ASHOK G. RAJANI versus BEACON TRUSTEESHIP LTD. & ORS on 22 September 2022

ASHOK G. RAJANI

v.

BEACON TRUSTEESHIP LTD. & ORS.

(Civil Appeal No. 4911 of 2021)

SEPTEMBER 22, 2022

[INDIRA BANERJEE AND J.K. MAHESHWARI JJ.]

Insolvency and Bankruptcy Code, 2016 - Ss. 7, 12A, 62 –Arbitration proceedings between corporate debtor and respondentno. 1 to 3 were pending – Respondent nos.1 to 3 filed applicationu/s.7 of IBC before the NCLT – Arbitrator passed award directingcorporate debtor to make payment – Parties arrived at a settlement– NCLAT considering settlement granted interim stay of publicationu/s. 13 of the IBC – Parties filed application u/s. 12A of IBC beforethe NCLT with the consent of IRP and the same was pending –However, NCLAT staying the formation of CoC, permitted the IRPto issue publication and also to handover all assets and proceedwith CIRP even though matter was settled between the parties – Onappeal, held: Section 12A of the IBC clearly permits withdrawal ofan application u/s. 7 of the IBC that has been admitted on anapplication made by the applicant – Before the Committee ofCreditors is constituted, there is no bar to withdrawal by theapplicant of an application admitted u/s. 7 of the IBC – Settlementcannot be stifled before the constitution of the CoC in anticipationof claims against the corporate debtor from third persons – There isno reason why the applicant for CIRP, should not be allowed towithdraw its application once disputes have been settled – NCLTdirected to take up the settlement application.

Dismissing the appeal, the Court

HELD: 1. Section 12A of the IBC clearly permits withdrawalof an application under Section 7 of the IBC that has been admittedon an application made by the applicant. The question of approvalof the Committee of Creditors by the requisite percentage ofvotes, can only arise after the Committee of Creditors isconstituted. Before the Committee of Creditors is constituted,

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Athere is no bar to withdrawal by the applicant of an applicationadmitted under Section 7 of the IBC. [Para 24][139-D-E]

2. The object of the IBC is to consolidate and amend thelaws relating to reorganisation and insolvency resolution ofcorporate persons, partnership firms and individuals in a timeBbound manner for maximisation of value of assets of such persons,to promote entrepreneurship, availability of credit and balanceof interests of all stakeholders including alteration in the orderof priority of payment of Government dues and to establish anInsolvency and Bankruptcy Board of India and matters connectedtherewith or thereto. An effective legal framework for timelyCresolution of insolvency and bankruptcy would supportdevelopment of credit markets, encourage entrepreneurship,improve business and facilitate more investments leading tohigher economic growth and development. [Para 26 & 27][139-H; 140-A-C]D

3. A reading of the statement of objects and reasons withthe statutory Rule 11 of the NCLT Rules enables the NCLT topass orders for the ends of justice including order permitting anapplicant for CIRP to withdraw its application and to enable acorporate body to carry on business with ease, free of anyEimpediment. Considering the investments made by the CorporateDebtor and considering the number of people dependant on theCorporate Debtor for their survival and livelihood, there is noreason why the applicant for the CIRP, should not be allowed towithdraw its application once its disputes have been settled.[Para 28 & 29][140-C-E]F

4. The settlement cannot be stifled before the constitutionof the Committee of Creditors in anticipation of claims againstthe Corporate Debtor from third persons. The withdrawal of anapplication for CIRP by the applicant would not prevent any otherfinancial creditor from taking recourse to a proceeding underGIBC. The urgency to abide by the timelines for completion of theresolution process is not a reason to stifle the settlement.[Para 30][140-E-F]

5. The application for settlement under Section 12A of theIBC is pending before the Adjudicating Authority (NCLT). TheNCLAT has stayed the constitution of the Committee of Creditors.The order impugned is only an interim order which does not callfor interference. In an appeal under Section 62 of the IBC, thereis no question of law which requires determination by this Court.The appeal is, accordingly, dismissed. The NCLT is directed totake up the settlement application and decide the same in thelight of the observations made above. [Para 32][142-B-C]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4911of 2021.

From the Judgment and Order dated 18.08.2021 of the NationalCompany Law Appellate Tribunal, Principal Bench at New Delhi inCompany Appeal (AT) (Ins) No.598 of 2021.

Mukul Rohtagi, Huzefa Ahmadi, Sr. Advs., Abhijeet Sinha, PuneetJain, Harsh Jain, Harshit Khanduja, Ms. Yashika Sharma, Ms. ChristiJain, Ravi Raghunath, Ms. Rathina Maravarman, Ms. Aakashi Lodha,Sanyat Lodha, Mahesh Agarwal, Himanshu Satija, Divyang Chandiramani,Ms. Komal Khushalani, Shadab S. Jan, Ms. Prerana Wagh, Yash Tembe,E. C. Agrawala, Advs. for the appearing parties.

