NCLT(s) allow settling cases post admission, despite Supreme Court orders

Varun Marwah January 25 2018

While the Supreme Court has, on more than one occasion, allowed settlement after admission of cases under the Insolvency and Bankruptcy Code, 2016 (IBC), it has done so with a caveat that the tribunals don’t have inherent powers to do so.

The Supreme Court under Article 142 of the Constitution has the power to “pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it.

But the NCLT and NCLAT don't.

The first time this question arose before the NCLAT, was in the case of Lokhandwala Kataria Construction, where the Appellate Tribunal refused to settle the case post admission.

In this case, Rule 11 of the NCLAT Rules, 2016 was relied upon, which is somewhat an adaptation of Article 142 of the Constitution insofar as powers of the NCLAT are concerned. However, Rule 8 of the I&B (Application to Adjudication Authority) Rules, 2016 unambiguously provides that a case can be settled by the Adjudicating Authority only before it is admitted.

Recognising this limitation of the NCLAT, the Supreme Court for the first time allowed settlement under Article 142 (Lokhandwala), and thereafter in (at least) two more cases, Sysco Industries and Uttara Foods and Feeds.

Although these decisions have been criticised for having ignored the spirit of the IBC, it may very well become the law since in Uttara Foods, the Apex Court  has asked for amending the law to allow such settlement.

At a policy level, the argument is that once the resolution process is triggered, a collective mechanism commences which places all creditors at par. Allowing the (single) triggering party to settle the dispute post admission may adversely impact the interests of other creditors, whose rights and interests would have otherwise been protected during the resolution process.

Be that as it may, while the Supreme Court is acting well within its mandate in passing such orders, the tribunals aren't. Here are a few instances where the NCLT and NCLAT have allowed settlement of cases even after they were admitted.

NCLT, Mumbai

In the case of Lift and Shift [link], ‘citing’ the Supreme Court Order (Lokhandwala), the Mumbai Bench allowed settlement post admission.

Seemingly, not one of its best rulings, given that the very Supreme Court Order which was cited, was clear in stating that Adjudicating Authorities don’t have the requisite power to record settlement after admission, for the reasons noted by the NCLAT in the case of Lokhandwala.

NCLT, Chennai 

In the case of Phoenix Global DMCC [link] Chennai Bench allowed settlement exercising its powers under Rule 11, and also because the Resolution Professional hadn’t been appointed and public announcement wasn’t made.

Although this ruling came before the Supreme Court had passed its Order, the NCLAT ruling in the case of Lokhandwala would still serve as precedent. In fact, the facts of this case are similar to Lokhandwala to the extent that a public announcement wasn't made in either. And on that point, the NCLAT had ruled,

Mere admission without subsequent step of advertisement having carried out, would not amount to refusal of claim of other creditors. Such submission as made by learned counsel for the appellant cannot be accepted in view of the provisions of the Act. ”

Call this ignorance of law or, defiance to precedents.

NCLAT

The case of Argoh Infrastructure Developers [link], however, isn’t as straightforward.

The appellant, corporate debtor first argued that no notice under Section 8 was provided by the operational creditor, which was rejected.

The appellant also argued that no notice by the NCLT was given and therefore, the order admitting the application was in violation of principles of natural justice. The NCLAT, here as well, declined to agree.

But the judgment somewhat ambiguously records that the parties have ‘settled’ the dispute and if the appealed order is set aside on grounds of violation of principles of natural justice, the respondent, operational creditor will withdraw the application .

It appears from the wordings of the judgment, thus, that the NCLT order was set aside on  grounds  of violation of principles of nature justice to simply pave the way for settlement post admission.