Once an insolvency petition has been admitted and the process is underway, can a corporate debtor and its creditors arrive at an out-of-court settlement and withdraw the insolvency proceedings? This question continues to exercise the minds of the adjudicating authorities under the Insolvency and Bankruptcy Code, 2016. While an ad hoc judicial solution constructed by the Supreme Court has been holding matters together thus far, there is an urgent need for a long-lasting resolution given the increasingly common use of the settlement process under the Indian insolvency regime. More curiously, even the adjudicating authorities have exhibited their eagerness to nudge combatants in an insolvency process to pursue a settlement.
The immediacy of the legal quagmire is palpable in the hotly contested insolvency of Binani Cement Ltd. The company was dragged into the insolvency process by a financial creditor, after which the resolution professional and committee of creditors undertook a bidding process. While a consortium led by Dalmia Bharat Ltd. emerged victorious in the bidding war, the entire process was upended when UltraTech Cement Ltd. entered into a parallel deal with Binani Industries Ltd. to buy its 98.43 percent shareholding in Binani Cement. In view of this, UltraTech and the company management sought to terminate the insolvency process. To this, the National Company Law Tribunal, as well as the National Company Law Appellate Tribunal have suggested that the parties nail down a settlement “in the interest of all the stakeholders”.
This has resulted in a peculiar situation. Dalmia Bharat’s bid, which was chosen in compliance with the elaborate process stipulated in the Code, is in danger of failure. Instead, UltraTech (which was the unsuccessful bidder) now stands a real chance of wresting control of the company, and that too through a deal struck outside the insolvency process, by which it raised its offer to make it palatable to the creditors. This scenario gives rise to a dichotomy of sorts.
- On the one hand, the sanctity of the insolvency process enshrined in the Code would dictate that parties must adhere to in a steadfast manner with no room whatsoever for deviation. If not, the entire purpose of the Code would be defeated.
- On the other hand, pragmatism would suggest that ultimately one must fall back upon market dynamics and determine the most optimal outcome for the stakeholders in an insolvency without procedure constituting an inefficient stumbling block.
There are arguments emanating from both ends of the spectrum.
Proponents of the sanctity of process approach assert that insolvency is a collective process involving all creditors and ceases to remain merely a matter of bilateral interest between the corporate debtor and one or more creditors.
The NCLT too observed in the case of Parker Hannifin India Pvt. Ltd. that the nature of an insolvency petition is that of a representative suit and that the dispute does not remain only between the creditor and the debtor, thereby disentitling them from withdrawing a petition after admission. Furthermore, a generous settlement opportunity risks converting the insolvency process into the recovery tool, which would create distorted incentives among creditors to rush to the adjudicating authorities with insolvency petitions against debtors in the hope of extracting a recovery in the settlement.
The principal counterargument from the pragmatists is that any outcome that results in a successful resolution of the debts of the company ought to be accepted so long as it is in the interests of all stakeholders.
In other words, the end justifies the means.
Bearing in mind these countervailing factors, it would be useful to consider the legal position in India on settlement of insolvency claims. Strikingly, there is limited guidance in the Code and attendant rules and regulations on whether insolvency proceedings can be withdrawn on the back of an out-of-court settlement. Whatever is available favours the sanctity of process camp. The clearest support emanates from Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which indicates that an adjudicating authority may permit withdrawal of an insolvency application upon request made “before admission”. Hence, once admitted, the adjudicating authorities’ hands are tied as they no longer possess the power to accept a settlement and terminate the insolvency process.
This legal position has been accepted by the Supreme Court in at least three cases involving Lokhandwala Kataria Construction Pvt. Ltd., Mothers Pride Dairy India Pvt. Ltd. and Uttara Foods and Feeds Pvt. Ltd. However, in a strange turn of events, despite a constraining position under the Code regime, the Supreme Court in all three cases exercised its discretionary powers under Article 142 of the Constitution to record the settlement and dispose matters accordingly. The Court has done so in brief orders that are devoid of the necessary reasoning on the jurisprudential questions, compounded by the fact that orders passed by the Supreme Court under Article 142 do not constitute binding precedent.
Hence, the uneasily constructed status quo would mean that all settlements in insolvency proceedings must receive the imprimatur of the Supreme Court in order to be effective.
It is not surprising that, as of this writing, the lenders of Binani Cement have required the company to obtain the seal of approval of the Supreme Court to the UltraTech deal before proceeding further. But, the earlier decisions of the Court must not be taken as an indication of the possible outcome in that case for several reasons. First, the Binani case is much larger and more complex than the earlier settlement cases before the Supreme Court. The brevity of the earlier decisions accompanied their lack of precedential value offers much less certainty as to the outcome in the Binani case. Second, in the earlier cases, the Court merely seemed to go through the motions of accepting the settlement without any dispute. One cannot fathom such an outcome in the wake of Dalmia Bharat’s continued protestations against any kind of settlement that is likely to witness a closely-fought battle in the Supreme Court. The decision may have to be guided by the objectives and principles of the Code and common law in view of the general constitutional discretion exercised by the court in such cases.
In order to avert the current logjam regarding settlements, the Supreme Court in the Uttara Foods case recommended that the relevant rules be amended to include inherent powers to the adjudicating authorities to obviate unnecessary appeals being filed before the Supreme Court in matters where such agreement has been reached. This recommendation sends strong signals in favour of pragmatism with powers to the authorities to accept settlements where they are found to be the most acceptable outcome for all stakeholders.
Perhaps taking a cue from the Supreme Court’s exhortation, the recently released report of the Insolvency Law Committee takes cognisance of this conundrum. Recognising the collective nature of the insolvency process, the Committee recommended that an insolvency process, once admitted, can be withdrawn only with the consent of the committee of creditors that is supported by a voting share of 90 percent. If this recommendation is accepted by the government, it will swing the pendulum somewhat as withdrawal matters are within the domain of a supermajority of creditors and not merely a bilateral matter between the corporate debtor and only some creditors. It reinstates settlement matters back into the insolvency process rather than outside it. Although 90 percent is an unduly high threshold, providing decision-making powers to the creditors on matters of settlement retains consistency with the goals of the Code.
Until the regulations are amended to clarify the legal position, the temporary solution crafted by the Supreme Court will constitute the mainstay of settlement in insolvency proceedings. Clearly, the ongoing Binani Cement saga is likely to test its mettle.
Umakanth Varottil is an Associate Professor of Law at the National University of Singapore. He specialises in company law, corporate governance and mergers and acquisitions.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.