Uttara Foods and Feeds Private Limited V. Mona Pharmachem

The Supreme Court's judgment in the present case involves restricting the NCLT from providing for a halt to the resolution process, but this is an economically ineffective move as the NCLT and NCALT's provision to halt the resolution process will give banks and corporate creditors the opportunity to minimize their losses on default loans. The Supreme Court's decision is based on the needs of the general public and made from the point of view of policy makers.
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Introduction

In the case of Uttara Foods and Feeds Private Limited v. Mona Pharmachem[1], the Supreme Court recommended that the competent authority should amend the relevant rules of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, to include the power to allow settlement. This led to the formation of the Insolvency Law Committee in late 2017, to consider the proposals to amend the Code.

Facts

Mona Pharmachem, a pharmaceutical company, used to supply products to Uttara Foods and Feeds Pvt. Ltd. A payment was due for drugs provided by Mona pharmachem to the Uttara Foods, for which bills were issued. The bill itself was outstanding on the first invoice which was issued on 10.6.2014 and got due on 9.8.2014. Although, Uttara Foods eventually paid part payment for three of the invoices, an unpaid Rs. 22,26,672 still existed. The Operational Creditor claimed that the invoices have interest of 24 % per annum on the pending payment and has demanded interest in addition to the Rs. 22,26,672 due amounts.

The Operational Creditor, herein, Mona pharmachem, filed a complaint against the Corporate Debtor, Uttara Foods and Feeds Private Limited, claiming a sum of Rs. 22,26,672 along with interest which is unpaid, and the first date of default happened on 9.8.2014. The Petitioner initiated this action against the Respondent pursuant to Section 9 of Insolvency and Bankruptcy Code, 2016, read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, seeking reliefs.

The operational creditor sent a demand notice to the corporate debtor under IBC on 15.03.2017, but the corporate debtor did not give a reply for the same. The operating creditor had already given a prior notice to the corporate debtor which expired on 13.03.2017. The corporate investor has no interest in repaying the money back to the company creditors that can be interpreted as they have not replied to any of the notices issued either by the operational creditor.

Mona Pharmachem however, filed a petition before the NCLT on 09.06.2017, submitting all the necessary bills, invoices, bank account statements, demand notices before the court. The court issued a notice to the corporate debtor to appear before the court, but the corporate debtor showed no interest in complying with the court’s instructions. The corporate investor has no interest in repaying the money back to the company creditors that can be interpreted as they have not replied to any of the notices issued either by the operational creditor.

The court acknowledged the evidence provided by the corporate creditor and therefore granted a verdict in favour of the corporate creditor. The court in its judgment forbade the corporate debtor to change the company’s properties before the full balance is paid to the corporate creditor. In addition, the court further forbade the transfer of legal rights over the company’s properties Later, the corporate creditor filed a petition for an out of court settlement with the corporate debtor which was thereby been accepted by the NCLT.

The Uttara Foods and Feeds Pvt. Ltd., hence, appealed before the Apex Court against the decision of the NCLT for accepting the petition for out of court settlement.

Issue Raised

  • Whether the NCLT has the power to accept petition for an out of court settlement after a proceeding is initiated under Sec. 9 of the IBC?

Decision of the Court

The Supreme Court directed the government to amend the clause relating to the inherent power of NCLT and NCLAT in order to allow the dismissal of petitions filed under the Insolvency Code in the event the parties settle the matter themselves. Under Rule 8 of the Insolvency and Bankruptcy Board (Application to Adjudicating Authority) Law, 2016, the Adjudicating Authority does not use its inherent powers for the withdrawal of the once it has accepted it.

Consequently, appeals were made before the Supreme Court against NCLAT’s decision, which by exercising its powers under Article 142 of the Constitution allowed for the removal of cases filed under the Insolvency Code where compromise has been reached between the parties. The appeal was therefore, been allowed by the Supreme Court and ordered to send a  copy of the order directly to the Ministry of Law and Justice for amending the relevant rules with regard to the inherent powers of the NCLT and NCLAT stated under the IBC, hence, eliminating frivolous litigation in cases where compromise between parties has been reached.

Analysis

The provisions which were specifically been challenged are Section 8 and Section 9 of the Insolvency and Bankruptcy Code, 2016, read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

With regard to the issue, the Supreme Court has not only given a new aspect to the Insolvency Code by allowing petitions filed under the Insolvency Code to be removed after the parties have agreed to resolve their financial disputes against a corporate debtor at some point of the insolvency proceedings, but also poses another important question as to the fate of other creditors who were unable to do so.

Through this judgment, the Supreme Court observed that NCLT and NCLAT do not have intrinsic powers to require the insolvency settlement process to resolve dispute and will be controlled by IBC provisions. The rationale behind this decision is that after the insolvency resolution accepts the petition, a joint procedure starts to complete the process, the NCLT or NCLAT’s order to post-admission out of court settlement may impact other creditors’ interests.

In Lokhandwala Kataria Construction Pvt. Ltd v. Nisus Finance and Investment Manager LLP[2], similar nature of facts could be seen. This is because the corporate creditor’s recovery of loans should be seen as a collective action, but the individual interest should not be weighed against other interests.

In addition, by ordering out of court settlement, the appeals made by the aggrieved parties would be in vain, and a pure waste of the judiciary’s time would thus reduce the effectiveness of the nation’s judiciary. Following the Tribunal’s approval of the appeal, it acquires the form of representative suit and causes a newspaper release while enabling other investors to seek a right to join in the insolvency settlement process. IBC will not require the complaint to be rejected on the grounds of a settlement between the operating creditor and the corporate debtor, because this would affect other creditors’ rights.

By providing the NCLT with the right to halt the resolution process when considering the settlement deal, it may help to prevent problems such as that which emerged in the Binani Cement resolution in which the default promoters and UltraTech, who came in behind winning bidder Dalmia Bharat, negotiated a deal to take over the promoters share.

The Supreme Court’s judgment in the present case involves restricting the NCLT from providing for a halt to the resolution process, but this is an economically ineffective move as the NCLT and NCALT’s provision to halt the resolution process will give banks and corporate creditors the opportunity to minimize their losses on default loans. The Supreme Court’s decision is based on the needs of the general public and made from the point of view of policy makers.

Conclusion

The Supreme Court, therefore, affirmed in this decision the dynamism of law and the rational solution in line with the ideals of natural justice. Focusing on the goal of the burden of litigation where the parties themselves decide to negotiate and resolve their disputes, such resolution would be fostered and granted contractual force, thereby facilitating the Alternative Dispute Settlement Mechanism, which is the basic legal framework.


[1] C. A. No. 18520 of 2017

[2] Lokhandwala Kataria Construction Pvt. Ltd v. Nisus Finance and Investment Manager LLP, (2017) 140 CLA 215 (India).

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