2021 (9) TMI 929 - AT - Insolvency and Bankruptcy

Tribunal upholds Adjudicating Authority's decision on ex-parte order, allows pursuit of settlement through legal provisions.

The Tribunal dismissed the appeal, upholding the Adjudicating Authority's decision not to set aside the ex-parte order after the constitution of the ... Power of the Adjudicating Authority under Rule 49(2) of the NCLT Rules to set aside ex-parte hearings - in rem nature of CIRP proceedings once admission under Sections 7-9 is made - effect of constitution of Committee of Creditors on jurisdiction to permit withdrawal or to set aside admission - permissibility of withdrawal/settlement before constitution of CoC under Section 12A of the IBC r/w Regulation 30A - consequence of notice not being duly served on the Corporate DebtorPower of the Adjudicating Authority under Rule 49(2) of the NCLT Rules to set aside ex-parte hearings - in rem nature of CIRP proceedings once admission under Sections 7-9 is made - Whether the Adjudicating Authority can, in exercise of Rule 49(2) of the NCLT Rules, set aside an ex-parte order of admission of CIRP after the Committee of Creditors has been constituted. - HELD THAT: - The Tribunal applied the settled principle that admission under Section 7 or 9 of the IBC converts the proceeding into a proceeding in rem and, accordingly, the body overseeing the resolution process must be consulted before permitting individual settlements. While Rule 49(2) empowers the Tribunal to set aside an ex-parte hearing if notice was not duly served or sufficient cause prevented appearance, that power is subject to the Code's collective-process regime. Before constitution of the CoC the Adjudicating Authority may, in appropriate cases, set aside an ex-parte admission (or permit withdrawal/settlement) after hearing affected parties; however, once the CoC is constituted the Adjudicating Authority loses competence under Rule 49(2) to set aside an admission order and the remedy lies by way of appeal under Section 61 of the IBC or by following the statutory route for withdrawal under Section 12A and Regulation 30A. The Tribunal relied on the exposition in Swiss Ribbons regarding consultation of the CoC and the exercise of inherent powers prior to constitution of the CoC, and concluded that post-constitution the collective interest predominates over unilateral reinstatement of pre-admission status. [Paras 20]Adjudicating Authority may set aside an ex-parte admission under Rule 49(2) only before constitution of the CoC; after constitution of the CoC it cannot exercise that power.Consequence of notice not being duly served on the Corporate Debtor - effect of constitution of Committee of Creditors on jurisdiction to permit withdrawal or to set aside admission - Whether non-service of notice on the Corporate Debtor entitled it to have the ex-parte admission set aside in the present case. - HELD THAT: - The Tribunal accepted that there is evidence indicating the notice was not duly served on the Corporate Debtor. Ordinarily, non-service would permit the Adjudicating Authority to set aside an ex-parte hearing under Rule 49(2). However, the admissibility of that remedy depends on timing: since the CoC was constituted on 20.11.2020 and the Adjudicating Authority passed the impugned order on 23.03.2021 (after constitution of CoC), the statutory collective regime had already crystallised. Consequently, the procedural defect of non-service did not revive the Adjudicating Authority's power under Rule 49(2) at that belated stage; the proper course where settlement is claimed after CoC constitution is withdrawal under Section 12A r/w Regulation 30A or an appeal under Section 61. [Paras 15, 16, 21]Although notice appears not to have been duly served, that ground could have been acted upon only before constitution of the CoC; in the present case the CoC was constituted prior to the Adjudicating Authority's order, so the defect did not warrant setting aside the admission.Permissibility of withdrawal/settlement before constitution of CoC under Section 12A of the IBC r/w Regulation 30A - effect of constitution of Committee of Creditors on jurisdiction to permit withdrawal or to set aside admission - Whether the parties' asserted settlement required any specific direction by the Adjudicating Authority and what remedy was open where settlement was reported after admission. - HELD THAT: - The Tribunal reiterated that prior to constitution of the CoC the Adjudicating Authority may, exercising its powers (including inherent powers under Rule 11), allow withdrawal or settlement applications after hearing concerned parties. Once the CoC is constituted, any attempt to withdraw or settle must conform to the procedure under Section 12A and Regulation 30A and involve the CoC's consultation and approval. In the facts of this appeal the parties may pursue withdrawal under Section 12A/Regulation 30A; the Adjudicating Authority's refusal to set aside the admission after CoC constitution was therefore in accordance with the statutory scheme. [Paras 19, 22]Settlement or withdrawal reported before constitution of the CoC can be considered by the Adjudicating Authority; after constitution