The Judgment of the Court was delivered by INDIRA BANERJEE, J.

This Appeal under Section 62 of the Insolvency and BankruptcyCode, 2016 (IBC) is against an interim order dated 18[th] August 2021passed by the National Company Law Appellate Tribunal (NCLAT),Principal Bench at New Delhi in Company Appeal (AT) (Insolvency)No. 598 of 2021, filed by the Appellant, whereby the NCLAT issuednotice of the Appeal, but did not restrain the Interim ResolutionProfessional (IRP) from proceeding with Corporate Insolvency ResolutionProcess (CIRP) of M/s Seya Industries Limited (hereinafter referred toas “Corporate Debtor”). The NCLAT, however, restrained the IRPfrom constituting a Committee of Creditors (CoC) till the next date ofhearing. In the meanwhile, the Appellant and the Respondents weregiven the opportunity to settle their disputes before the AdjudicatingAuthority (NCLT) in terms of Section 12A of the IBC read with Rule 11

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Aof the National Company Law Tribunal Rules, 2016 (NCLT Rules). Theappeal was directed to be listed for hearing on 13[th] September 2021.

2. The Appellant is an erstwhile Director of Respondent No. 4,that is the Corporate Debtor. The Corporate Debtor, a companyincorporated under the Companies Act, 1956 has been carrying onBbusiness, inter alia, of manufacture of benzene based SpecialityChemicals since 1990. It is stated that the Corporate Debtor had investedabout Rs.400 Crores in its existing manufacturing facilities and had furtherinvested about Rs.900 Crores in an integrated Greenfield Mega Projectfor Speciality Chemicals.

C3. According to the Appellant, the Corporate Debtor is the sourceof livelihood for about 150 workmen, 40 unskilled workers and 75employees on its payroll and is engaged with more than 200 Customers/Vendors. It is claimed that the Corporate Debtor has a net worth of Rs.972 Crores and fixed assets worth more than Rs.1500 Crores.

D4. In order to expand its chemical manufacturing plant at Tarapur,Palghar (Maharashtra), the Corporate Debtor raised capital and theRespondent No.1 - M/s Beacon Trusteeship Limited (hereinafter referredto as “Beacon Trusteeship”) committed to invest Rs. 100 Crores in thesaid integrated Greenfield Mega Project, in the form of Rs.20 Crores,towards Compulsorily Convertible Preference Shares (CCPS) and Rs.E80 Crores, by way of Non-Convertible Debentures (NCDs). Thereafterthe Appellant, the Corporate Debtor and Respondent-Beacon Trusteeshipexecuted a Debenture Trust Deed (DTD), inter-alia, recording theterms and conditions of the issue of said NCDs. The Respondent No. 1was appointed, the Debenture Trustee as recorded in the DTD. TheFDTD laid down the obligations of the Corporate Debtor towards theNCDs.

5. On or about 11[th] March 2019, Beacon Trusteeship released asum of Rs.72,00,00,000/- (INR Seventy Two Crores) toward subscriptionsof 360 Series A debentures and 360 Series B Debentures (“First trancheGDebentures”). The aforesaid amount was to be invested in capacityexpansion of the company and hence not available as cashflow. Theservice of interest for the first tranche had to be met out of the secondtranche of Rs. 8 Crores to be invested by the Beacon Trusteeship whichwould have created the cash flow for the same and the remaining amount H

was to be invested for Capex investment. Beacon Trusteeship, however,defaulted in making payment of the second tranche of Rs. 8 Crores.

6. In addition to the DTD dated 8[th] March 2019, the parties enteredinto a Supplemental Deed dated 14[th] March 2019 revising certain termsset out in DTD including the timelines and schedule for the InterestPayment Dates.

7. On 31[st] May 2019, the Corporate Debtor sent an email to theRespondent Nos. 1 to 3, requesting payment of the second tranche ofRs.8 Crores in terms of the DTD. The Corporate Debtor also issuednotice to the Respondent Nos.1 to 3 to make payment of second trancheof Rs. 8 Crores.

8. On 12[th] September 2019, the Corporate Debtor took recourseto Arbitration Proceedings against the other Respondents. BeaconTrusteeship issued a notice to the Corporate Debtor regarding non-payment of interest amount of Rs.2,18,95,890.41/-. Beacon Trusteeshipalso issued an Enforcement Notice accelerating payment of the fullinvestment amount i.e. Rs.77,94,92,513/- as due on 17[th] October 2019on account of non-payment of Rs.2,18,95,890.41/- being interest couponamount.

