Has Supreme Court Made ‘Settlements’ Easier Or Tougher In The Insolvency Regime?

In ruling on one of its first important insolvency cases, the Supreme Court has left many questions unanswered, say experts

(Source: Supreme Court of India website)
(Source: Supreme Court of India website)

The outcome of the first important case of India’s insolvency regime that was decided by the Supreme Court this week has experts confused. The confusion relates to whether, once an insolvency application has been admitted by the National Company Law Tribunal, the parties have the option to withdraw and settle out-of-court.

The matter started at the Mumbai bench of the NCLT where Nisus Finance filed an insolvency application against Lokhandwala Kataria Constructions. The application was filed on grounds that Lokhandwala Kataria failed to repay its debenture holders as per agreed terms. Based on the evidence, the NCLT noted that Lokhandwala Kataria Constructions had defaulted in repaying its debt to the financial creditor i.e Nisus Finance, and admitted the insolvency application.

But then, the parties changed their minds.

Lokhandwala Kataria Constructions approached the National Company Law Appellate Tribunal against the NCLT order and argued that since a settlement has been reached and part of the amount that was due has been paid, the insolvency process should not proceed. The company argued that the NCLAT can use its inherent powers to allow the withdrawal of the application.

The NCLAT disagreed and held that the Insolvency and Bankruptcy Code permits such a withdrawal only prior to the admission of an application. The bench also concluded that since the inherent powers provided in the NCLAT Rules, 2016 have not been notified, they cannot be used. The inherent powers, under Rule 11 of the NCLAT Rules, allow the appellate tribunal to give directions in the interest of justice and to prevent process abuse.

Lokhandwala Kataria Constructions challenged this order before the apex court and won.

Though the Supreme Court agreed with NCLAT’s conclusion that inherent powers can’t be used, it used its own powers under Article 142 of the Constitution to allow the parties to settle. Article 142 gives powers to the apex court to pass orders necessary for doing complete justice.

But the grounds for this decision aren’t clear and that has experts confused.

Explanation Missing

It’s not clear what the facts and circumstances were that led the apex court to use its powers under Article 142 to accept the consent terms, Divyanshu Pandey, a partner in the banking and finance team of law firm JSA told BloombergQuint.

I don’t expect that the Supreme Court will be using this power very frequently for the insolvency regime. But they have correctly held that NCLAT does not have inherent powers to accept the consent terms once an application has been admitted.
Divyanshu Pandey, Partner, JSA

Fereshte Sethna, a lawyer specialising in insolvency law said the Supreme Court judgment has the potential effect of making the process onerous since parties will now be required to obtain the sanction of the apex court on proposed consent terms if they seek to settle after admission of an insolvency application.
The powers of the NCLAT require urgent determination, since insolvency proceedings can also result in the closure of a company, she added.

Since the Supreme Court did not enter into a detailed examination of the scope of powers of the NCLAT but restricted its observations on a prima facie basis, relying on powers under Article 142 of the Constitution of India to deliver justice, the issue will have to await another litigation to be settled.
Fereshte Sethna, Partner, DMD Advocates

What About Other Creditors?

It’s not clear if any other creditors were involved in the insolvency proceedings against Lokhandwala Kataria Constructions and what their fate is now that one creditor has arrived at a settlement. Neither the tribunal orders nor the Supreme Court judgment say anything regarding this.

The only hint of other creditors is in the NCLT order which states that Lokhandwala Kataria Constructions had argued that the majority of debenture holders have not given their consent to proceed with the insolvency application. But this argument found no further deliberation either.

Arjun Gupta, a litigation lawyer at Nishith Desai Associates said despite the lack of details on other creditors it can be assumed that Supreme Court would have ensured its order is not prejudicial to the interest of any other stakeholder.

The application had been filed by a particular financial creditor whose outstanding dues are being satisfied by the corporate debtor. The withdrawal of this particular application does not preclude any other financial/operational creditor from initiating proceedings against the corporate debtor in the future.
Arjun Gupta, Litigation Lawyer, Nishith Desai Associates 

So, the withdrawal does not per se affect the interest of any other stakeholder, he added.