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WHETHER A FINANCIAL CREDITOR CAN OPPOSE THE SETTLEMENT PROPOSAL OF CORPORATE DEBTOR?

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WHETHER A FINANCIAL CREDITOR CAN OPPOSE THE SETTLEMENT PROPOSAL OF CORPORATE DEBTOR?
Mr. M. GOVINDARAJAN By: Mr. M. GOVINDARAJAN
September 29, 2022
All Articles by: Mr. M. GOVINDARAJAN       View Profile
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Corporate Insolvency Resolution Process

Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides the procedure for initiation of corporate insolvency resolution process by the financial creditor.  Section 7(1) of the Code provides that a financial creditor may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.  Section 7(5)(a) of the Code provides that where the Adjudicating Authority is satisfied that a default has occurred and the application is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application.

Withdrawal of application

Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides that the Adjudicating Authority may permit withdrawal of the application made under rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission.

Then the question may arise as to whether the application can be withdrawn after the admission of the application for initiation of corporate insolvency resolution process, by the Adjudicating Authority. 

The Code provides for withdrawal of application filed under section 7 after admission of the application by Adjudicating Authority.  Section 12A was inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 with effect from 06.06.2018.  Section 12A provides that the Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of 90% voting share of the committee of creditors, in such manner as may be specified.

In this regard Rule 30A was inserted vide Notification No. IBBI/2018-19/GN/REG031, dated 03.07.2018.  The said Rule was substituted vide Notification No.IBBI/2019 – 20/GN/REG048, dated 25.07.2019.  The newly substituted Rule 30A provides that an application for withdrawal under section 12A may be made to the Adjudicating Authority –

  1. before the constitution of the committee, by the applicant through the interim resolution professional;
  2. after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be.

Where the application is made under clause (b) after the issue of invitation for expression of interest under regulation 36A, the applicant shall state the reasons justifying withdrawal after issue of such invitation.  The Adjudicating Authority may, by order, approve the said application.  In the said order the Adjudicating Authority may indicate that if the settlement is failed then the financial creditor is having liberty to restore the application for corporate insolvency resolution process against the corporate debtor.

Issue

The issue to be discussed in this article is as to whether the financial creditor may oppose the settlement when offered by the corporate debtor with reference to the decided case law.

The object of the Code is for the revival of the business by conducting the corporate insolvency resolution process by insolvency professionals as a going concern.  When the corporate debtor and financial creditor reach an agreement for settlement they may file application before the Adjudicating Authority indicating the details of settlement.  If the settlement is not fulfilled as per the agreement reach by the parties to the settlement, then the financial creditor is having liberty to file an application for the restoration of the application for corporate insolvency resolution process.

Normally the financial creditor unless agreed to settlement offered by the corporate debtor will not oppose the settlement.  In one case, discussed below, the corporate offered to settle the entire amount of the dues the financial creditor opposed the settlement.  However the Adjudicating Authority directed the corporate debtor to pay the dues within 45 days; if the corporate debtor failed to pay the said amount the financial creditor may file an application for restoration.

Case law

In RELIANCE COMMERCIAL FINANCE LIMITED, (FORMERLY KNOWN AS RELIANCE CAPITAL LIMITED) VERSUS DARODE JOG BUILDER PRIVATE LIMITED - 2022 (9) TMI 911 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI, the appellant in the present appeal sanction two loans for the amount of Rs.10.5 crores and Rs.8.5 crores to Darode Jag Builder Private Limited (‘Corporate Debtor’) on 29.07.2013.  The said two term loans were declared as Non Performing Assets on 17.03.2017 and 25.02.2017 respectively. 

The appellant filed an application under Section 7 of the Code before the Adjudicating Authority for initiation of corporate insolvency resolution process against the corporate debtor as Rs.15.79 crores was due and payable by the corporate debtor.  The said application was adjourned on several occasions.  In the hearing held on 06.07.2022 the corporate debtor accepted his liability to pay the dues to the financial creditor and came forward to pay Rs.12.75 crores and the same will be paid within 45 days.    The Adjudicating Authority directed the Counsel of the financial creditor to get the instruction of the financial creditor in respect of the said offer.  Further the Adjudicating Authority held that if the corporate debtor did not make payment as promised then the application would be automatically admitted on the next hearing date.

The next hearing was posted on 11.07.2022.  On that day the corporate debtor offered to pay the entire amount of Rs.15.79 crores within 45 days.  But the financial creditor did not accept the same and was not willing to settle the matter since they have no confidence on the corporate debtor in view of the past conduct of the corporate debtor.  However the Adjudicating Authority collected the bank details of the financial creditor.  Then the Adjudicating Authority directed the corporate debtor to deposit the entire amount in the bank account of the financial creditor.  If the corporate debtor failed to deposit the same then the financial creditor is at liberty to file application for restoration of the corporate insolvency resolution and disposed the application.

