2024 (8) TMI 1600 - AT - IBC

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 ... Round tripping - Invocation of Rule 11 of NCLAT Rules, 2016 for the purpose of accepting the settlement - suit was filed for grant of prohibitory/mandatory injunction - HELD THAT:- The Applicant raised a hue and cry that the amount which is being paid is from the money borrowed by the borrower in US, therefore, it is a case of round tripping. It was also the case of the Applicant that since the Applicant is the Financial Creditor, therefore, the amount being paid to the OC would make a dent in their ultimate claim as they have the preferential right. It is also the case of the Applicant that there is a prohibitory injunction against Riju Raveendran by the Delaware Court not to use in any manner USD 533,000,100.00. Because of this, the case was adjourned from 31.07.2024 to 01.08.2024 because Counsel for the Appellant had submitted that allegation made in the application of round tripping is totally incorrect as the money being paid by Riju Raveendran is not from the money of the creditors nor it belongs to CD but it is being paid by him from his own funds as ex-promoter, director and being the largest shareholders. Therefore, the case was adjourned to 01.08.2023 on the asking of the Appellant to show the source of money. In the undertaking, he has categorically stated that he is not violating the order dated 18.03.2024 passed by the Delaware Court and confirmed that he has not directly, indirectly or in any form or manner received any sum of money from disbursements made under the Credit agreement. Although, the Applicant is not satisfied about the undertaking but the Applicant has also not brought on record any evidence to the contrary that the money which is being offered has actually been brought by Riju Raveendran from the money disbursed to the borrower in terms of credit agreement or has been taken out of the coffers of the CD. In so far as the present proceedings are concerned, the settlement has been arrived at between the parties before the CoC could have been constituted, source of money being offered by one of the ex-promoters / directors (shareholder of the CD) is disclosed and the interest of the Applicant has already been watched and safeguarded by the Adjudicating Authority vide order dated 16.07.2024 - As it has been generally said that the first hour of justice is the hour of compromise and when the offer has been made by one of the ex-promoter, suspended director, at the behest of the CD to bury the hatchet forever with the OC, the Court can invoke Rule 11 for the purpose of exploring the settlement between the parties. In view of the undertaking given and affidavit filed, the settlement between the parties is hereby approved and as a result thereof, the present appeal succeeds and the impugned order is set aside - Appeal allowed. 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.