Adjudicating Authority sets aside insolvency order after parties settle claim pre-COC formation

The Adjudicating Authority admitted the application under Section 9 of the Insolvency and Bankruptcy Code, 2016, filed by an Operational Creditor against a company. However, as the parties settled the claim before the formation of the Committee of Creditors and the principal amount had been paid, the order was challenged. The settlement was confirmed, leading to the setting aside of the impugned order. Consequently, all related actions were deemed illegal, and the company was released from insolvency obligations to operate independently through its Board of Directors. The appeal was allowed with no costs awarded.

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Issues:
1. Application under Section 9 of the Insolvency and Bankruptcy Code, 2016 filed by an Operational Creditor against a company.
2. Settlement of the claim between the parties before the constitution of the Committee of Creditors.
3. Legal implications of settling a claim before the formation of the Committee of Creditors.

Analysis:
1. The judgment pertains to an application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 by an Operational Creditor against a company, seeking initiation of the Corporate Insolvency Resolution Process. The Adjudicating Authority admitted the application, leading to an appeal by the company, challenging the order.

2. Following submissions made by the company's counsel, it was revealed that the principal amount had already been paid, and no interest was payable as per the terms of the agreement. Additionally, the parties had settled the claim before the constitution of the Committee of Creditors. The Respondent, the Operational Creditor, acknowledged the payment of the principal amount and interest, confirming the settlement by agreement.

3. Citing the Supreme Court's observations in a related case, the judgment emphasized the importance of consulting the Committee of Creditors before allowing a corporate debtor to settle its claim. Since the settlement occurred prior to the formation of the Committee of Creditors and the Adjudicating Authority failed to note the payment of the principal amount, the impugned order was set aside. Consequently, all orders appointing the Interim Resolution Professional, declaring moratorium, freezing accounts, and related actions were deemed illegal and dismissed.

4. The company was released from the obligations imposed by the law, allowing it to operate independently through its Board of Directors immediately. The Adjudicating Authority was tasked with determining the fee of the Interim Resolution Professional, to be paid by the company for the period of service. The appeal was allowed with the specified observations, and no costs were awarded in the circumstances of the case.

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