Can a Corporate Debtor Settle Claims During Insolvency Proceedings? Supreme Court Clarifies
GLAS Trust Company LLC vs BYJU Raveendran & Ors.
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• 4 min readKey Takeaways
• A court cannot approve a settlement during insolvency proceedings without following the prescribed legal framework.
• Section 12A of the IBC allows withdrawal of applications post-admission only with 90% creditor approval.
• The NCLAT's inherent powers under Rule 11 cannot override established procedures for insolvency settlements.
• All creditors become stakeholders once a corporate insolvency resolution process is initiated.
• Settlements must be scrutinized to prevent potential misuse of funds and ensure compliance with court orders.
Introduction
The Supreme Court of India recently addressed critical questions regarding the settlement of claims during insolvency proceedings in the case of GLAS Trust Company LLC vs BYJU Raveendran & Ors. This judgment clarifies the legal framework governing such settlements, particularly in the context of the Insolvency and Bankruptcy Code (IBC). The ruling emphasizes the importance of adhering to established procedures to protect the interests of all creditors involved in the insolvency process.
Case Background
The case arose from a judgment of the National Company Law Appellate Tribunal (NCLAT) dated August 2, 2024, which approved a settlement between Byju Raveendran and the Board of Control for Cricket in India (BCCI) regarding operational debts owed by Think and Learn Pvt Ltd, the corporate debtor. The appellant, GLAS Trust Company LLC, a financial creditor, objected to this settlement, raising concerns about the source of funds and the implications for other creditors.
The NCLAT had invoked its inherent powers under Rule 11 of the NCLAT Rules to approve the settlement, despite the ongoing corporate insolvency resolution process (CIRP) initiated under Section 9 of the IBC. The appellant contended that the NCLAT erred in bypassing the established procedures for withdrawal and settlement of claims, particularly given the significant changes in the legal framework governing such matters.
What The Lower Authorities Held
The NCLAT held that the affidavit and undertaking provided by Riju Raveendran, one of the respondents, indicated that the funds for the settlement were generated from his personal sources and did not violate any court orders. The NCLAT concluded that the settlement was valid and in the interest of the corporate debtor, despite the objections raised by the appellant.
The Court's Reasoning
The Supreme Court, led by Chief Justice Dhananjaya Y Chandrachud, examined the legal framework surrounding the IBC and the implications of the NCLAT's decision. The Court emphasized that once a CIRP is initiated, the proceedings become collective, involving all creditors as stakeholders. This collective nature of the proceedings necessitates that any settlement must consider the interests of all creditors, not just those directly involved in the settlement.
The Court noted that Section 12A of the IBC provides a clear procedure for the withdrawal of applications post-admission, requiring the approval of 90% of the committee of creditors. The NCLAT's reliance on its inherent powers under Rule 11 to approve the settlement was deemed inappropriate, as it circumvented the established legal framework designed to protect the interests of all creditors.
Statutory Interpretation
The judgment highlighted the importance of adhering to the statutory provisions of the IBC, particularly Section 12A and Regulation 30A, which outline the procedures for withdrawal and settlement of claims. The Court underscored that these provisions were enacted to ensure that the interests of all creditors are considered and that the insolvency process is not misused for preferential payments or to circumvent the collective nature of the proceedings.
Why This Judgment Matters
This ruling is significant for legal practice as it reinforces the necessity of following established procedures in insolvency matters. It clarifies that settlements cannot be approved without proper scrutiny and adherence to the legal framework, thereby protecting the rights of all creditors involved in the insolvency process. The judgment serves as a reminder that the IBC is designed to facilitate collective resolution rather than individual recovery, ensuring that all stakeholders are treated fairly.
Final Outcome
The Supreme Court allowed the appeal filed by GLAS Trust Company LLC and set aside the NCLAT's judgment approving the settlement. The Court directed that the parties must follow the legal framework governing the withdrawal of CIRP and that the amount maintained in escrow must be deposited with the committee of creditors.
Case Details
- Case Title: GLAS Trust Company LLC vs BYJU Raveendran & Ors.
- Citation: 2024 INSC 811
- Court: IN THE SUPREME COURT OF INDIA
- Bench: Justice Dhananjaya Y Chandrachud, Justice J.B. Pardiwala, Justice Manoj Misra
- Date of Judgment: 2024-10-23
