2024 (10) TMI 1185 - SC - IBC

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

GLAS Trust Company LLC Versus BYJU Raveendran & Ors.

SC set aside NCLAT order allowing settlement between operational creditor and corporate debtor during CIRP proceedings. Court held appellant financial ... Locus of the appellant before the Court - inherent powers under Rule 11 of the NCLAT Rules 2016 - adequate addressing of objections raised by the appellant or not - discretionary power under Rule 11 of the NCLAT Rules 2016. Whether the appellant, who is not a party to the settlement between the second respondent and the Corporate Debtor, has locus in the proceedings before this Court? - HELD THAT:- Section 62 of the IBC stipulates that “any person” who is aggrieved by the order of the NCLAT may file an appeal before the Supreme Court within the prescribed limitation period. Similar language is used in Section 61 of the IBC, which provides for appeals to NCLAT from orders of the NCLT.50 The use of the phrase “any person aggrieved” indicates that there is no rigid locus requirement to institute an appeal challenging an order of the NCLT, before the NCLAT or an order of the NCLAT, before this Court. Any person who is aggrieved by the order may institute an appeal, and nothing in the provision restricts the phrase to only the applicant creditor and the corporate debtor - The appellant who claims to be a Financial Creditor, has expressed reasonable apprehensions about the prejudice it would face if there were roundtripping of the funds, and the prioritization of the debts of the second respondent, an operational creditor. The appellant had moved an application before the NCLAT seeking impleadment as a respondent and the objections of the appellant were specifically recorded and addressed in the Impugned Judgement. Therefore, there is no doubt that the appellant falls within the ambit of the phrase “any person aggrieved” and has the locus standi to institute the present Civil Appeal before this Court. Whether the NCLAT erred in invoking its inherent powers under Rule 11 of the NCLAT Rules 2016 in the presence of a prescribed procedure for withdrawal of CIRP and settlement of claims between parties? - HELD THAT:- The ‘inherent powers’ cannot be used to subvert legal provisions, which exhaustively provide for a procedure. To permit the NCLAT to circumvent this detailed procedure by invoking its inherent powers under Rule 11 would run contrary to the carefully crafted procedure for withdrawal. In the Impugned Judgement, the NCLAT does not provide any reasons for deviating from this procedure or the urgency to approve the settlement without following the procedure. The correct course of action by the NCLAT would have been to stay the constitution of the CoC and direct the parties to follow the course of action in Section 12A read with Regulation 30A of the CIRP Regulations 2016. This legal framework for such withdrawal was formulated after giving due consideration to the appropriate procedure for withdrawal and balancing it with the objectives of the IBC. Even if the procedural infirmity is kept aside, once the CIRP was admitted, the proceedings became collective, and all creditors of the Corporate Debtor became stakeholders. Without prejudice to the above, whether the NCLAT adequately addressed the objections raised by the appellant, while exercising its discretionary power under Rule 11 of the NCLAT Rules 2016? - HELD THAT:- The ongoing investigation by the Enforcement Directorate against the first respondent and the Corporate Debtor; and other attempts by the Corporate Debtor to dissipate assets, were not adequately addressed by the NCLAT. The impugned judgment of the NCLAT dated 2 August 2024 is set aside - appeal allowed. 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.