Supreme Court allows two broke firms to settle dispute

The Supreme Court, using its extraordinary constitutional powers, has allowed two companies to withdraw from insolvency proceedings and settle their loan dispute despite the case having been admitted by the National Company Law Tribunal (NCLT).

It should be noted here that once the NCLT admits a case for initiating corporate insolvency resolution process under the Insolvency and Bankruptcy Code of 2016, the case cannot be withdrawn even if the parties have decided to settle.

Article 142 provides that “the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it”.

Just seven months after the operationalization of the Insolvency and Bankruptcy Code (IBC), it has been tested by the Supreme Court with its latest judgment. The policy underlying IBC shifts the incentive of the parties from individual recovery actions to collective action. In that context, after a petition has been filed in NCLT, allowing out-of-court bilateral settlement between the borrower and one creditor may contradict that basic objective of collective action.

After the admission of the petition, it acquires the character of a representative suit and through publication in newspapers, other creditors get a right to participate in the insolvency resolution process and therefore IBC does not allow the petition to be dismissed on the basis of a compromise between the operational creditor and corporate debtor.

National Company Law Tribunal:

National Company Law Tribunal (NCLT) is a quasi-judicial body that will govern the companies in India. It was established under the Companies Act, 2013 and is a successor body to the Company Law Board.

NCLT will have the same powers as assigned to the erstwhile Company Law Board (which are mostly related to dealing with oppression and mismanagement), Board for Industrial and Financial Reconstruction (BIFR)(revival of sick companies) and powers related to winding up of companies (which was available only with the High Courts).

The setting up of NCLT as a specialized institution for corporate justice is based on the recommendations of the Justice Eradi Committee on Law Relating to Insolvency and Winding up of Companies.

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