Supreme Court clarifies the boundaries of “Inherent Powers” of NCLAT

CIRP Withdrawal in GLAS Trust Company LLC v BYJU Raveendran & Ors

– Barsha Dikshit, Partner | resolution@vinodkothari.com

It is a well-established principle that the exercise of inherent powers is permissible only in the absence of an express provision within the statutory framework. Also, that the Insolvency and Bankruptcy Code, 2016 (IBC) is not to be used as a mechanism for mere debt recovery.

In a recent ruling in GLAS Trust Company LLC vs. BYJU Raveendran & Ors[1]., the Hon’ble Supreme Court set aside the order of the National Company Law Appellate Tribunal (NCLAT) [2]that permitted withdrawal of CIRP post admission by NCLT, by exercising inherent powers under Rule 11 of the NCLAT Rules, 2016, despite existing statutory procedures for CIRP withdrawal. The matter arose from a dispute concerning the validity of a settlement, wherein a financial creditor objected to the source of settlement funds, asserting that it constituted preferential payment or amounted to round-tripping, thereby warranting judicial scrutiny under the insolvency framework.

The article analyses the impact of the ruling on the jurisdiction of NCLAT to deal with various matters related to the corporate debtor under insolvency or liquidation.

Facts of the case

The appellant, an administrative agent of the  secured lenders, had filed an application under Section 7 of IBC to initiate CIRP against Think and Learn Pvt. Ltd (CD), a 100% subsidiary of Byju’s Alpha Inc, a USA based entity, due to default under Credit Agreement by Byju’s Alpha, wherein CD had acted as a guarantor. However, a CIRP against the CD was commenced pursuant to order passed by NCLT [3]based on an application by an Operational Creditor, viz. BCCI under Section 9 of the IBC. The appellant was then allowed to submit a claim in the ongoing CIRP and also was given a liberty to seek restoration of its petition at a later date, pending developments in appellate proceedings.

However, appeals challenging this order of the NCLT were preferred by both the appellant and the CD before the NCLAT, and NCLAT, via an ad interim order, stayed the constitution of the Committee of Creditors (“CoC”).

During the pendency of these proceedings, one of the directors of the CD proposed a settlement of dues with BCCI. The appellant expressed concerns regarding the source of funds for this settlement, suspecting that the funds originated from Byju’s Alpha Inc., which, they argued, could amount to round-tripping and raise issues regarding financial transparency. Furthermore, the appellant contended that payment by the CD’s director would result in preferential treatment of the Operational Creditor (OC) to the detriment of other creditors. However, the NCLAT, having regard to prior orders permitting the withdrawal of the CIRP and the liberty granted to the appellant by the NCLT,, exercised its inherent powers under Rule 11 of the NCLAT Rules[4] to permit the withdrawal of CIRP. Consequently, the appellant has filed an appeal before the Hon’ble Supreme Court, challenging the order of the NCLAT. 

Contentions raised before Supreme Court

Key issues raised before the Hon’ble Supreme Court in the present case were as follows:

  • Discretion under Rule 11: It was contended that Rule 11 powers are discretionary and cannot be exercised when the statutory framework prescribes a specific procedure for CIRP withdrawal and claim settlements.
  • Financial Health of the CD: The appellant cited indicators such as a sharp decline in the CD’s valuation, non-filing of financial statements etc., which demonstrated the need for continuation of insolvency proceedings.
  • Improper Use of IBC: The appellant argued that setting aside CIRP merely due to a single creditor’s recovery through a settlement, contradicts the core principle of IBC that IBC cannot serve as a recovery mechanism for individual creditors but must serve collective interests once the CIRP is admitted.

Issues before Supreme Court

  1. Whether the appellant, who was not party to the settlement, had locus standi in the proceedings?
  2. Whether NCLAT’s invocation of Rule 11 powers was justified in light of existing procedures for CIRP withdrawal?
  3. Whether NCLAT adequately addressed the appellant’s objections while exercising discretionary power under Rule 11?

Observations of Apex Court

In the instant case, the Hon’ble Apex Court has analyzed the law with regard to- (a) the principles governing IBC relevant to the instances of withdrawing CIRP or settlement of claims; (b) the nature of the proceedings after commencement of CIRP; and (c) the scope of Rule 11 of the NCLAT Rules 2016.

