The National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has in its judgment dated July 07, 2021 (“Judgement”), in the matter of Anuj Tejpal v. Rakesh Yadav and Another [I.A. No. 815 of 2021 in Company Appeal (AT) (Insolvency) No. 298 of 2021], allowed withdrawal of corporate insolvency resolution process (“CIRP”) proceedings filed against the Corporate Debtor (defined below) prior to the constitution of the committee of creditors (“CoC”). The NCLAT further held that, in the interest of justice, the inherent powers can be exercised by both National Company Law Tribunal (“NCLT”) and NCLAT, who may allow or disallow the application of withdrawal keeping in view the interest of the concerned parties and the facts of each case.

Facts

Mr. Anuj Tejpal (“Appellant”), an erstwhile ‘Director’ of ‘OYO Hotels and Homes Private Limited’ (“Corporate Debtor”) preferred the instant appeal (“Appeal”), under Rule 11 (Inherent Powers) of the National Company Law Appellate Tribunal Rules, 2016 (“NCLAT Rules”). The Appeal was filed against the order of NCLT dated March 30, 2021 (“Impugned Order”) in view of an amicable settlement arrived at between the concerned parties. The NCLT by virtue of the Impugned Order had admitted the application, filed under Section 9 of the IBC, for initiation of CIRP against the Corporate Debtor and not ‘Mypreferred Transformation and Hospitality Private Limited’ (“MTH”), the sister concern of the Corporate Debtor being a distinct legal entity.

The Corporate Debtor (erstwhile Alcott Town Planners Private Limited) had executed a ‘Management Services Agreement’ dated November 16, 2018 (“MSA”) with Mr. Rakesh Yadav, the respondent no. 1 herein (“Operational Creditor”), to manage and operate ‘Hotel Yellow White Residency’ for which the Operational Creditor had received as security deposit INR 13,50,000 in addition, to an investment of INR 14,25,098/- as capital expenditure, made by the Corporate Debtor. During the subsistence of MSA, all rights and liabilities were transferred to MTH, with effect from June 01, 2019. MTH revised the MSA on July 17, 2019 wherein the benchmark revenue payable to the Operational Creditor was modified. MTH had made the payments as per modified commercial terms. Thereafter, the Operational Creditor issued demand notices under Section 8 of the IBC, for default in payment, dated September 13, 2019, pertaining to the period of July 2019 to September 2019 amounting to INR 7,02,000/- and another demand notice dated November 11, 2019 for the period pertaining to July 2019 to November 2019 amounting to INR 16,02,000/-(“Demand Notices”). It was stated that, the Demand Notices were incorrectly addressed to the Corporate Debtor, when all the rights and obligations under MSA were vested with MTH.

The NCLAT by an order dated April 08, 2021, issued a notice and suspended the constitution of the CoC of the Corporate Debtor, based on the submission that, the Operational Creditor had wrongly proceeded against the Corporate Debtor instead of MTH, and that, MTH had already paid all the amounts claimed by the Operational Creditor. It had also been submitted that, all efforts would be made to reach an amicable settlement with the Operational Creditor under Section 12-A (Withdrawal of application admitted under Sections 7, 9 or 10) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Subsequently, the Operational Creditor had issued a letter dated April 23, 2021 to the effect that, all disputes, claims and counter claims of the Operational Creditor qua both the Corporate Debtor as well as MTH stood settled to the full satisfaction of the parties. It was also submitted that, the interim resolution professional (“IRP”) had received the payment towards the total expenses incurred by him and there was no further amount outstanding in this regard.

During the pendency of the Appeal, certain intervention applications were filed by a few intervenors including ‘Federation of Hotel and Restaurant Associations of India’ among others with regard to their respective claims.

