Tribunal sets aside order under Insolvency Code due to settlement before Creditors' Committee formation

The Tribunal set aside the order admitting the application under Section 7 of the Insolvency and Bankruptcy Code, 2016, due to a settlement between the parties before the constitution of the Committee of Creditors and the failure to consider the question of 'default'. Consequently, all related orders were declared illegal, and the Corporate Debtor was released from legal restrictions to function independently. The appeal was allowed with directions, and no costs were ordered.

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Issues:
Challenge to order admitting application under Section 7 of the Insolvency and Bankruptcy Code, 2016; Settlement between parties before constitution of Committee of Creditors; Failure to consider the question of 'default' by the Adjudicating Authority.

Analysis:
The judgment involves a challenge by the appellant, a Shareholder (Corporate Debtor), against the order passed by the Adjudicating Authority under Section 7 of the Insolvency and Bankruptcy Code, 2016, admitting the application filed by the respondent. The Adjudicating Authority had passed an order of moratorium and appointed an interim resolution professional. The appellant contended that the Adjudicating Authority failed to consider the contract between the parties, asserting that there was no 'default' in payment of 'debt' as claimed by the respondent. It was also highlighted that the parties had already settled the claim before the constitution of the Committee of Creditors.

The respondent, represented by learned counsel, acknowledged the settlement between the parties. The Interim Resolution Professional confirmed that the resolution cost and fee had been paid to him in accordance with the 'Terms of Settlement'. It was further revealed that although an advertisement was issued for claims, the 'Committee of Creditors' had not been constituted in the case.

Referring to a judgment by the Hon'ble Supreme Court in the case of 'Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors.', the Tribunal emphasized the importance of consulting the overseeing body before allowing an individual corporate debtor to settle its claim in a collective proceeding. In the absence of a constituted Committee of Creditors, the Tribunal held that a party could approach the NCLT directly for withdrawal or settlement, as per Rule 11 of the NCLT Rules, 2016.

In light of the settlement between the parties before the constitution of the Committee of Creditors, and the failure of the Adjudicating Authority to consider the question of 'default', the Tribunal set aside the impugned order and dismissed the application under Section 7 as withdrawn. Consequently, all orders related to the appointment of the Interim Resolution Professional, declaration of moratorium, freezing of accounts, and actions taken by the Resolution Professional were declared illegal and set aside. The 2nd Respondent Company was released from legal restrictions and permitted to function independently through its Board of Directors. The Interim Resolution Professional, having received the fees and resolution cost, required no separate order.

Ultimately, the appeal was allowed with the aforementioned observations and directions, with no order as to costs in the given circumstances.

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