Out of court settlement during ongoing Insolvency Process?

Vivek Bansal Vs Burda Druck India Pvt. Ltd. & Anr. (NCLAT Delhi)

In a recent judgment (Company Appeal (AT) (Insolvency) No. 552 of 2020, dated 14-07-2020), the National Company Law Appellate Tribunal (NCLAT) held that a company could exit an ongoing insolvency process even as an interim resolution professional had been appointed and a moratorium imposed under the Insolvency and Bankruptcy Code (IBC) by the adjudicating authority, that is the National Company Law Tribunal (NCLT) triggering the debate over the best option for banks and other creditors to recover their dues-a resolution monitored by the court, or an out-of-court settlement with lenders.

In the judgment, a bench headed by acting chairperson Justice Bansi Lal Bhat noted that since the operational creditor (who had taken the company to NCLT) and the corporate debtor had “amicably settled the dispute”, it allowed the parties to exit the CIRP.

The judgment was passed in the case of Burda Druck India Pvt Ltd, a company that had been taken to the NCLT by its operational creditor Vivek Bansal.

The latest move by the NCLAT paves the way for companies to settle claims and end ongoing insolvency cases. The ‘corporate debtors’ in such cases can thus arrive at a settlement with the lenders, even after initiation of the corporate insolvency resolution process (CIRP) under the IBC.

This new window could especially come as a relief to those firms already under the resolution process, with relatively smaller debts. However, all IBC proceedings have been halted for the time being in light of the COVID-19 pandemic. The Centre has suspended insolvency proceedings for the next six months with a proposal to extend the same up to a period of one year. This has been done to cushion firms against the economic fallout of the pandemic and the lockdown that followed, as fresh debts during this period will not attract IBC proceedings.

These are quicker and devoid of delays that can be caused by third-party litigation. However, the flip side is that they bind only the parties to the settlement and, therefore, are not effective where the financial difficulties of the corporate debtor involve a number of stakeholders.

Additionally, NCLAT make it clear that in the event of default not adhering to the terms of ‘Settlement Agreement’ as regards the payment of the outstanding instalments, the ‘Operational Creditor’ shall be at liberty to seek revival/restoration of the ‘corporate insolvency resolution process’ proceedings before the Adjudicating Authority.

This sentiment works only in cases where a company has defaulted on repayment before 25 March, when the covid-19 lockdown started. Lenders are barred by an ordinance issued in June from dragging companies to bankruptcy tribunals, where defaults happened after 25 March, for at least six months

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FULL TEXT OF ORDER OF NATIONAL COMPANY LAW APPELLATE TRIBUNAL,, DELHI

I.A. No. 1534 of 2020 has been filed by the Appellant in terms of Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 for recording the settlement arrived at between the parties. Copy of the settlement dated 7th July, 2020 entered, inter se, the Appellant and Respondent No. 1 is annexed thereto. It is submitted that the ‘corporate insolvency resolution process’ was commenced at the instance of the Respondent (Operational Creditor) in terms of the impugned order dated 27th May, 2020 passed by the Adjudicating Authority (National Company Law Tribunal), New Delhi Bench –V with consequential orders in the nature of slapping of the moratorium and appointment of ‘Interim Resolution Professional’. However, the parties have amicably settled the dispute and the ‘Corporate Debtor’ has agreed to accept the amount of Rs.4,25,00,000/- (Rupees Four Crores and Twenty Five Lakhs Only) towards full and final settlement of all claims. The ‘Settlement Agreement’ incorporates the terms of settlement and the mode of payment at paragraph 3 and 4 thereof. The execution and the contents of the ‘Settlement Agreement have been admitted by the parties.

As the parties have reached the settlement and the ‘Committee of Creditors’ was not constituted, in exercise of powers conferred under Rule 11 of the NCLAT Rules, 2016, we set aside the impugned order dated 27th May, 2020 passed in ‘C.P. No. IB 2223 (ND)/2019’ and allow exit from the ‘corporate insolvency resolution process’ which is permissible in terms of the verdict of the Hon’ble Apex Court in ‘Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors.’ – (2019) 4 SCC 17). The matter is accordingly disposed of in terms of the ‘Settlement Agreement’ between the parties.

In effect, order (s) passed by Ld. Adjudicating Authority appointing ‘Interim Resolution Professional’, declaring moratorium and all other order (s) passed by Adjudicating Authority pursuant to impugned order and action taken by the ‘Resolution Professional’ are set aside. The application preferred by the Respondent under Section 9 of the I&B Code is disposed of as withdrawn. The Adjudicating Authority will now close the proceeding. The Respondent Company is released from all the rigour of law and is allowed to function independently through its Board of Directors with immediate effect.

So far as the fee and expenses incurred by the Resolution Professional is concerned, we find that grossly inflated claim has been set up which is unwarranted. Having regard to the fact that the constitution of the ‘Committee of Creditors’ had been put on hold on 17th June, 2020 and the fact that the ‘Interim Resolution Professional’ worked for not more than one and a half month, we deem it appropriate to fix the fee and ‘corporate insolvency resolution process cost’ at a consolidated amount of Rupees Seven Lakhs (inclusive of Rupees Two Lakhs, which has already been paid by the ‘Operational Creditor’) to be borne by both the parties in terms of the settlement agreement in equal proportion.

We make it clear that in the event of default not adhering to the terms of ‘Settlement Agreement’ as regards the payment of the outstanding instalments, the ‘Operational Creditor’ shall be at liberty to seek revival/restoration of the ‘corporate insolvency resolution process’ proceedings before the Adjudicating Authority.

The appeal is accordingly disposed of. No order as to costs