IBC Withdrawal and Settlement Procedure: A Case Study of Ashok G. Rajani vs Beacon Trusteeship
The case of Ashok G. Rajani vs Beacon Trusteeship Ltd. & Ors. revolves around a dispute under the Insolvency and Bankruptcy Code, 2016 (IBC). The petitioner, Ashok G. Rajani, an erstwhile director of the corporate debtor, sought to challenge an interim order passed by the National Company Law Appellate Tribunal (NCLAT) regarding the initiation of the Corporate Insolvency Resolution Process (CIRP) against M/s Seya Industries Limited. This appeal under Section 62 of the IBC brings into focus the procedural aspects of insolvency cases, particularly the issue of withdrawal and settlement under Section 12A of the IBC.
Background of the Case
The corporate debtor, M/s Seya Industries Limited, is a company engaged in the manufacture of benzene-based specialty chemicals. The company had invested approximately Rs. 400 crores in its manufacturing facilities and an additional Rs. 900 crores in a Greenfield Mega Project. However, due to financial difficulties, the company found itself in dispute with its investors and creditors, particularly Beacon Trusteeship Ltd., the respondent in this case. Beacon Trusteeship had invested Rs. 72 crores in the company’s expansion project, which was partly funded by Non-Convertible Debentures (NCDs).
After the company defaulted on certain payments, Beacon Trusteeship invoked the share pledge agreement and initiated arbitration proceedings against the corporate debtor. Despite attempts at negotiation and settlement, the creditor filed a petition under Section 7 of the IBC before the National Company Law Tribunal (NCLT), Mumbai Bench, to initiate CIRP against the corporate debtor. The petitioner challenged this move, citing that a settlement had already been reached between the parties.
The Petitioner’s Arguments
The petitioner, Ashok G. Rajani, argued that the corporate debtor had made significant investments and was a crucial source of livelihood for hundreds of employees. He contended that the insolvency proceedings should be halted, as the disputes between the parties had already been resolved through settlement, as evidenced by the formal settlement agreement filed with the NCLAT. The petitioner emphasized that the corporate debtor had a net worth of Rs. 972 crores and that initiating CIRP at this stage would cause irreparable harm to the company and its employees.
Furthermore, the petitioner highlighted that under Section 12A of the IBC, the applicant could withdraw the application for CIRP before the constitution of the Committee of Creditors (CoC). He argued that since the CoC had not yet been constituted, there was no legal barrier to the withdrawal of the application. The petitioner requested the NCLAT to allow the withdrawal of the CIRP petition in light of the settlement.
The Respondent’s Arguments
Beacon Trusteeship Ltd. opposed the petitioner’s arguments, asserting that the application for the CIRP had already been admitted by the NCLT, and the process had reached an advanced stage. The respondent contended that allowing the withdrawal at this stage would undermine the purpose of the IBC, which is to ensure timely resolution and maximization of value for creditors. Beacon Trusteeship further argued that the settlement could not be accepted unless the Committee of Creditors was constituted and had the opportunity to approve the terms of the settlement.
Additionally, the respondent highlighted the urgency of the resolution process, as the debtor’s financial condition was deteriorating rapidly. Allowing the withdrawal would set a dangerous precedent and encourage debtors to delay or evade their financial responsibilities, the respondent claimed.
The Court’s Analysis
The Supreme Court, in this case, focused on the procedural aspects of Section 12A of the IBC, which allows the withdrawal of an application for CIRP before the constitution of the Committee of Creditors, provided that the withdrawal is agreed upon by the applicant. The Court also considered the inherent powers of the NCLT under Rule 11 of the NCLT Rules, which grants the Tribunal the authority to pass orders necessary for the ends of justice or to prevent abuse of the process.
The Court observed that the object of the IBC was to maximize the value of assets and promote entrepreneurship, but it also recognized the need for a fair resolution process. The Court emphasized that if the parties had already settled their disputes, the insolvency process should not be allowed to stifle the settlement, particularly before the CoC was constituted. The Court noted that the urgency of adhering to timelines for the resolution process was not a sufficient reason to block the settlement, as the withdrawal of the application would not prevent other creditors from pursuing their claims under the IBC.
Final Judgment
The Supreme Court ruled in favor of the petitioner, holding that the NCLAT’s interim order did not require interference. The Court reaffirmed that Section 12A of the IBC allowed for the withdrawal of the CIRP application before the CoC was constituted. Furthermore, the Court found that the settlement reached between the parties should not be disregarded, and the NCLT should take the settlement into account when considering the withdrawal application.
The Court also emphasized the importance of Rule 11 of the NCLT Rules, which grants the NCLT the inherent power to pass orders to ensure justice is served. The Court noted that since no claims had been made against the corporate debtor by other creditors at that stage, there was no reason to prevent the withdrawal of the CIRP application.
Significance of the Judgment
This judgment reinforces the idea that the insolvency process should not unnecessarily hinder settlements between parties, especially before the CoC has been formed. It clarifies the procedural rights of debtors under Section 12A of the IBC and emphasizes the Tribunal’s discretion to permit withdrawal or settlement when it serves the interests of justice. The ruling also underlines the importance of the IBC’s objective to maximize asset value and protect all stakeholders while ensuring that the process remains fair and transparent.
The Court’s decision to allow the withdrawal of the CIRP application demonstrates a balanced approach, ensuring that the legal framework of the IBC is upheld while also respecting the parties’ efforts to resolve disputes amicably.
Petitioner Name: Ashok G. Rajani.Respondent Name: Beacon Trusteeship Ltd. & Ors..Judgment By: Justice Indira Banerjee, Justice J.K. Maheshwari.Place Of Incident: Mumbai, Maharashtra.Judgment Date: 22-09-2022.
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