the statutory route under Section 12A r/w Regulation 30A must be followed.Finality of admission order post initiation of subsequent CIRP events - Whether interference was warranted with the Adjudicating Authority's order disposing of the application to set aside the ex-parte admission in the present appeal. - HELD THAT: - Having considered timing, the constitution of the CoC prior to the impugned order, and the statutory framework that assigns collective primacy to the CoC once constituted, the Tribunal found no illegality in the Adjudicating Authority's conclusion that it could not belatedly exercise Rule 49(2) to set aside the admission. The Tribunal noted that the Operational Creditor could pursue withdrawal under the prescribed statutory mechanism if settlement existed, and that the Corporate Debtor's remedy post-CoC constitution was by way of appeal under the IBC. [Paras 21, 23]No interference; the appeal is dismissed as the Adjudicating Authority correctly declined to set aside the admission after CoC constitution.Final Conclusion: The appeal is dismissed. The Tribunal held that while an Adjudicating Authority may set aside an ex-parte admission under Rule 49(2) if notice was not duly served, that power exists only prior to constitution of the Committee of Creditors; once the CoC is constituted the statutory collective-process regime applies and withdrawal/settlement must follow Section 12A r/w Regulation 30A or be challenged by appeal under the IBC. Issues Involved:1. Whether the Adjudicating Authority can set aside an ex-parte order initiating Corporate Insolvency Resolution Process (CIRP) under Rule 49(2) of the NCLT Rules, 2016.2. Whether the notice was duly served on the Corporate Debtor.3. Whether the constitution of the Committee of Creditors (CoC) affects the ability to set aside the ex-parte order.4. Whether the settlement between the Corporate Debtor and Operational Creditor impacts the CIRP proceedings.Detailed Analysis:1. Whether the Adjudicating Authority can set aside an ex-parte order initiating CIRP under Rule 49(2) of the NCLT Rules, 2016:The Appellant argued that the Adjudicating Authority erroneously refused to set aside the ex-parte order, despite the notice not being duly served on the Corporate Debtor. The relevant provision, Rule 49(2) of the NCLT Rules, 2016, allows the Tribunal to set aside an ex-parte hearing if the notice was not duly served or if there was sufficient cause for the respondent's non-appearance. The Tribunal emphasized that once the CIRP is initiated, the proceedings become in rem, meaning they affect the rights of all creditors and stakeholders, not just the parties involved. Therefore, after the constitution of the CoC, the Adjudicating Authority cannot set aside the ex-parte order and the Corporate Debtor must file an appeal under Section 61 of the IBC.2. Whether the notice was duly served on the Corporate Debtor:The Appellant contended that they did not receive the notice and only became aware of the ex-parte order during a conversation with a bank employee. The record showed that the notice sent to the Corporate Debtor was returned with the postal remark 'left.' The order sheets from the Adjudicating Authority indicated that the Operational Creditor was directed to inform the Corporate Debtor of the hearing date, but there was no evidence that this was done. The Tribunal found that the notice was not duly served on the Corporate Debtor.3. Whether the constitution of the CoC affects the ability to set aside the ex-parte order:The Tribunal noted that the application to set aside the ex-parte order was filed before the constitution of the CoC. However, the CoC was constituted on 20.11.2020, after the application was filed but before the Adjudicating Authority disposed of the application on 23.03.2021. The Tribunal referred to the Supreme Court's decision in Swiss Ribbons Pvt. Ltd. Vs. Union of India, which held that after the constitution of the CoC, the Adjudicating Authority cannot set aside the ex-parte order. Therefore, the Tribunal found no illegality in the Adjudicating Authority's decision to refuse to set aside the ex-parte order after the CoC was constituted.4. Whether the settlement between the Corporate Debtor and Operational Creditor impacts the CIRP proceedings:The Appellant submitted that a settlement was reached between the Corporate Debtor and the Operational Creditor, and the CoC was informed of this settlement. The CoC directed the IRP to file an application for the withdrawal of the CIRP. The Tribunal noted that if the matter is settled, the Operational Creditor can file an application for withdrawal under Section 12A of the IBC r/w Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The Tribunal did not interfere with the impugned order but indicated that the settlement could be pursued through the appropriate legal provisions.Conclusion:The Tribunal dismissed the appeal, finding no illegality in the Adjudicating Authority's decision to refuse to set aside the ex-parte order after the constitution of the CoC. It was noted that the Corporate Debtor and Operational Creditor could still pursue withdrawal of the CIRP through the appropriate legal mechanisms.