Issue

• Whether NCLAT can exercise its inherent powers under Rule 11 of NCLAT Rules to allow withdrawal of CIRP proceedings, prior to constitution of CoC of the Corporate Debtor.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that, since the settlement was arrived at prior to the constitution of the CoC, the question of applicability of Section 12-A of the IBC did not arise in this case. This was not an application under Section 12-A of the IBC and therefore Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) and the procedure thereunder was not applicable to the facts of this case. Further that, NCLAT had exercised its inherent power under Rule 11 of NCLAT Rules in several precedents and therefore it could not be said that only NCLT had the inherent powers under Rule 11 of NCLT Rules, 2016 (“NCLT Rules”).

The Appellant further contended that the intervention applications were not maintainable at this stage of Appeal due to the settlement arrived at between the parties. Further that the intervention applications were contrary to the settled principles of law laid down in Swiss Ribbons Private Limited and Others. v. Union of India and Others [(2019) 4 SCC 17], among others that the scope of the IBC is meant for ‘revival’ of the Corporate Debtor. Further that, the proposed intervenors were not allowed to contest the merit of the Appeal or contest the settlement of the subject dispute as proceedings under the IBC were not debt recovery proceedings. The proposed intervenors could come into existence only on the constitution of CoC as per the provisions of the IBC and till then they had no locus standi to object a settlement. Further that, Section 14 of the IBC bars the filing of any application against the Corporate Debtor under Sections 7 and 9 of the IBC during the moratorium period and that the proposed intervenors had not placed any documents on record to substantiate any ‘debt’ or ‘default’. Therefore, in view of the settlement between the Operational Creditor and MTH, no other purported claimant could object to the setting aside of the CIRP against the Corporate Debtor.

The Appellant submitted that, great prejudice would be caused to the Corporate Debtor in view of the subsistence of the CIRP proceedings despite having settled the matter with Operational Creditor. Further that the CIRP proceedings would lead to loss of goodwill and reputation, loss of perspective investments and serious administrative difficulties in collection of revenue from the existing partners, disbursement of payments to dependent hotel owners, vendors and employees.

Observations of the NCLAT
The NCLAT noted that, Section 12-A of the IBC refers to a situation which is post constitution of CoC, whereas Regulation 30-A(1)(a) of CIRP Regulations deals with procedure to be followed before the constitution of CoC. The NCLAT noted that Regulation 30-A of the CIRP Regulations was amended with effective from July 25, 2019, and reads as mentioned below:

“1. An application for withdrawal under section 12A may be made to the Adjudicating Authority –

• before the constitution of the committee, by the applicant through the interim resolution professional”.

Further that, Section 12-A of IBC read together with amended Regulation 30-A of the CIRP Regulations provided that stage of pre-constitution of CoC would be covered under the Regulation 30-A(1)(a) of the CIRP Regulations.

The NCLAT further also referred to Rule 11 of NCLAT Rules, which provides that, “Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal.”

The NCLAT observed that in the judgment in Jogender Kumar Arora v. Dharmendar Sharma and Others [Company Appeal (AT) (Insolvency) No. 94, 95 of 2019] it was held that, the NCLAT had inherent powers under NCLAT Rules to decide on an application for withdrawal of CIRP, taking into consideration that, before the constitution of CoC, the Corporate Debtor and Operational Creditor had settled their dues amicably. The NCLAT noted that in a catena of judgements it was observed that, the NCLAT and the NCLT had consistently exercised inherent powers conferred upon them to allow withdrawal, on a case-to-case basis in view of the settlement reached prior to formation of a NCLAT relied extensively on the observations made in Swiss Ribbons (supra) wherein it was noted that, once IBC gets triggered on admission of a petition filed by a creditor(s), by the NCLT, the proceeding before the NCLT, being a collective proceeding, would be a proceeding in rem. Therefore, at any stage where the CoC would not have been constituted, a party could approach and consult NCLT directly, which may, in exercise of its inherent powers under Rule 11 of NCLT Rules, allow or disallow an application for withdrawal or settlement which will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case. NCLAT noted that, in the case of Brilliant Alloys Private Limited v. Mr. S. Rajagopal and Others [SLP (Civil) No. 31557/2018], it was clarified that Regulation 30-A is not mandatory but is directory for the simple reason that on the facts of a given case, an application for withdrawal may be allowed in exceptional cases even after issuing the invitation for expression of interest under Regulation 36-A. Further the NCLAT rejected the contention that the application for withdrawal, filed, prior to constitution of CoC ought to be mandatorily dealt with the provisions under the Regulation 30-A(1)(a) of CIRP Regulations.

