence of default post-settlement, as the revival clauses hinge on proving the corporate debtor’s failure to meet the agreed terms.
- Understand the scope of Rule 11 powers before NCLAT or NCLT, especially when the original order explicitly granted liberty to revive or when a settlement agreement contains such a provision.
Conclusion
The NCLAT ruling reaffirms the flexibility and justice-oriented nature of IBC proceedings. Even in the absence of a specific revival clause, the IBC framework enables protection against defaulting debtors through mechanisms like the revival of insolvency applications upon breach of consent terms, ensuring creditors retain rights to pursue defaulting parties. This strengthens the integrity and reliability of the insolvency resolution ecosystem by harmonising procedural and substantive elements, providing legal clarity and safeguarding stakeholder interests.
Recent Posts
