Supreme Court Overturns NCLAT's Approval of Settlement in Insolvency Case

Category : Corporate Law

Sub- Category : Insolvency Law

Subject: Corporate Insolvency Resolution Process

Background

The Supreme Court recently addressed a significant case involving Think and Learn Pvt Ltd , a company engaged in online education, and its former directors, Byju Raveendran and Riju Raveendran . The case arose from a judgment by the National Company Law Appellate Tribunal (NCLAT) that approved a settlement between the company and the Board of Control for Cricket in India (BCCI) during the Corporate Insolvency Resolution Process (CIRP). The appellant, GLAS Trust Company LLC, a financial creditor, contested the NCLAT's decision, arguing that the settlement was improperly approved without following the established legal framework under the Insolvency and Bankruptcy Code (IBC).

Arguments

The appellant contended that the NCLAT erred by invoking its inherent powers under Rule 11 of the NCLAT Rules to approve the settlement, arguing that there was a prescribed procedure for withdrawal and settlement under Section 12A of the IBC and Regulation 30A of the CIRP Regulations. They highlighted concerns regarding the source of funds for the settlement and the potential for preferential treatment of the operational creditor, BCCI.

Conversely, the respondents argued that the NCLAT acted within its rights to approve the settlement, as the Committee of Creditors (CoC) had not yet been constituted at the time of the settlement request. They maintained that the inherent powers of the NCLAT allowed for such approvals to facilitate settlements and prevent the economic death of the corporate debtor.

Court's Analysis and Reasoning

The Supreme Court analyzed the legal framework governing the CIRP, emphasizing that once an application is admitted, the proceedings become collective, involving all creditors. The Court noted that the NCLAT's approval of the settlement bypassed the necessary procedures outlined in the IBC, which require that any withdrawal or settlement must be processed through the Interim Resolution Professional (IRP) and submitted to the NCLT for approval.

The Court found that the NCLAT failed to adequately address the objections raised by the appellant regarding the source of the settlement funds and the implications of the ongoing investigations against the directors. The Supreme Court underscored that the NCLAT's reliance on the undertaking provided by Riju Raveendran was insufficient, given the serious allegations of financial misconduct.

Decision

Ultimately, the Supreme Court allowed the appeal, setting aside the NCLAT's judgment. The Court directed that the amount of Rs 158 crore, which had been maintained in an escrow account, should be deposited with the CoC. The ruling reinforces the importance of adhering to the established legal procedures in insolvency cases and ensures that all creditors are considered in the resolution process.

This decision has significant implications for the handling of settlements in insolvency proceedings, emphasizing the need for transparency and adherence to the legal framework designed to protect the interests of all stakeholders involved.