WITHDRAWAL OF CORPORATE INSOLVENCY RESOLUTION PROCESS APPLICATION - LATEST SUPREME COURT JUDGMENT

[Mr. M. GOVINDARAJAN]

In ABHISHEK SINGH VERSUS HUHTAMAKI PPL LTD. & ANR. - 2023 (3) TMI 1285 - SUPREME COURT, the Corporate Debtor Manpasand Beverage Limited, is manufacturing and distribution of fruit beverages.  The respondent No. 1 Huhtamaki PPL Limited (operational creditor) supplied packaging material to the Corporate Debtor.  The Operational Creditor filed an application against the Corporate debtor before the Adjudicating Authority for initiation of corporate insolvency resolution process for a total outstanding amount of Rs.1,31,00,825/-  The application was admitted by the Adjudicating Authority vide CP (IB) No. 503 of 2019 on 01.03.2021. 

On 03.03.2021 i.e., after two days of the admission of the application the Corporate Debtor and Operational Creditor entered into a settlement.  According to the settlement the Corporate Debtor was to pay an amount of Rs.95.72 lakhs to the operational creditor.  This settlement was reached before the constitution of the Committee of Creditors.  The operational creditor received the amount as arrived at under settlement in two installments - one on 04.03.2021 - Rs.50 lakhs and the other on 08.03.2021 Rs.45.72 lakhs. 

In view of the settlement reached the Interim Resolution Professional moved an application under Regulation 30A of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘Regulations’ for short), on 10.03.2021 seeking withdrawal of corporate insolvency resolution process  against the Corporate Debtor.   The application of operational creditor dated 09.03.2021 under Section 12A of the Code was also attached. The said application was registered as IA No. 196 of 2021.

In the meantime an appeal was filed by the suspended Director of the Corporate Debtor before the National Company Law Appellate Tribunal challenging the order of Adjudicating Authority on 01.03.2021 as not maintainable on the ground of pre existing dispute.  Later the said appeal was withdrawn with liberty for revival of the appeal in case of settlement failed.  The National Company Law Appellate Tribunal allowed the withdrawal of the appeal and granted stay for the constitution of Committee of Creditors.    

The Adjudicating Authority, vide their order dated 13.04.2021 rejected the settlement application and fixed hearing for the disposal of the application filed under Regulation 30A.   The Interim Resolution Professional constituted the Committee of Creditors.  The appellant, the suspended director of the Corporate Debtor filed the present appeal before the Supreme Court.  The Operational Creditor did not object the appeal since he has received the entire amount as per settlement.  The Interim Resolution Professional and other three operational creditors who filed claims against the corporate debtor filed intervening applications before the Supreme Court.  The Supreme Court ordered the parties to maintain status quo.

The Supreme Court analyzed the provisions of Rule 11 of National Company Law Tribunal Rules, 2016 (inherent powers), Section 12A (withdrawal of application admitted under section 7, 9, or 10, Regulation 30A.  The Supreme Court observed from the order of Adjudicating Authority that the suspended directors of the Corporate Debtor despite the moratorium having commenced with effect from 01.03.2021 has not only made transactions of deposit but also withdrawal from the account of the Corporate Debtor. They have thus violated the directions contained in the admission order dated 01.03.2021.  However the said allegation has not been proved. Further 35 claims have been received from the creditors.  As such withdrawal of the proceedings would adversely affect their rights.    The proceedings once admitted and IRP having initiated, such proceedings are in rem and all stake holders can participate in the proceedings with their respective claims.

The appellant submitted the following before the Supreme Court-

• The provisions of section 12A of the Code and Regulation 30A clearly permit settlement between the creditor and the debtor and withdrawal of proceedings prior to the constitution of Committee of Creditors.
• Once the settlement was arrived at and acted upon prior to the constitution of Committee of Creditors,  the Adjudicating Authority committed a grave error in not allowing the withdrawal of the proceedings.
• The effect that the Adjudicating Authority was swayed by the fact that there were several other creditors who had raised their claims against the Corporate Debtor  and as such without hearing such creditors, permission of withdrawal would not be proper.
• Once the Committee of Creditors had not been constituted the claims of other creditors would not come into play to defeat the settlement arrived at between the Operational Creditor and the Corporate Debtor.
• The amount transferred from the account of Corporate Debtor to the personal account of the suspended Director was utilized in paying off the amount as per the settlement to the Operational creditor. Further the Adjudicating Authority itself recorded a finding that the above objection taken by the Interim Resolution Professional was not conclusively established.
• Despite the said finding the Adjudicating Authority was apparently influenced by the objection taken by the Interim Resolution Professional.
• The Adjudicating Authority had no jurisdiction to declare or hold that Regulation 30A of Regulations was not binding on it.
• It was beyond the power of the Adjudicating Authority to have discarded a statutory provision.

