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Can a Settlement be allowed once the Insolvency resolution mechanism is initiated-f Ultra Foods and

Facts of The Case:
Mona pharmachem supplied pharma products to Uttara foods and feeds pvt. Ltd. The Petitioner states that the amount is due in respect of medicines supplied to the Respondent for which bills were raised from 10.6.2014 to 25.4.2015. The payment is pending for the first invoice itself which was raised on 10.6.2014 and fell due on 9.8.2014. Even though the Respondent has made part payment for three of the invoices subsequently raised, still there is an outstanding of Rs. 22,26,672/-. The Operational Creditor says that the invoices provide for 24% interest per annum on the delayed payment and has claimed interest in addition to the principle due of Rs. 22,26,672/-.

Mona Pharmachem, the Petitioner/Operational Creditor herein, filed this Insolvency and Bankruptcy Petition against the Respondent/Corporate Debtor, Uttara Foods and Feeds Private Limited, claiming that a sum of Rs. 22,26,672/- along with interest is unpaid and the first date of default happened on 9.8.2014. The Petitioner initiated this proceeding against the Respondent under section 9 of Insolvency and Bankruptcy Code, 2016 (the Code) read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (the Rules) seeking reliefs.

A demand notice was given by the operational creditor on 15th of march, 2017 under IB code to the corporate debtor, but the corporate debtor didn’t give a reply for the same. A prior notice was already given by the operational creditor to the corporate debtor which expired on 13th of march, 2017. The corporate debtor didn’t have any interest in paying back the money to the corporate creditor.

This could be seen as the corporate debtor didn’t reply to any of the notices given by either the corporate debtor or the judiciary.
Henceforth, a petition was filed by mona pharmachem on 9th June, 2017 under the NCLT and thereby provided all the required bills, invoices, bank account statements, demand notices to the tribunal and submitted in front of the court. A notice was sent by the court to the corporate debtor to appear before the court, but the corporate debtor paid no interest in adhering to the orders of the court.

The court admitted the case being satisfied by the evidences provided by the corporate creditor and thereby provided a judgement in favour of the corporate creditor. Further this case was admitted into the insolvency process by the IB board. Later, the corporate creditor filed for a out of court settlement to reach a understanding with the corporate debtor. NCLT thereby accepted the petition.

This was challenged by the Uttara foods and feeds pvt. Ltd before the hon’ble supreme court.

Legal Analysis:
The NCLT of Mumbai bench passed a judgement in the favour of the corporate creditor. In its judgement, the court prohibited the corporate debtor from altering the assets of the company till the due amount is paid to the corporate creditor. Further, the court also prohibited from transfer of legal rights over the assets of the company. The court ordered that any goods that are being supplied to the debtor be suspended immediately. The court ordered the case to be presented for insolvency resolution process so as to follow a plan of action to recover the loans or liquidate the required assets of the company.

After the appeal by Uttara foods and feeds pvt. Ltd. Before the hon’ble supreme court, it was ordered that the Government should amend the provision regarding the inherent power of NCLT and NCLAT to allow withdrawal of petitions filed under Insolvency Code in case the matter is settled by the parties. Under Rule 8 of the Insolvency and Bankruptcy Board (Application to Adjudicating Authority) Rules, 2016, Adjudicating Authority cannot exercise their inherent powers to allow withdrawal of petition after it has been admitted by the Adjudicating Authority. As a result, appeals against order of NCLAT are being filed before Supreme Court which alone can exercise its powers under Article 142 of the Constitution to allow withdrawal of cases filed under Insolvency Code where agreement has been reached between the parties. The Supreme Court has directed that order of copy that has to be sent to Ministry of Law and Justice immediately.

The moot point which arises is that the Supreme Court has not given a new dimension to the Insolvency Code by allowing withdrawal of petitions filed under the Insolvency Code after parties reach agreement to settle their financial disputes at any stage of insolvency proceedings against a corporate debtor. This also raises another relevant issue as to the fate of other creditors who have not been able to settle their dues with the corporate debtor.

Thus, the supreme court admitted the case thereby over ruling the NCLT judgement for out of court settlement after the admission of the case under the insolvency resolution process.

Economic analysis of the case:

Through this judgement, the hon’ble Supreme Court observed that NCLT and NCLAT do not have inherent powers to allow settlement of dispute post admission by the insolvency resolution mechanism and will be ruled by provisions of IBC. The rationale behind this judgement is that once the insolvency resolution admits the case, then a collective mechanism commences to complete the process, the order by the NCLT or NCLAT to out of court settlement post admission might affect the interests of other creditors.

In Lokhandwala Kataria Construction Pvt. Ltd vs Nisus Finance and Investment Manager LLP[1], similar nature of facts could be seen. This is because, the recovery of loans by the corporate creditor should be considered as a collective action but the individual interest shouldn’t be weighed over others interests.