9. On 18[th] October 2019, the Respondent Nos. 1 to 3 invokedClause 6.1 of the share pledge agreement and transferred 26.60 lakhshares worth Rs 91.78 Crores into the DEMAT Account(s) of theRespondents.

10. Between 18[th]-20[th] October 2019, the Corporate Debtor initiatedArbitration Proceedings before the High Court of Bombay. While theArbitral Proceedings, to which the Respondent Nos. 1 to 3 had themselvesagreed and consented to, were pending, they filed an application underSection 7 of the IBC before the National Company Law Tribunal(NCLT), Mumbai Bench.

11. On 15[th] January 2020, the Corporate Debtor filed its statementof claim seeking an award aggregating to Rs.848,75,30,000/- for lossesand damages suffered by it.

12. On 26[th] February 2020, the Respondents filed statement ofdefence and counter claim seeking an award for payment of its claimamounting to Rs.73,56,59,238/-.

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A13. On 24[th] March 2021, the Arbitrator passed an interim awardin favour of Beacon Trusteeship and other Respondents and directedthe Corporate Debtor to make payment of Rs.72,06,99,244/- along withinterest.

14. On 21[st] April 2021, being aggrieved by the order of theBArbitrator, the Appellant and Corporate Debtor preferred an arbitrationpetition under Section 34 of the Arbitration and Conciliation Act, 1996before the High Court of Bombay which is still pending.

15. The NCLT, Mumbai Bench heard the matter and reserved itsorder on 13[th] May 2021. On 1[st] July 2021, the Corporate Debtor and theCRespondents Nos. 1 to 3 filed a joint application before the NCLT, MumbaiBench requesting to defer the order as the parties were in the processof arriving at a settlement and sought time till 10[th] July 2021.

16. On 12[th] July 2021, the Corporate Debtor and the RespondentsNos. 1 to 3 again filed a joint application before the NCLT, MumbaiDBench seeking further time till 23[rd] July 2021 for arriving at a settlement.Thereafter, on 26[th] July 2021, they again sought time for settlement till12[th] August 2021.

17. On 3[rd] August 2021, the NCLT, Mumbai Bench, rejected therequest of the parties for further deferment of orders for arriving at aEsettlement and admitted and allowed the application under Section 7 ofthe IBC preferred by Respondent Nos. 1 to 3 against Corporate Debtor.

18. Being aggrieved by the order dated 3[rd] August 2021 passedby the NCLT, Mumbai Bench, admitting and allowing application forinitiating CIRP against the Corporate Debtor, the Appellant who isFDirector of the Corporate Debtor filed an appeal being Company Appeal(AT)(Insolvency) No. 598 of 2022 in the NCLAT, New Delhi.

19. On 8[th] August 2021, the parties had amicably settled theirdisputes and entered into a formal settlement, a copy of which is annexedto the paper book as annexure A-25.

20. On 10[th] August 2021, the NCLAT considering the settlementarrived at between the parties, granted interim stay of publication underSection 13 of the IBC and further gave liberty to the parties to adoptprocedure under Section 12A of IBC.

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21. On 12[th] August 2021, the parties with the consent of the IRPfiled an application under Section 12A of the IBC before the NCLT,Mumbai. However, the same has not been listed till date.

22. On 18[th] August 2021, the NCLAT stayed the formation ofCoC, but declined to exercise its power under Rule 11 of the NCLATRules to take on record the settlement and dispose of the matter. Further,the NCLAT permitted the IRP to issue publication and also handover allassets and proceed with the CIRP even though the matter had beensettled between the parties. Being dissatisfied by the order dated 18[th]August 2021 of the NCLAT, the Appellant has preferred the presentCivil Appeal.

23. Section 12A of the IBC enables the Adjudicating Authority toallow the withdrawal of an application admitted under Section 7 or Section9 or Section 10, on an application made by the applicant with the approvalof 90% voting shares of the Committee of Creditors in such a manneras may be specified.

24. Section 12A of the IBC clearly permits withdrawal of anapplication under Section 7 of the IBC that has been admitted on anapplication made by the applicant. The question of approval of theCommittee of Creditors by the requisite percentage of votes, can onlyarise after the Committee of Creditors is constituted. Before theCommittee of Creditors is constituted, there is, in our view, no bar towithdrawal by the applicant of an application admitted under Section 7of the IBC.