The NCLAT further observed that it is a well-settled proposition of law that, substantive law takes precedence over a regulation and Section 12-A of the IBC clearly refers to the withdrawal of an application under Sections 7, 9 or 10 of the IBC after the constitution of the CoC. The NCLAT noted that, the main thrust against the provision of Section 12-A is the fact that 90% of a CoC would have to allow withdrawal. The withdrawal shall be a consequence of all financial creditors contemplating and deciding together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into with a corporate debtor.

The NCLAT noted with regard to the intervenors applications that it was not the case of the intervenors that demand notices under Section 8 of the IBC were pending. Rather their contention was that, the Corporate Debtor owed them certain monies/dues. The NCLAT observed that, before constitution of CoC, mere filing of a ‘Claim’ did not constitute default per se. It was only on the basis of the ‘Claims’ that the CoC was constituted. The NCLAT observed that the prime objective of the IBC is not recovery, but revival of the Corporate Debtor. Further that, after admission of petition under IBC, the NCLT, on a case to case basis can exercise its inherent power under Rule 11 of the NCLT Rules for withdrawal of CIRP, if parties are interested to amicably settle the matter prior to constitution of CoC.

The NCLAT noted that, the communication filed by the Operational Creditor evidenced that all amounts due and payable by the Corporate Debtor, had been paid in full and final satisfaction. The NCLAT proceeded to reiterate that, in the interest of justice, the inherent powers could be exercised by both NCLT and NCLAT and consequentially, they may allow or disallow the application of withdrawal keeping in view the interest of the concerned parties and the facts of each case.

Decision of the NCLAT

The NCLAT proceeded to hold that, in the interest of justice it would exercise the inherent powers and allow withdrawal of CIRP application against the Corporate Debtor in view the interest of the concerned parties. The NCLAT noted that, Regulation 30-A(1)(a) was not applicable to the present case.

The NCLAT allowed the Appeal and set aside the Impugned Order, thereby consequentially also set aside appointment of IRP, moratorium against Corporate Debtor, etc. The NCLAT further directed that, the Corporate Debtor was released from all the rigours of law and is allowed to function independently through its board of directors with immediate effect.

The intervenor applications filed during the pendency of the Appeal, were dismissed. The NCLAT further held that, the intervenors were free to seek legal remedies available under IBC by filing separate application for admission of CIRP at any stage and that NCLT shall hear the matter, uninfluenced by this Judgement, if any, on merits and proceed in accordance with law.

VA View:

The NCLAT in this Judgement held that Regulation 30A of the CIRP Regulations was not applicable to the instant Appeal. The NCLAT rightly observed that an appeal before NCLAT is essentially a continuation of the original proceeding. Hence a change in law can always be applied in an original or appellate proceeding. The NCLAT noted that IBC envisages the said principle more particularly on account of Section 32 of the IBC which provides that any appeal from an order approving the resolution plan shall be in the manner and on the grounds specified in Section 61(3) of the IBC. The NCLAT held that its inherent powers were sufficient for allowing the withdrawal of CIRP proceedings.

The NCLAT also considered the effect of the pandemic on the ‘Hospitality and Tourism Industry’ and noted that creditors were free to move an application before the NCLT or they could alternatively approach the Corporate Debtor and reach an amicable settlement for the same.

For more information please write to Mr. Bomi Daruwala at [email protected]

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