Examining Revival of Insolvency Proceedings after Settlement Agreement violation
(A third-year law student from Dr. Ram Manohar Lohiya National Law University, Lucknow)
Since its enactment in 2016, the Insolvency and Bankruptcy Code (“IBC”) has witnessed inconsistent interpretation of its various provisions. One such intricacy relates to the breach of the settlement agreement reached between the parties in a Corporate Insolvency Resolution Process (“CIRP”). On breach, a critical issue arises whether the CIRP can be revived if the corporate debtor doesn’t adhere to the settlement agreement after the withdrawal of the insolvency proceeding.
In 2018, Section 12A was introduced in the IBC to allow the withdrawal of the insolvency application. This provides statutory recognition to the settlement agreement reached between the parties after the application to initiate the CIRP has been admitted. However, the IBC Code and its rules or regulations do not comprise any provision for seeking revival of the CIRP proceedings once it is withdrawn.
In the absence of the specific provision for seeking revival of the withdrawn CIRP, the inherent jurisdiction of the National Company Law Tribunal (‘NCLT’) has been invoked by filing an application under Section 60(5)(b) of the IBC and Rule 11 of NCLT Rules which allow the tribunal to make such order as may be necessary for securing complete justice.
CIRP Revival Necessary to Ensure Complete Justice
Instances have often been observed where the corporate debtor reaches a settlement with the creditor in an attempt to evade the rigours of CIRP. In anticipation of an expedited recovery, the creditor withdraws the insolvency application on the terms and conditions as may be agreed in a settlement agreement. This leads to the discontinuation of the CIRP proceeding before the Adjudicating Authority.
However, the issue arises when the corporate debtor doesn’t adhere to the settlement terms. Such action results in the abuse of the process of the tribunal and leaves the creditor with no choice but to seek the revival of the insolvency application. This raises a critical question before the NCLT whether the insolvency proceeding be revived if no specific provision exists under the IBC and its regulation? On this issue, there have been divergent views that have evolved and changed over time.
In the case of ICICI Bank v. OPTO Circuits (India) Ltd (2022) ibclaw.in 317 NCLAT, the NCLT declined an application to revive CIRP and allowed the creditors to file a fresh application to initiate the CIRP. On appeal, the NCLAT reversed the order of the Adjudicating Authority and held that the order granting the liberty to file a fresh application for CIRP was erroneous and not in accordance with the principles of natural justice. As a result, the NCLAT allowed the financial creditors to file an application to restore the CIRP proceedings.
The foundation of this decision stemmed from NCLAT’s ruling in Vivek Bansal v. Bruda Druck India Pvt. Ltd.  ibclaw.in 20 NCLAT, wherein the tribunal had held that in case of default and non-adherence to the settlement agreement, the creditor shall have the liberty to seek restoration of the CIRP proceeding.
Liberty of the Tribunal- A Mandate or Norm?
It is crucial to understand whether it is essential to seek the liberty of the tribunal to revive the CIRP proceedings or it can be sought as a matter of right by invoking the inherent jurisdiction of the NCLT. This position was examined in the case of Krishna Garg & Anr v. Pioneers Fabricators Pvt. Ltd. (2021) ibclaw.in 64 NCLAT, wherein the Hon’ble NCLAT declined to revive the CIRP proceedings because the settlement terms were not filed, nor were they brought on record and incorporated in the order of the NCLT with liberty to restore the CIRP in case the corporate debtor doesn’t abide by the settlement agreement.
The NCLAT clarified there exists a distinction between the cases wherein the Insolvency Proceedings were withdrawn by mere reference of the fact of settlement and wherein the withdrawal of such proceedings was materialised by bringing the Settlement Agreement on record and thereby seeking the liberty to revive the proceedings.
This division was further reinforced in the case of SRLK Enterprises LLP v. Jalan Tran Solutions India Ltd. (2021) ibclaw.in 189 NCLAT, wherein the Settlement Agreement has been brought on record and had been made part of the withdrawal order. The tribunal held that the revival of insolvency proceedings can be done in the event of default in such instances.
Revival Clause Renders Tribunal Liberty Unnecessary
In Pooja Finlease Ltd.v. Auto Needs (India) Pvt. Ltd. in IB-322/ND/2021 RA/82/2022 dated 30.11.2022, NCLT, New Delhi Court-V., it was held that the order by which the Adjudicating Authority accepted the withdrawal of application based on a Settlement Agreement comprising a revival clause that allows for restoration of CIRP in case of default will be as good as the NCLT granting the liberty of revival of the insolvency proceedings in case of non-adherence to the Settlement Agreement. When such an application was approved based on the consent terms by taking on record the Settlement Agreement, it should be considered as part of the order. In short, it implies that the creditor has the authority to revive the petition if any default in consent terms arises.
It would be relevant to refer to the similar case Himadri Foods Ltd. v. Credit Suisse Funds AG (2021) ibclaw.in 08 NCLAT judgment, where the NCLAT had held that where the terms of the settlement were incorporated in the NCLT’s order, the revival of the insolvency proceedings would not be dependent on liberty being granted by the NCLT.
This position has been further fortified in the recent case of IDBI Trusteeship Services Limited v. Nirmal Lifestyle Ltd. (2023) ibclaw.in 317 NCLAT, the NCLAT has held that when an insolvency application is withdrawn by placing the consent/settlement terms on record, which provides for the revival of the application upon any event of default, then the application is liable to be revived. It is not necessary for the NCLT to grant liberty for such revival in its order for withdrawal. The NCLAT further observed that the tribunal had made an error by declining the revival of CIRP proceeding as the consent term itself contains a revival clause in the event of default. Therefore, the NCLT’s permission for revival becomes irrelevant in such instances.
Through a catena of the orders, the tribunals have made it clear that the inherent jurisdiction of the Adjudicating Authority may be invoked to seek revival of the withdrawn insolvency proceeding in case of non-adherence to the settlement agreement. In a nutshell, the only prerequisite to be fulfilled for the revival of CIRP proceedings is either the NCLT has granted the liberty to seek the revival or if the settlement agreement itself permits the revival of CIRP proceedings in case of default, provided that the same has been brought on record of the NCLT while withdrawal of the insolvency proceeding.
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