NCLAT allows Corporate Debtor to exit from CIRP midway; opens door for mid-way-settlement

National Company Law Appellate Tribunal (“NCLAT”), in its recent order, allowed Corporate Debtor to exit from the insolvency proceedings, midway, even as the Interim Resolution Professional was appointed, and the Moratorium in terms of Section 14 of the Insolvency and Bankruptcy Code (“IBC”), 2016, was imposed.

NCLAT, vide its order dated 14.07.2020, permitted Dynamic Textbooks Printers Pvt. Ltd. (“Corporate Debtor”) to exit from the corporate insolvency resolution process (“CIRP”), initiated by Burda Druck India Pvt. Ltd. (“Operational Creditor”), as the parties had amicably settled their disputes.

What were the facts of the case?

· Earlier, an application under Section 9 of IBC, 2016, for initiation of CIRP, was filed by Operation Creditor, against the Corporate Debtor.

· The application was admitted by National Company Law Tribunal, New Delhi Bench-V (“Adjudicating Authority”), on May 27, 2020.

· Consequently, orders imposing moratorium and appointing IRP, were also made on the same date i.e. May 27, 2020.

· However, thereafter, the parties amicably settled the dispute, and Operational Creditor agreed to accept INR 4,25,00,000/- as full and final settlement of its claims.

· The parties accordingly entered into a Settlement Agreement, on July 7, 2020, incorporating the terms of settlement and the mode of payment. · Consequently, an appeal was filed before the NCLAT, in terms of Rule 11 of NCLAT Rules, 2016, for recording the settlement arrived between the parties.

What was the stage of the proceeding before the Adjudicating Authority?

The application under Section 9 of IBC, 2016, filed by the Operational Creditor, was admitted by the Adjudicating Authority, and consequently:

· CIRP was initiated;

· Moratorium, in terms of Section 14 of IBC, 2016, was imposed; and

· Interim Resolution Professional (IRP), in terms of Section 16 of IBC, 2016, was appointed. Click here to view the order dated 27.05.2020 passed by NCLT, New Delhi Bench-V.

What was the order of NCLAT?

· Keeping in view the facts and circumstances of the case, and the pleadings of the parties, the NCLAT set aside the impugned order dated 27.05.2020, passed by Adjudicating Authority, by making the following observations:

“As the parties have reached a settlement and the ‘Committee of Creditors’ was not yet constituted, therefore in exercise of the powers conferred under Rule 11 of the NCLAT Rules, 2016, we set aside the impugned order dated May 27, 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 SCC 17). The matter is accordingly disposed of in terms of the ‘Settlement Agreement’ between the parties “

· The NCLAT released the Corporate Debtor from all the rigours of law, and directed its Board of Directors, to be reinstated, with immediate effect.

· Consequently, the other orders passed by the Adjudicating Authority, imposing moratorium, appointing IRP, and the actions taken by IRP, were also set aside by the NCLAT.

· The NCLAT, however, made it precisely clear, that in case the Corporate Debtor does not adhere to the terms of the settlement, the Operational Creditor will be at liberty to seek revival of CIRP proceedings before the Adjudicating Authority (i.e. NCLT, New Delhi Bench-V).

How much fees was fixed for Interim Resolution Professional?

· The Bench observed that the claims presented by IRP on account of the fees and expenses incurred by him, is far too excessive and is unreasonably high.

· It further observed that the IRP worked for only ‘one and a half month’.

· The Bench therefore fixed the fees of the IRP to a consolidated amount of INR 7,00,000/-, and directed both the parties to borne it together, in equal proportions.

With the above-mentioned orders and observations, the Bench of Justice Bansi Lal Bhat, Justice Anant Bijay Singh, and Dr. Ashok Kumar Mishra, disposed of the appeal.

Conclusion

It is a welcoming order, as it opens up a window for the Corporate Debtor, to exit the CIRP, and make an out of court settlement with its creditors. It is a win-win situation for all the stakeholders, as on one hand, settlement would offer a much better value to the creditors, who are otherwise forced to take a massive haircut on their pending dues, and on the other hand, it would also allow the promoter to retain his company, by paying off the dues. Mid-way-settlement offers a lot of scope and opportunity, as it is time effective, and would also aid in mitigating the burden of the NCLTs, which are weighted down with the backlog of such like cases and applications.

Click here to view the order dated 14.07.2020, passed by NCLAT.