A. IBC Principles relevant to the instances of withdrawing CIRP or settlement of claim: Referencing Swiss Ribbons (P) Ltd. v. Union of India, the Court noted that IBC’s intent is to achieve collective distribution, balancing  interest of all the stakeholders of CD. Thus, once CIRP is initiated, decisions on its withdrawal cannot be based on individual settlements. The Court outlined four stages for CIRP withdrawal:

  • Before CIRP Admission: Prior to the admission of the CIRP petition, the proceedings retain an in personam character, meaning the interests of other creditors remain unaffected. At this stage, withdrawal of the CIRP petition may be permitted by the NCLT as per rule 8 of NCLT rules upon the applicant’s request, as no other creditors’ rights are implicated.
  • Post-Admission but Pre-Committee of Creditors (CoC) Formation: Upon admission of CIRP, the proceedings transition to involve the interests of all creditors. Therefore, any request for withdrawal should generally require the consent of creditors. In cases where the CoC has not yet been constituted, Regulation 30A (3) of the Insolvency Resolution Process for Corporate Persons (IRPCP) Regulations allows the interim resolution professional (IRP) to file an application for withdrawal on behalf of the applicant.
  • After CoC constitution but Pre-Invitation of Expression of Interest (EOI): Following the formation of the CoC, Section 12A of the IBC mandates that any withdrawal application must receive the approval of at least 90% of CoC members, voting in favor of the proposed withdrawal.
  • Post-EOI Invitation: After the invitation for EOI has been issued, withdrawal may still be pursued as per section 12A with an additional obligation to justify the delay in seeking such withdrawal

B. Nature of Proceedings Post-CIRP Admission: While dealing the present case, Hon’ble Supreme Court has also elucidated that upon the admission of a CIRP application, the character of the proceedings transforms from in personam—pertaining solely to the rights and obligations of the applicant creditor vis-à-vis the corporate debtor—to in rem, thus impacting the rights and interests of all creditors and stakeholders. Specifically, the CIRP, at the stage of application, concerns only the initiating creditor’s interests. However, upon admission by the NCLT, the nature of the proceedings fundamentally changes, leading to significant procedural actions, including the transfer of management of the corporate debtor’s affairs to the IRP,, the imposition of a moratorium under Section 14 of IBC, and the collation of claims from all creditors. Consequently, the proceedings extend beyond the applicant creditor to encompass all creditors, including those who were not part of the initial application. This transition mandates that all stakeholders, irrespective of their initial involvement, are implicated in the resolution process and bear an interest in the corporate debtor’s restructuring. Thus, the proceedings acquire a universal character, thereby binding all concerned parties to the outcome of the CIRP.

C. Rule 11 vs. Section 12A and Regulation 30A: In addressing the issues raised in the instant matter, the Hon’ble Supreme Court examined the interplay between Rule 11, Section 12A, and Regulation 30A, specifically regarding the exercise of ‘inherent powers’. The doctrine of inherent powers endows courts with the authority to administer justice effectively in instances where statutory provisions are silent or ambiguous. These powers, while not specifically written into law, have been judicially acknowledged as essential for fair and effective decision-making. However, courts cannot use these inherent powers to go against clear legal rules or established principles. Sometimes, higher courts have stepped in to define the limits of these powers,  affirming that the inherent powers are confined to the administration of justice within its defined jurisdiction, without interfering into the statutory procedures.

In the present case, the Hon’ble Supreme Court reaffirmed that while inherent powers under Rule 11 of the NCLAT Rules are valid, they must operate in conjunction with the structured procedures set out in the IBC, particularly concerning the withdrawal of CIRP proceedings. Once a CIRP has been admitted, any withdrawal of the process must adhere strictly to Section 12A of the IBC, as read with Regulation 30A, to safeguard the collective rights of creditors involved.

In select cases, the Supreme Court has exercised its powers under Article 142 of the Constitution of India to permit withdrawal of CIRP proceedings post-admission, providing a unique remedy in exceptional circumstances where complete justice necessitates such intervention (e.g., Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers LLP, or Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem]

Conclusion

The Supreme Court’s ruling reaffirmed the foundational principle of the IBC asserting that the IBC is not intended as a mere debt recovery mechanism. Also, this judgement reinforces that the IBC framework prioritizes structured insolvency resolution for the collective benefit of creditors and other stakeholders. NCLAT’s use of Rule 11 to approve a post-admission settlement was curtailed, emphasizing strict adherence to Section 12A and Regulation 30A for CIRP withdrawals. This decision underscores the in rem nature of CIRP, binding all creditors to the collective interests and curbing discretionary settlements that could compromise collective rights under the IBC framework.


[1] https://ibbi.gov.in//uploads/order/ced39437b87c85df96571e40dc9727a0.pdf

[2] https://indiankanoon.org/doc/50482061/

[3] https://nclt.gov.in/gen_pdf.php?filepath=/Efile_Document/ncltdoc/casedoc/2903111026142023/04/Order-Challenge/04_order-Challange_004_17211087081320402653669608e4328a2.pdf

[4]  https://nclat.nic.in/sites/default/files/2023-06/NCLAT_Rules.pdf

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