The Evolution of Pre-CoC Settlements Under IBC: Analyzing the Impact of GLAS Trust v. Byju Raveendran Or Deviation from the earlier precedents: Why Byju’s judgment revives certain old but dead problems
Pervinder Chatrapati
Practicing Advocate: NCLT, NCLAT, HC and SC
Partner, RRG & Associates
Shikher Upadhyay
Practicing Advocate: NCLT, NCLAT, HC and SC
Senior Associate, RRG & Associates
Introduction
The Insolvency and Bankruptcy Code, 2016 (IBC) marked a paradigm shift in India’s insolvency regime, transitioning from a debtor-in-possession to a creditor-in-control framework. While IBC had many amendments to overcome its teething problems, a recent judgment by the Supreme Court in GLAS Trust Company LLC v. BYJU Raveendran & Ors. (2024) ibclaw.in 275 SC (“GLAS Trust”) has significantly altered, inter-alia, the landscape of settlements prior to constitution of-Committee of Creditors (CoC) under the IBC, warranting a detailed examination of its implications for stakeholders.
Legislative framework and historic development
Legislature while drafting had a clear understanding regarding malicious and fraudulent use of the IBC by any Creditor. Therefore, Section 65 IBC comes to aid in those circumstances. However, there was nothing in the IBC to overcome the pressure tactics being adopted by the Creditors in order to threaten a Debtor by filing insolvency applications. So much so, there were no provisions in IBC for settlement after admission, initially. When Rule 11 of the National Company Law Tribunal Rules, 2016 (NCLT Rules) was found of no help, Debtors approached the Hon’ble Supreme Court directly and under Article 142 of the Constitution, settlements were permitted.
Evolution of settlement mechanism
The IBC initially contained no explicit provisions for withdrawal of proceedings post-admission. This gap was addressed through judicial pronouncements and subsequent legislative response:
- The Supreme Court, exercising powers under Article 142, initially permitted settlements in cases such as Lokhandwala Kataria Construction v. Nisus Finance and Investment (2017) ibclaw.in 04 SC. The grey area was very well acknowledged by the Supreme Court, therefore settlements were allowed exercising inherent powers in the following cases –
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- Mothers Pride Dairy India Private Limited vs. Portrait Advertising (2017]) ibclaw.in 05 SC.
- Uttara Foods and Feeds Private Limited vs. Mona Pharmachem (2017) ibclaw.in 10 SC.
- Impex Ferri Tech Limited vs. Agarwal Coal Corporation Private Limited (2017) ibclaw.in 12 SC.
- Brilliant Alloys Private Limited vs. Mr. S. Rajagopal & Ors. (2018) ibclaw.in 35 SC.
- As Led Zeppelin used to sing “a stairway to heaven,” in a parallel world, similar staircase was created by the Justice Rohinton Fali Nariman for the promoters to save their corporate child prior to constitution of COC, providing for settlements to be allowed by NCLT under Rule 11 of NCLT Rules, 2016. Swiss Ribbons (P) Ltd. vs. Union of India (2019) ibclaw.in 03 SC at para 82 held the following –
“82. It is clear that once the Code gets triggered by admission of a creditor’s petition under Sections 7 to 9, the proceeding that is before the adjudicating authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim. A question arises as to what is to happen before a Committee of Creditors is constituted (as per the timelines that are specified, a Committee of Creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the Committee of Creditors is not yet constituted, a party can approach NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case.
- The principles enunciated under Swiss Ribbons judgment was followed in various other SC judgments to facilitate settlements prior to constitution of CoC. A few of the judgments of the Supreme Court allowing settlement post Swiss Ribbons (supra) are as follows–
- Kamal K Singh vs. Dinesh Gupta and Another (2021) ibclaw.in 156 SC
- Abhishek Singh vs. Huhtamaki PPL Limited (2023) ibclaw.in 37 SC
- Ashok G. Rajani vs. Beacon Trusteeship Ltd. (2022) ibclaw.in 115 SC
- Inherent powers of NCLT and NCLAT under Rule 11 are reproduced below for ease of reference, which became a norm for allowing settlements by the Tribunals –
NCLT
11. Inherent Powers.-
Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.
NCLAT
11. Inherent powers.-
Noting in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal.
Birth of Section 12A
- Section 12A was born on 6 June 2018, wherein a withdrawal was permitted only after approval by 90% of the CoC. Meaning, CoC mandatorily has to be consulted for invoking withdrawal under Section 12A by the promoters upon presenting an acceptable settlement/repayment plan.
“[12A. Withdrawal of application admitted under section 7, 9 or 10. –
The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.]”
- Pursuant to the amendment of Regulation 30A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) a specific scenario was incorporated dealing with the settlements “prior to the constitution of the CoC.” Relevant part of Regulation 30A is reproduced –
“[30 A. Withdrawal of application.
