Settlement Between Operational Creditor and Suspended Director Can't Override Lenders' Claims: NCLT Ahmedabad

The National Company Law Tribunal (NCLT) at Ahmedabad has recently held that a settlement between an operational creditor and a suspended director cannot be used to withdraw a company from insolvency once the Committee of Creditors is in place.

Dismissing a withdrawal plea in the insolvency of Vimla Fuels & Metals Limited, the tribunal said such a private arrangement cannot override the claims of financial creditors exceeding Rs 61 crore.

A bench of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma said that after the CoC is formed, withdrawal is governed by Regulation 30A(1)(b) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

This requires the approval of at least 90 percent of the committee. That approval was absent. The tribunal noted that the “admitted claims of the Financial Creditors aggregate to Rs. 61,41,67,420/-, dwarfing the Operational Creditor's settlement amount of Rs. 1,18,46,826/.”

It further observed that it is “further significant to note that the total admitted claims of four Financial Creditors far exceed the settlement amount, and the rights of such creditors cannot be defeated by a bilateral arrangement between the Operational Creditor and the suspended director.”

The company was admitted into insolvency on October 6, 2025, on a petition by an operational creditor. On October 28, the suspended management entered into a settlement for Rs 1.18 crore with that creditor.

Relying on this, the Interim Resolution Professional moved an application to withdraw the case, citing the provision that allows withdrawal before the CoC is constituted. To comply with timelines, however, the IRP constituted the CoC the next day.

The committee comprised State Bank of India, Bank of Maharashtra, Indian Overseas Bank and Mukund Security. All four voted against the withdrawal. The suspended director argued that since the withdrawal form was filed before the CoC was constituted, the exit should have been automatic. The lenders opposed this, saying insolvency proceedings affect all creditors and cannot be undone by a private deal.

Rejecting the plea, the tribunal relied on a ruling of the Supreme Court of India in GLAS Trust Company LLC v. BYJU Raveendran, and said the filing of the withdrawal form does not create an automatic right to exit insolvency. It also described the settlement as “illusory”, noting that it was conditional on withdrawal and that no payment had actually been made.

With the CoC already in place and a unanimous rejection on record, the tribunal dismissed the application and directed the insolvency process to continue.

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