The respondents strongly objected the contentions of the appellant.  They supported the findings of the Adjudicating Authority.  They averred that the appellant has an alternative remedy available by filing appeal before the National Company Law Appellate Tribunal.  The Interim Resolution Professional has contended that his fees as Interim Resolution Professional have not been paid.  The interveners further submitted that once the Adjudicating Authority has admitted the petition and had issued restraint order, section 14 of the Code had come into play; the transactions made in the accounts of the Corporate Debtor would be unlawful and illegal as such payment of the settlement amount from the funds of the Corporate Debtor  transferred to the account of the suspended Director after 01.03.2021 ought to be rejected and no discretion should be exercised permitting withdrawal of the proceedings.

The Supreme Court observed the following-

• The application for withdrawal had been filed prior to the constitution of the Committee of Creditors.
• The settlement had been arrived at within two days of the admission order.
• The payment as per the settlement had been made within the next five days i.e. in a weeks’ time from the date of admission
• The application for withdrawal was filed on the 10th day.

Once the parties had settled the dispute even before the Committee of Creditors had been constituted, the application ought to have been allowed then and there rather than await the other creditors to jump into the fray and allow the Interim Resolution Professional to proceed further.

In respect of the plea of alternative remedy the Supreme Court held that it is a self-imposed restriction by the superior Courts and is never an absolute bar unless barred by the statute.  Since these matters being commercial in nature keeping these matters pending for long, frustrates the very object of Code.

In respect of multiple claims by other creditors the Supreme Court held that the rights of the creditors for their respective claims do not get whittled down or adversely affected if the settlement with the operational creditor  in the present case is accepted and the proceedings allowed being withdrawn.

In respect of the fees of Interim Resolution Professional the Supreme Court observed that the Interim Resolution Professional recover the same in the same proceedings and the Adjudicating Authority is well within its power to clear the dues of the Interim Resolution Professional.

In regard to the legality of the order passed by the Adjudicating Authority that Regulation 30A was not binding upon it and could not be of any help to the Corporate Debtor or its suspended Directors the Supreme Court relied on various judgments.  The Supreme Court observed that the settlement cannot be stifled before the constitution of the Committee of Creditors in anticipation of claims against the Corporate Debtor from third persons. The withdrawal of an application for corporate insolvency resolution process by the applicant would not prevent any other financial creditor from taking recourse to a proceeding under Code. The urgency to abide by the timelines for completion of the resolution process is not a reason to stifle the settlement.

The Supreme Court further observed that the Adjudicating Authority appears that it was annoyed with the conduct of Corporate Debtor  and its counsel and has recorded its displeasure and annoyance at a couple of places referring to the conduct of the Corporate Debtor and its counsel before the National Company Law Appellate Tribunal, and maybe for this reason, the Adjudicating Authority passed the impugned order ignoring the observation in the National Company Law Appellate Tribunal  order dated 26.03.2021 which had specifically expressed that the Adjudicating Authority would pass orders on the withdrawal application without standing on technicalities.

Regulation 30A provides a complete mechanism for dealing with the applications filed under such provision. The issue raised by the IRP regarding its claim for expenses is well taken care of under the said provision. Various safeguards have been provided in Regulation 30A to be fulfilled by the Operational Creditor which apparently has been fulfilled as there is no complaint in that regard either by the Interim Resolution Professional nor it is apparent from the impugned order of the Adjudicating Authority. Thus, the objection raised by the Interim Resolution Professional does not merit any consideration in this appeal.

The Supreme Court allowed the appeal and set aside the order of Adjudicating Authority.  The Supreme Court further held that that any claim for expenses incurred may be dealt with by the Adjudicating Authority in accordance with law.