(1) An application for withdrawal under section 12A may be made to the Adjudicating Authority –
(a) before the constitution of the committee, by the applicant through the interim resolution professional;”
- The procedure and practice enunciated by the earlier judgments of the Hon’ble Supreme Court continued to be relevant even after the baby Section 12A turned 6 years and Regulation 30A turned 5. Now at such a stage when the Code is in its teenage, GLAS Trust not only deviates from the earlier followed proposition but also does not clarify the procedure to be adopted at the ground level.
Pre – GLAS Trust jurisprudence
- As a general practice, a procedure was laid down by the series of judgments wherein settlements were being allowed, prior to the constitution of the CoC, by the Hon’ble NCLAT and NCLTs under Rule 11 exercising their inherent powers by deviating from strict compliance of Regulation 30A. The Supreme Court in Swiss Ribbons (supra) established that:
- CIRP proceedings are proceedings in rem requiring CoC consultation for withdrawals.
- Before CoC constitution, parties could approach the NCLT directly under Rule 11 of the NCLT Rules, 2016.
The GLAS Trust judgment: Analysis and Implications
A strict compliance of GLAS Trust will bring down the ongoing and future settlements to a standstill.
- Key findings
In crux, the Supreme Court Byju’s has categorically held that –
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- Regulation 30A procedures are mandatory for pre-CoC withdrawals
- NCLT/NCLAT cannot exercise inherent powers under Rule 11 to bypass these procedures
- Previous well settled judgments were declared per incuriam
- Procedural Impact
The judgment creates a structured framework requiring:
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- Mandatory filing of Form FA
- Processing through the IRP
- Strict adherence to Regulation 30A timelines
- Practical Challenges
Strict compliance of Regulation 30A leads to certain possible deadlocks, some of them are highlighted as follows: –
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- Refusal by the original creditor, who initiated the insolvency proceedings, to sign the Form FA even after agreement for payment of debt; or
- Interim Resolution Professional (IRP) constituting CoC before withdrawal is allowed by NCLT– i) threat of IRP constituting CoC immediately after Form FA is handed over to IRP after settlement or ii) IRP constituting CoC after receiving Form FA and before withdrawal by the NCLT;
- Scope of consideration of the concerns of “all creditors” prior to constitution of CoC; and
- NCLT rejecting a pre constitution of CoC settlement in view of various claims received by the IRP.
For starters, the Hon’ble NCLAT in Mr. K Srinivas Krishna vs. Shyam Arora & Ors. (2021) ibclaw.in 418 NCLAT, Appellate Tribunal was facing an issue wherein the original applicant (an operational creditor), on who’s insolvency application admission order was passed, refused to sign the Form FA even after satisfaction of its claim.
Further, in Amrapali La-Residentia Flat Buyers Welfare Association (ALRFBWA) vs. La Residentia Developers Pvt. Ltd. (Under CIRP) & Ors. (2022) ibclaw.in 524 NCLAT, Appellate Tribunal had an occasion to deal with an issue wherein, IRP deliberately did not file an application for withdrawal on the ground of settlement and proceeded to constitute the CoC even after submission of Form FA.
The Hon’ble NCLAT in numerous precedents have heard the third-party financial creditors and intervenors prior to allowing a settlement. However, none of the arguments on behalf of the third-party financial creditors and intervenors could be considered as fatal to the settlement, as the stage was “settlement prior to constitution of the CoC.” A Few of the judgments on same instances are reproduced below –
- Jogendra Kumar Arora Vs. Dharmender Sharma & Ors. (2019) ibclaw.in 531 NCLAT.
- Anuj Tejpal vs. Rakesh Yadav & Ors. (2021) ibclaw.in 304 NCLAT
- Gajendra Sharma vs. M/s Dinesh Sanitary Store & Ors. (2020) ibclaw.in 441 NCLAT
- Avishek Roy shareholder of M/s Reacon Engineers (India) Pvt. Ltd. vs. Diamond Steel Enterprise (2019) ibclaw.in 257 NCLAT
In above scenarios, the Hon’ble NCLAT exercised its inherent powers drawing inference from aforementioned well settled procedure laid down by the Hon’ble Supreme Court in its earlier judgments, and allowed the settlement, consequently closure of the CIRP process. The new framework presents several procedural considerations:
Timeline Management
- IRP appointment triggers a 30-day window for CoC constitution
- Form FA processing must be completed within this window
- NCLT must hear and dispose of withdrawal applications expeditiously
Stakeholder Coordination
- Original applicant must cooperate in Form FA execution
- IRP must promptly process withdrawal applications
- Other creditors’ interests require consideration
Conclusion
The GLAS Trust judgment represents a significant shift toward procedural rigidity in pre-CoC settlements. While this promotes consistency and creditor protection, it necessitates careful navigation of the prescribed procedures. Success under the new framework requires proactive engagement by all stakeholders and careful attention to procedural requirements.
The evolution of the IBC continues to reflect a balance between creditor protection and efficient resolution. Future amendments and judicial interpretations may further refine these procedures based on practical experience with the GLAS Trust framework.
