2024 (10) TMI 1185 - SC - IBC

Supreme Court overturns settlement approval during insolvency proceedings, rules financial creditor has standing under Section 62 IBC

SC set aside NCLAT order allowing settlement between operational creditor and corporate debtor during CIRP proceedings. Court held appellant financial ... Withdrawal of corporate insolvency resolution process - Settlement of claims after admission of CIRP - Inherent powers under Rule 11 - Section 12A read with Regulation 30A - Proceedings in rem after admission - Locus standi of creditorsLocus standi of creditors - Proceedings in rem after admission - Appellant's locus to challenge the NCLAT order - HELD THAT: - The Court held that the phrase 'any person aggrieved' in Section 62 includes a creditor such as the appellant and there is no rigid locus requirement to institute an appeal. Once CIRP is initiated on admission, the proceedings become collective (in rem) and all creditors become stakeholders; the appellant had its claim verified by the IRP and had been impleaded and heard before the NCLAT. Consequently, the appellant had standing to file the present appeal before this Court. [Paras 73, 74, 75, 76]Appellant has locus to maintain the appeal.Section 12A read with Regulation 30A - Withdrawal of corporate insolvency resolution process - Inherent powers under Rule 11 - Validity of NCLAT's invocation of Rule 11 to approve settlement when Section 12A and Regulation 30A prescribe the procedure - HELD THAT: - The Court concluded that the statute and regulations now provide an exhaustive framework for withdrawal/settlement post-admission at the different stages (before admission, after admission but before constitution of CoC, after constitution of CoC, and after issuance of invitation for EOIs). Where such an exhaustive procedure exists, inherent powers under Rule 11 cannot be invoked to subvert the prescribed process. In the present case the settlement was approved before (i) any formal application under Regulation 30A was filed through the IRP, (ii) the matter was placed before the NCLT as mandated, and (iii) the procedure under Section 12A/Regulation 30A was followed. The NCLAT offered no justification for departing from the statutory procedure. Therefore recourse to Rule 11 of the NCLAT Rules was not warranted. [Paras 77, 78, 79, 80, 81]NCLAT erred in invoking its inherent powers under Rule 11 to approve the settlement in lieu of the procedure prescribed by Section 12A and Regulation 30A.Settlement of claims after admission of CIRP - Proceedings in rem after admission - Whether NCLAT adequately addressed the appellant's objections regarding source of funds and other factual concerns - HELD THAT: - The Court observed that the NCLAT relied primarily on the undertaking/affidavit of Riju Raveendran and summarily dismissed the appellant's detailed objections (including alleged round tripping, the Delaware Court orders, contempt findings and other investigative proceedings) without adequate inquiry or evidence to rebut those objections. Given that once CIRP is admitted the proceedings are collective, objections by other stakeholders required careful consideration. The Supreme Court declined to adjudicate these objections on merits in this appeal, noting ongoing parallel proceedings and pending investigations, but found that the NCLAT did not adequately deal with the appellant's contentions. [Paras 81, 86]NCLAT did not adequately address the appellant's objections; the approval was unsustainable on the recorded approach.Final Conclusion: The appeal is allowed; the NCLAT judgment dated 2 August 2024 is set aside on the ground that its invocation of Rule 11 to approve the settlement bypassed the statutory procedure under Section 12A and Regulation 30A and failed adequately to address the appellant's objections. The Court did not decide the merits of the factual objections, directed that parties may seek withdrawal or settlement only in compliance with the prescribed framework, and ordered the escrowed amount to be deposited with the CoC. Issues Involved:1. Locus of the appellant before the Court.2. Invocation of inherent powers by NCLAT under Rule 11 of the NCLAT Rules 2016.3. Adequacy of NCLAT's consideration of objections raised by the appellant.Issue-wise Analysis:1. Locus of the Appellant Before the Court:The appellant's locus to challenge the NCLAT's decision was questioned on the grounds that it was not a party to the settlement between the Corporate Debtor and the second respondent. However, the Supreme Court clarified that under Section 62 of the IBC, 'any person aggrieved by an order of the National Company Law Appellate Tribunal' may file an appeal to the Supreme Court. The appellant, being a verified financial creditor and a stakeholder in the CIRP, was deemed to have the locus standi to challenge the NCLAT's order. The Court emphasized that once CIRP is initiated, proceedings become in rem, involving all creditors, not just the applicant creditor and corporate debtor.2. Invocation of Inherent Powers by NCLAT Under Rule 11 of the NCLAT Rules 2016:The NCLAT invoked its inherent powers to allow the withdrawal of CIRP despite an existing legal framework under Section 12A of the IBC and Regulation 30A of the CIRP Regulations. The Supreme Court found this invocation inappropriate, as the detailed procedure for withdrawal was not followed. The Court noted that inherent powers should not be used to subvert explicit legal provisions. The correct procedure would have been to stay the constitution of the CoC and direct the parties to follow the prescribed legal framework for withdrawal. The NCLAT's approach was criticized for bypassing the mandatory process, which requires an application through the IRP and approval by the NCLT.3. Adequacy of NCLAT's Consideration of Objections Raised by the Appellant:The appellant raised concerns about the source of funds for the settlement, suspecting round-tripping and violation of a Delaware Court order. The NCLAT dismissed these objections based on an affidavit by Riju Raveendran, without adequately addressing the appellant's concerns. The Supreme Court highlighted that once CIRP is initiated, the proceedings are collective, and all creditors become stakeholders. The NCLAT's reliance on the affidavit without thorough scrutiny was deemed insufficient, especially given the serious allegations of fund mismanagement and ongoing investigations.Conclusion:The Supreme Court allowed the appeal, setting aside the impugned judgment of the NCLAT. It emphasized adherence to the prescribed legal framework for withdrawal of CIRP and noted that the NCLAT's invocation of inherent powers was unwarranted. The Court directed that the amount of Rs 158 crore, maintained in escrow, be deposited with the CoC, to be held until further directions from the NCLT. The decision underscores the importance of following statutory procedures and considering the interests of all stakeholders in insolvency proceedings.