As a part of the Insolvency law practice of our firm, we are pleased to email you our research update which deal with the following:
Introduction
In the recent order given (on 24th July, 2017) in the case of Lokhandwala Kataria Construction Limited v Nisus Finance And Investment Managers, LLP, the Honourable Supreme Court of India allowed the parties to enter into a settlement even after the insolvency application was admitted in the National Company Law Tribunal (“NCLT”) under the Insolvency and Bankruptcy Code, 2016 (“Code”).
The Court did so by using its powers conferred upon it under Article 142 of the Constitution of India.
Facts of the Case and Issue
An insolvency application under section 7 of the Code was filed before the NCLT Mumbai Bench by Nisus Finance and Investment Managers, LLP (being the creditor) against Lokhandwala Kataria Construction Limited (being the corporate debtor).
After the application was admitted by the NCLT, the parties settled the matter between themselves and approached the National Company Law Appellate Tribunal (“NCLAT”) to set aside the decision of the NCLT in light of the dispute being settled.
The NCLAT did not allow the withdrawal of the application by holding that an application could be withdrawn only before it was admitted, but not after its admission, and matter cannot be closed till claim of all the creditors are satisfied by the corporate debtor. Further, as Rule 11 was not adopted for the purpose of the Code and only Rules 20 to 26 were adopted, in the absence of any specific inherent power bestowed upon the NCLAT, it held that it did not have inherent power to allow withdrawal of the application.
The parties approached the Supreme Court.
Issue before the Honorable Supreme Court
Whether NCLAT could exercise its inherent power to allow a compromise between the parties where insolvency application was already admitted?
Applicable legal provisions
Article 142 of the Indian Constitution – Enforcement of decrees and orders of Supreme Court
As per the said Article, the Supreme Court has the power to pass such decree or order as is necessary for doing complete justice in any cause or matter pending before it, and any such decree / order is enforceable throughout the territory of India.
Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016
As per the said Rule, NCLT may permit withdrawal of the insolvency application made by an operational or a financial creditor on a request made by the applicant before its admission.
Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 – Inherent powers of the Appellate Tribunal
As per the said Rule, NCLAT has inherent powers to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of the process of the NCLAT.
Court’s Order
The Honorable Court held that,- the NCLAT did not have any such power to allow a compromise between the parties where insolvency application was already admitted.
The Court however exercised its power under Article 142 of the Constitution of India and allowed the settlement and disposed of the appeal based on the consent terms entered into by the party.
Our Analysis & Comments (in brief)
As the NCLAT does not have power to allow settlement in cases where parties desire settlement after admission of insolvency application, the parties will have to approach the Honorable Supreme Court for the same.
While the constitutional powers of the Supreme Court under Article 142, cannot, in anyway, be controlled by any statutory provisions and may be put on a wider footing then the ordinarily inherent powers of the court to prevent injustice; but at the same time, these powers, are to be used sparingly and not meant to be exercised when their exercise may come directly in conflict with what has been expressly provided for in a statute dealing expressly with the subject. Further, the powers also cannot be used to grant relief on a question which does not fall within its jurisdiction.
In this background, the ruling has drawn a mixed response. On one hand the insolvency of the corporate debtor is important not only for the applicant creditor but also for the other creditors because once the application is admitted, it ceases to remain a private dispute and becomes akin to a representative suit wherein, the interest of all the creditors and the company has to be taken into consideration. On the other hand, one may also argue that,- as the insolvency proceedings were commenced at the behest of the applicant creditor specifically (and not other creditors / any other person), if there was a settlement between the applicant creditor and the debtor, then, the insolvency application would not have been filed the insolvency application in the first instance.
The judgment is positive in a way that insolvency of a company is the last resort which the Courts would order for recovery of debts; hence, by encouraging a settlement, substantial time and expense is saved, which would have otherwise been spent in insolvency proceedings. This is particularly important where,- at times the debt amount (though rightfully claimed to be recovered) may not be substantial, but because of this, the company has to compulsorily face insolvency proceedings.
As the Court exercised its discretionary powers under Article 142, we believe that this order cannot be taken as a binding precedent and every similar case will have to be evaluated by the Honorable Supreme Court on merits. Interestingly, however, as the order of Supreme Court does not disclose the reason for exercising such powers specifically on the merits of the case, it remains to be seen whether the authorities deem this order as a settled position that,- if the parties desire a compromise even after admission of the insolvency application, they can do so.