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 creditor had locus standi as "aggrieved person" under Section 62 IBC despite not being party to settlement. NCLAT erred in invoking inherent powers under Rule 11 instead of following prescribed Section 12A withdrawal procedure. Court found NCLAT inadequately addressed appellant's objections regarding potential asset dissipation and ongoing enforcement proceedings. Settlement approval without proper procedural compliance and stakeholder consideration violated IBC's collective proceedings framework.

---

---

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.

---