25. In exercise of power conferred by Section 469 of theCompanies Act, 2013, the Central Government has made the NationalCompany Law Tribunal Rules, 2016, hereinafter, referred to as the“NCLT Rules”. Rule 11 of the NCLT Rules reads as :-

“11. Inherent Powers.- Nothing in these rules shall bedeemed to limit or otherwise affect the inherent powers ofthe Tribunal to make such orders as may be necessary formeeting the ends of justice or to prevent abuse of theprocess of the Tribunal.”

26. As stated in its statement of objects and reasons, the object ofthe IBC is to consolidate and amend the laws relating to re-organisationand insolvency resolution of corporate persons, partnership firms and A

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Aindividuals in a time bound manner for maximisation of value of assetsof such persons, to promote entrepreneurship, availability of credit andbalance of interests of all stakeholders including alteration in the orderof priority of payment of Government dues and to establish an Insolvencyand Bankruptcy Board of India and matters connected therewith orthereto.B

27. The statement says that an effective legal framework fortimely resolution of insolvency and bankruptcy would supportdevelopment of credit markets, encourage entrepreneurship, improvebusiness and facilitate more investments leading to higher economicgrowth and development.C

28. A reading of the statement of objects and reasons with thestatutory Rule 11 of the NCLT Rules enables the NCLT to pass ordersfor the ends of justice including order permitting an applicant for CIRPto withdraw its application and to enable a corporate body to carry onbusiness with ease, free of any impediment.D

29. Considering the investments made by the Corporate Debtorand considering the number of people dependant on the Corporate Debtorfor their survival and livelihood, there is no reason why the applicant forthe CIRP, should not be allowed to withdraw its application once itsdisputes have been settled.E

30. The settlement cannot be stifled before the constitution of theCommittee of Creditors in anticipation of claims against the CorporateDebtor from third persons. The withdrawal of an application for CIRPby the applicant would not prevent any other financial creditor fromtaking recourse to a proceeding under IBC. The urgency to abide byFthe timelines for completion of the resolution process is not a reason tostifle the settlement.

31. Mr. Mukul Rohtagi, learned Senior Counsel appearing on behalfof the Appellant drew our attention to an order dated 25[th] August 2021,passed by a Bench of coordinate strength comprising S. Abdul NazeerGand Krishna Murari, J.J. in Civil Appeal No. 4993 of 2021, the relevantpart whereof is extracted hereinbelow:

“(3) We have heard learned counsel for the parties. It isnot in dispute that CoC has not been constituted so far.This Court in Swiss Ribbons Private Limited and Anr. v.

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Union of India and others- (2019) 4 SCC 17 has held thatat any stage, before a Committee of Creditors is constituted,a party can approach National Company Law Tribunal(NCLT) directly and that the Tribunal may, in exercise ofits inherent powers under Rule 11 of NCLT Rules, allow ordisallow an application for withdrawal or settlement. Itwas held thus:

82. It is clear that once the Code gets triggered byadmission 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 bodywhich is to oversee the resolution process must beconsulted before any individual corporate debtor isallowed to settle its claim. A question arises as to whatis to happen before a Committee of Creditors isconstituted (as per the timelines that are specified, aCommittee of Creditors can be appointed at any timewithin 30 days from the date of appointment of the interimresolution professional). We make it clear that at anystage where the Committee of Creditors is not yetconstituted, a party can approach NCLT directly, whichTribunal may, in exercise of its inherent powers underRule 11 of NCLT Rules, 2016, allow or disallow anapplication for withdrawal or settlement. This will bedecided after hearing all the parties concerned andconsidering all relevant factors on the facts of each”case.

(emphasis supplied)

(4) In the instant case, as noticed earlier, the applicant-respondent no.1 had made an application before the NCLT,Mumbai Bench, under Rule 11 of the NCLT Rules forwithdrawal of company petition filed under Section 9 ofthe Insolvency and Bankruptcy Code, 2016 (IBC) on theground that the matter has been settled between theCorporate debtor and the applicant-respondent no.1.

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(5) Having heard learned counsel for the parties andhaving regard to the facts and circumstances of the case,we are of the view that the applicant-respondent no.1 wasjustified in filing the application under Rule 11 of the NCLTRules for withdrawal of the company petition on the ground A

that the matter has been settled between the parties.”B

32. The application for settlement under Section 12A of the IBCis pending before the Adjudicating Authority (NCLT). The NCLAT hasstayed the constitution of the Committee of Creditors. The order impugnedis only an interim order which does not call for interference. In anappeal under Section 62 of the IBC, there is no question of law whichCrequires determination by this Court. The appeal is, accordingly,dismissed. The NCLT is directed to take up the settlement applicationand decide the same in the light of the observations made above.

Ankit Gyan and Anurag BhaskarD(Assisted by : Rahul Kumar, LCRA)

Appeal dismissed.

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