Inherent Powers Under Rule 11 of NCLT Rules Cannot Be Used To Circumvent Procedure To Withdraw CIRP Under S.12A IBC & R. 30A: Supreme Court

The Supreme Court Bench led by CJI DY Chandrachud comprising Justices JB Pardiwala and Manoj Misra held that '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.IntroductionThe Supreme Court in the present case first discussed the evolution of law with respect to CIRP withdrawal application under the IBC. The Insolvency and Bankruptcy Code (IBC), 2016 did not contain provisions pertaining to withdrawal of application after the admission of an insolvency petition. Absence of relevant provisions created problems for the creditors and the corporate debtor who after the admission of their insolvency petitions arrived at a settlement and wanted to withdraw their petitions. Despite this, the Supreme Court permitted the withdrawal by exercising its extraordinary power under Article 142 of the Indian Constitution even after the admission of the insolvency petition.The Supreme Court firstly in Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers (2018) invoked its power under Article 142 to record the settlement of the parties and allow the compromise between the creditor and the corporate debtor after the admission of the concerned application. While doing so, this Court also prima facie agreed with the proposition that in view of Rule 8 of the CIRP Rules, the NCLAT cannot use its inherent powers under Rule 11 of the NCALT Rules 2016 to allow a settlement or withdrawal after the admission of the application.This judgment of the supreme court highlighted lacunae in the current framework of the IBC which required to be filled by suitable legislative actions. This concern was raised by the supreme court in Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem (2018) wherein it was emphasised that instead of coming to this court under article 142, required amendments should made in the statutory framework to address issue of settlement after the admission of insolvency petition.The court in the above case held that “we are of the view that instead of all such orders coming to the Supreme Court as only the Supreme Court may utilise its powers under Article 142 of the Constitution of India, the relevant Rules be amended by the competent authority so as to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached.”Subsequent DevelopmentAfter the concerns were raised by the Supreme Court, Ministry of Corporate Affairs constituted an Insolvency Law Committee (ILC). This committee was saddled with a responsibility to address the highlighted lacunae in the IBC. The committee submitted its report on March 26, 2018 in which it recommended the incorporation of withdrawal of insolvency petition after its admission by the NCLT. The committed further recommended that the withdrawal is permissible only if the same is approved with 90% of votes by Committee of Creditors (CoC). The committee observed that “it was agreed that once the CIRP is initiated, it is no longer a proceeding only between the applicant creditor and the corporate debtor but is envisaged to be a proceeding involving all creditors of the debtor. The intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors.”The committee further observed that “the Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post admission if the CoC approves of such action by a voting share of ninety per cent. It was specifically discussed that rule 11 of the National Company Law Tribunal Rules, 2016 may not be adopted for this aspect of CIRP at this stage (as observed by the Hon'ble Supreme Court in the case of Uttara Foods and Feeds Private Limited v. Mona Pharmacem) and even otherwise, as the issue can be specifically addressed by amending rule 8 of the CIRP Rules.”Introduction of Section 12A and Regulation 30ASubsequently, section 12A was incorporated in the IBC through Amendment Act of 2018. This section permitted the withdrawal of insolvency petition under sections Sections 7, 9, or 10 provided it is approved by the CoC with 90% voting shares. The committee reasoned that the higher threshold for the withdrawal is due to the involvement of all other stakeholders after the admission of the petition.Regulation 30A was also introduced in the CIRP ...

Inherent Powers Under Rule 11 of NCLT Rules Cannot Be Used To Circumvent Procedure To Withdraw CIRP Under S.12A IBC & R. 30A: Supreme Court

Mohd Malik Chauhan

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