In addition to this by, ordering out of court settlement, the appeals placed by the aggrieved parties would be of vain and a pure waste of time of the judiciary thereby reducing the effectiveness of judiciary in the nation. After the admission of the petition by the tribunal, it acquires the character of representative suit and triggers a publication in newspapers thereby encouraging other creditors to get a right to participate in the insolvency resolution process. IBC does not allow the petition to be dismissed on the basis of a compromise between the operational creditor and corporate debtor as it would affect the interests of other creditors.

Through the Provision of the power to the NCLT to halt the resolution process while considering the settlement agreement could help avoid complications like the one that has arisen in the Binani Cement resolution in which the defaulting promoters and UltraTech, which came in behind winning bidder Dalmia Bharat, have struck a deal to take over the promoters’ stake.

The judgement by the supreme court in uttara foods case involves restricting the NCLT from providing for the halt in resolution process, but this is an economically ineffective move as by the provision to halt the resolution process by the NCLT and NCALT, this will bring an opportunity to the banks and the corporate creditors to minimize their losses on defaulting loans as after gathering the 90% support of the lenders and creditors effectively gives likely buyers an opportunity to enter into one-time settlement with banks, operational creditors and employees/workmen while bankruptcy proceedings are on. [2]

Current research states that out of 2,700 cases that have been referred to NCLT by operational creditors, close to 2,000 were withdrawn before admission since the dispute was settled outside court. [3]This could be understood by the reason that out of court proceedings are effective in nature and also doesn’t reduce the goodwill of the corporate debtor as once, a suit is filed on the corporate debtor, it reflects the corporate insolvency and ineffective management system of the organisation thereby reducing the goodwill of the organisation in the public. If this kind of action is completely supported by the supreme court, this might turn out to be a effective move as this is a speedy process and also the judiciary could place its focus on other important aspects.
Even after the strict ruling laid down by the Supreme Court, the NCLT and NCALT did not adhere to the decision of the apex court and allowed the out of court settlement after the admission of the case for insolvency process under IBC.

The economic impact of the judgement of this case is opposite to that of the previous case analysis of mobilox case where the judiciary process is fastened as a result of the defining the existence of dispute in a case, in the present case, this judgement creates a burden on the judiciary of the nation thereby increasing the judicial process of the case. In this case, the appellant didn’t appear before the court for more than two hearings thereby not reaching a judgement by the hon’ble court. This would result in the late payment of the bills by the debtor or even might result in the non-payment thereby creating a economic harm to the nation reducing, the profits, investments, aggregate demand and finally GDP of the economy of the country.

But this judgement is not being followed by the NCLT and NCALT, thereby indicating no impact on the economy. This could be observed in argoh infrastructure developers case[4] where the NCALT provided for settlement post admission. In another case of phoenix global DMCC case[5], the NCLT tribunal of Chennai set aside the resolution process as there was no advertisement of the settlement thereby creating no harm to the interests of other creditors.

Thus, the judgement passed by the supreme court is based on the interests on the general public and made from the point of view as a policy maker but this judgement is not economically efficient but it could be declared that there was no much impact on the economy by this judgement as these judgement were not considered as a precedent by many NCLT and allowed for settlement post admission by the resolution process by the way of creating a fact making the prior judgement reviewed.
Conclusion

The main objective of the insolvency and bankruptcy code, 2016 is the protection of interests of the creditors and debtors. In the case of creditors, the code supports and takes appropriate actions for the recovery of the loans thereby protecting the creditors’ interests and in the case of debtors, the code takes actions against overburdening for the repayment of the loans leading to shut down of business entities. In the above-mentioned cases, the supreme court is doing the same.

In mobilox case, the SC is laying down directions and precedents thereby easing the judiciary process and leading to fast repayment of loans. In the Uttara foods and feeds case, the judgement laid down by the SC is restricting actions of the NCLT and NCALT in the interest of all the creditors instead of weighing the interests of one individual creditor.

Here it could be observed that the judiciary is safe guarding the interests of all the creditors instead of passing an economically efficient judgement. The NCLT takes this judgement into consideration and adapts its judgements according to the facts of that case. Thus it could be concluded that the Insolvency And Bankruptcy Code of 2016 is a economically efficient law creating a positive impact on the economy of the country.

End-Notes:

  1. Lokandwala kataria construction pvt. Ltd. Vs. nisus finance and investment managers llp, [2017]140CLA215
  2. New corporate law treatise, IBC, 2016 - Tribunal to be empowered to discontinue Insolvency Resolution Process in case of settlement between parties, http://blog.nclt.in/2018/03/ibc-2016-tribunal-to-be-empowered-to.html
  3. Supra note, 11
  4. Narmada construction pvt. Ltd. v/s. argoh infrastructure developer pvt. Ltd., cp. (I.B) No. 16/9/NCLT/AHM/2017
  5. Phoenix global dmcc vs a & a trading pvt. Ltd., cp no. / 500(IB)/cb/2017ind/1471.

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