NCLAT Upholds Early Settlement Under Rule 11, Rejects Round-Tripping Claims in Corporate Dispute
The NCLAT allowed the appeal and set aside the impugned order, approving the settlement between the parties under Rule 11 of the NCLAT Rules, 2016. The appellant's contention of round-tripping was not substantiated with evidence, and the funds offered by the ex-promoter/director were confirmed not to originate from the corporate debtor or creditor disbursements. The tribunal noted the settlement was reached before the CoC constitution, with the source of funds disclosed and the applicant's interests safeguarded by the Adjudicating Authority. Given the undertaking and affidavit filed, the court found it appropriate to uphold the compromise, emphasizing the importance of early settlement in such disputes.
ISSUES:
Whether a settlement between the Corporate Debtor and the Operational Creditor before constitution of the Committee of Creditors (CoC) can be approved by the Appellate Tribunal invoking Rule 11 of the NCLAT Rules, 2016.Whether the source of settlement funds offered by a suspended director/promoter can be scrutinized for alleged preferential payment or round-tripping, especially when challenged by a Financial Creditor.Whether Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC) and Regulation 30A of the Insolvency and Bankruptcy Board of India (IBBI) Regulations, 2016 apply to settlement or withdrawal applications before constitution of the CoC.Whether the Appellate Tribunal should exercise its inherent powers under Rule 11 of the NCLAT Rules in circumstances where the Corporate Debtor's management is non-cooperative and multiple creditors have filed claims.Whether the rights of other creditors, including Financial Creditors, are prejudiced by allowing settlement and withdrawal of the Corporate Insolvency Resolution Process (CIRP) initiated by an Operational Creditor.Whether breach of the undertaking given by the suspended director/promoter in the settlement would lead to automatic revival of the admission order under Section 9 of the IBC.
RULINGS / HOLDINGS:
The Appellate Tribunal held that a settlement between the Corporate Debtor and the Operational Creditor before constitution of the CoC can be approved by invoking Rule 11 of the NCLAT Rules, 2016, as supported by the Supreme Court's decision in Swiss Ribbons Pvt. Ltd. & Ors. Vs. Union of India & Ors., particularly paragraph 82 which states that "at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly" and the Tribunal may allow or disallow settlement after hearing all concerned parties.The source of the settlement funds offered by the suspended director/promoter was accepted as legitimate and generated from personal sources within India, including sale of shares on which income tax was paid, and not from the funds involved in the US Delaware Bankruptcy Court proceedings; thus, the allegation of preferential payment or round-tripping was not substantiated by the Financial Creditor.Section 12A of the IBC and Regulation 30A of the IBBI Regulations, which require 90% approval of the CoC for withdrawal or settlement after constitution of CoC, do not preclude entertaining settlement applications before CoC constitution; such applications can be entertained under Rule 11 of the NCLAT Rules as held in Abhishek Singh Vs. Huhtamaki PPL Ltd. & Ors. and related Supreme Court precedents.The Appellate Tribunal declined to withhold exercise of discretion under Rule 11 despite the Corporate Debtor's management being non-cooperative and multiple creditors having filed claims, observing that other creditors retain their rights to pursue independent claims and that the Financial Creditor was given liberty to revive its petition if settlement fails.The Tribunal emphasized that allowing settlement and withdrawal of CIRP initiated by an Operational Creditor does not prejudice other creditors' rights, as they have independent remedies under the law; this principle is supported by Supreme Court rulings in Ashok G. Rajani Vs. Beacon Trusteeship Ltd. & Ors. and others.The undertaking given by the suspended director/promoter was accepted on record with the stipulation that any breach would lead to automatic revival of the admission order dated 16.07.2024 without further recourse, ensuring enforcement of the settlement terms.
RATIONALE:
The Court applied the statutory framework of the Insolvency and Bankruptcy Code, 2016, particularly Sections 7, 9, 12A, and 14, along with the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and procedural Rules of the National Company Law Appellate Tribunal (NCLAT) Rules, 2016.Precedents from the Supreme Court, notably Swiss Ribbons Pvt. Ltd. & Ors. Vs. Union of India & Ors., Ashok G. Rajani Vs. Beacon Trusteeship Ltd. & Ors., Abhishek Singh Vs. Huhtamaki PPL Ltd. & Ors., Kamal K. Singh Vs. Dinesh Gupta, and Nippon Life India AIF Management Ltd. & Ors. Vs. Ashapura Options Pvt. Ltd., were extensively relied upon to interpret the scope of settlement and withdrawal applications before CoC constitution and the exercise of inherent powers under Rule 11.The Court recognized the collective nature of CIRP proceedings ("a proceeding in rem") but clarified that settlement before CoC constitution is permissible and does not extinguish other creditors' rights to pursue claims independently.The Court distinguished the procedural requirements of Section 12A and Regulation 30A, which contemplate settlement after CoC constitution, from the jurisdiction to entertain settlement applications before CoC constitution under Rule 11, reflecting an evolving jurisprudence favoring early resolution and compromise.The Court declined to consider extraneous matters such as the US Delaware Bankruptcy Court's injunction and penalty orders against the suspended director/promoter as irrelevant to the Indian insolvency proceedings and settlement under consideration.The Court imposed a safeguard by conditioning the approval of settlement on the undertaking's strict compliance, with automatic revival of the admission order in case of default, thereby balancing interests of all stakeholders and ensuring enforcement.
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