NCLAT sets aside Section 7 admission order after settlement and creditor payment under IBC 2016

NCLAT allowed the appeal and set aside the admission order under Section 7 of the IBC, 2016 after a settlement was reached between the parties and payment was made to the creditor. The CoC constitution had been stayed for eight days, preventing the CIRP process. The disposed petition was declared revivable for creditors to pursue remedies against the corporate debtor. The tribunal directed that IRP dues could be addressed through proper application to the Adjudicating Authority, and required filing of Form FA with bank guarantee for petition withdrawal.

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Issues Involved:

1. Admission of an application under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Non-constitution of the Committee of Creditors (CoC) due to a stay order.
3. Settlement between the Corporate Debtor and Financial Creditor.
4. Claims and costs of the Interim Resolution Professional (IRP).
5. Rights of other financial creditors and the applicability of legal precedents.

Issue-wise Detailed Analysis:

1. Admission of an application under Section 7 of the Insolvency and Bankruptcy Code, 2016:

The first appeal was filed by the Suspended Director of the Corporate Debtor, challenging the admission of an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, by the Financial Creditor. The Tribunal admitted the petition, declared a moratorium, and appointed an Interim Resolution Professional (IRP). The appellant argued that there were ongoing settlement discussions, and the Financial Creditor did not inform them about the Section 7 application, which led to their absence in the proceedings.

2. Non-constitution of the Committee of Creditors (CoC) due to a stay order:

The Tribunal ordered that the CoC should not be constituted until the next hearing, which was still operative at the time of the judgment. This stay order was crucial because it prevented the formal constitution of the CoC, allowing the Suspended Director to negotiate a settlement with the Financial Creditor.

3. Settlement between the Corporate Debtor and Financial Creditor:

During the pendency of the appeal, a One-Time Settlement (OTS) was proposed by the Suspended Director and accepted by the Financial Creditor for Rs. 17 Crores, which was paid. The Financial Creditor issued a letter confirming the settlement and agreed to withdraw all litigations and release charges on the project. The Tribunal noted that the settlement was akin to the Supreme Court's decision in "Abhishek Singh vs. Huhtamaki PPL Ltd. & Ors.," where a settlement was allowed before the CoC was constituted.

4. Claims and costs of the Interim Resolution Professional (IRP):

The IRP claimed costs of Rs. 30,00,000/-, which the appellant opposed, arguing that the IRP worked for only eight days due to the stay on CoC constitution. The Tribunal acknowledged the IRP's role in collating claims and other compliances but emphasized that the IRP's costs could be addressed by the Adjudicating Authority if an application is filed.

5. Rights of other financial creditors and the applicability of legal precedents:

The second appeal involved other financial creditors who argued that they should not be disadvantaged by the settlement between the Corporate Debtor and one Financial Creditor. They cited the "Swiss Ribbons" case, emphasizing that proceedings under the Code are collective and in rem, requiring consultation with the CoC. However, the Tribunal found the facts similar to the "Abhishek Singh" case, where the Supreme Court allowed withdrawal before CoC constitution. The Tribunal concluded that the settlement did not affect other creditors' rights to pursue their claims independently.

Conclusion:

The Tribunal allowed both appeals, setting aside the orders of admission. It directed the Financial Creditor to file the necessary forms for withdrawal and allowed the IRP to claim costs. The Tribunal emphasized the need for expeditious resolution of the matters, directing parties to appear before the Tribunal for further proceedings. The judgment underscored the importance of settlements in insolvency proceedings, especially before CoC constitution, while safeguarding the rights of other creditors.

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