The financial creditor, being aggrieved against the order of the Adjudicating Authority filed the present appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short).  The appellant submitted the following before NCLAT-

  • The Adjudicating Authority committed an error in disposing of the company petition while the financial creditor has expressed its unwillingness to settle the matter with the corporate debtor.
  • The Adjudicating Authority could not have been permitted the corporate debtor to deposit the amount in the bank account of the financial creditor.

The corporate debtor submitted that the financial creditor wanted to pay the entire dues by the corporate debtor and therefore it showed its unwillingness.  The corporate debtor was having financial stability and it offered to pay the entire amount to the financial creditor.  The corporate debtor submitted photocopy of the bank drafts taken on 22.08.2022 and 23.08.2022 before NCLAT. 

The NCLAT considered the submissions made by the parties to the appeal.  The NCLAT observed that the financial creditor filed an application under section 7 of the Code against the corporate debtor claiming an amount of Rs.15.79 crores.  When the petition was taken up for hearing on 06.07.2022 the corporate debtor came with an offer of Rs.12.75 crores and not the entire amount of Rs.15.79 crores, to be paid within 45 days.  The Adjudicating Authority directed the Counsel of the financial creditor to obtain instructions from the financial creditor in this regard.  On the hearing held 11.07.2022 the corporate debtor offered to pay the entire amount Rs.15.79 crores instead of Rs.12.75 crores offered in the earlier hearing, within 45 days. 

The Adjudicating Authority passed over the matter and asked the financial creditor to furnish its bank details.  The financial creditor furnished its bank details.  The Adjudicating Authority, then, directed the corporate debtor to deposit the entire amount i.e. Rs.15.79 crores in the bank account given in the order within 45 days.

The NCLAT observed that the contention of the appellant is that the course adopted by the Adjudicating Authority is impermissible.  The Adjudicating Authority did not direct the financial creditor to enter into settlement with the corporate debtor.  It only recorded the statements of the corporate debtor that they are ready to deposit the entire defaulted amount within 45 days.  The Adjudicating Authority accepted the contentions of the corporate debtor and directed to deposit the entire amount within 45 days.  Further the Adjudicating Authority indicated that if the said amount is not paid within 45 days the financial creditor is at its liberty to revive the company petition.

The NCLAT relied on the Supreme Court judgment in VIDARBHA INDUSTRIES POWER LIMITED VERSUS AXIS BANK LIMITED - 2022 (7) TMI 581 - SUPREME COURT.  In this case the Adjudicating Authority admitted an application under section 7 of the Code.  Against this order appeal was made before NCLAT.  The NCLAT refused to grant the stay order as prayed for by the appellant.  The appellant challenged the said order of NCLAT before the Supreme Court.  The Supreme Court considered the ambit and scope of section 7 of the Code.  The Supreme Court observed that in the said case the Adjudicating Authority and NCLAT proceeded on the premises that an application must necessarily be entertained under section 7(5)(a) of the Code, if a debt existed and the corporate debtor was in default of payment of debt.    The Supreme Court did not agree this concept.  The Supreme Court held that even after debt and default is there, the Adjudicating Authority is to apply its mind to relevant factors including the initiation of corporate insolvency resolution process.  The Supreme Court set aside the orders of the Adjudicating Authority and NCLAT and remanded the matter back to the Adjudicating Authority to reconsider the application under section 7 of the Code.

The NCLAT raised a question as to whether the Adjudicating Authority is still to admit the application under section 7 of the Code after the payment of the entire amount of dues by the corporate debtor on the basis of the order of Adjudicating Authority.  The answer for the said question is ‘No’.   No purpose and occasion shall survive to still proceed with the Insolvency Resolution of the Corporate Debtor. The NCLAT did not   find any error in the course adopted by the Adjudicating Authority to ascertain as to whether the Corporate Debtor can comply to deposit the entire defaulted amount in the Bank Account of the Financial Creditor.  

The interest of the Financial Creditor is fully protected since liberty has already been granted to the Financial Creditor to revive the Application under Section 7 of the Code in event, the amount is not deposited within 45 days.

The NCLAT dismissed the appeal filed by the appellant.

Conclusion

Once the settlement is offered the creditors either the financial creditor or the operational creditor may not oppose the same unless the settlement is not agreeable to.  If the corporate debtor is not fulfilling the agreements as per the settlement, then the creditor is having right to restore the application.  Thus there is protection for the creditors in such cases.

 

By: Mr. M. GOVINDARAJAN - September 29, 2022

 

 

 

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