This has been authored by Eshna Kumar & Gloria H. Purty.

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Under Rule 11 of the NCLT Rules, the NCLT has been given inherent powers. These powers were regularly used even to carry out settlements. This piece attempts to explain the contours of Rule 11 of the NCLT Rules, in light of the recent judgment in the matter titled In Glas Trust Company LLC v. BYJU Raveendran & Ors. 2024 INSC 811.

In the BYJU Raveendran Judgment, the Supreme Court delved into the use of inherent powers and set boundaries around extraordinary authority. This landmark ruling highlights that procedural safeguards cannot be bypassed in insolvency matters, emphasizing that inherent powers should not undermine statutory mandates like Section 12A of the IBC (which protects creditors’ collective interests through a rigorous procedural mechanism). However, it is interesting to note that the BYJU Raveendran Judgment leaves the contours of Section 60 still remain open.

Prior to 2018, withdrawal of insolvency proceedings after admission were allowed relied only under Article 142 of the Constitution of India. To name,  Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers (2018) 15 SCC 589 was once such case.

As a result the Supreme Court of India in Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem (2018) 15 SCC 587 highlighted the need for legislative intervention for such withdrawal post admission.

The Ministry of Corporate Affairs responded by introducing Section 12A of IBC, which mandates a 90% approval threshold from the Committee of Creditors (CoC) for withdrawal applications post admission, thus formalizing the process to ensure that no individual creditor’s settlement undermines the collective interests of the financial creditors.

The Supreme Court’s Analysis: Beyond Rule 11’s Inherent Powers

In the BYJU Raveendran judgment, the Court reiterated that while tribunals possess inherent powers, these cannot be wielded to contravene statutory procedures laid down in Section 12A and Regulation 30A. This reasoning draws from the decision in Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17, where the Supreme Court upheld the constitutionality of the 90% CoC threshold, asserting that such a high bar preserves the interests of all stakeholders. The Supreme Court retained part of the Swiss Ribbons which emphasized that insolvency proceedings are “in rem,” extending beyond individual creditors to encompass the entire creditor body, which justifies the strict withdrawal criteria. However, the present case also catalyzed a formal withdrawal framework through Section 12A and Regulation 30A, replacing ad-hoc reliance on inherent powers under Rule 11 with a detailed, stage-wise procedure. This evolution is a departure from Swiss Ribbons which emphasis on invoking Rule 11 on a case-by-case basis. Thus, it narrows Rule 11’s scope, establishing that procedural compliance takes precedence except where no statutory alternative exists.

The Court also referenced Brilliant Alloys Private Limited vs. S. Rajagopal and Ors. (2022) 2 SCC 544., which had previously noted that while Regulation 30A initially seemed to restrict withdrawals post-invitation for expressions of interest, it was to be read alongside Section 12A, permitting withdrawals even at later stages under specific circumstances. This judgment underscored the need for procedural compliance while allowing limited flexibility when justifiable.

Consequences of the BYJU Raveendran Decision

1. Reaffirmation of Procedural Discipline: The judgment mandates strict adherence to Section 12A, limiting the scope of Rule 11’s inherent powers. This sets a precedent that inherent powers cannot bypass procedural rules designed to protect all stakeholders, ensuring that Rule 11 is not a shortcut to settle individual claims at the expense of creditor rights.
2. Impact on Settlement Efficiency: The decision’s insistence on a formal withdrawal route may slow settlement processes within insolvency, potentially deterring creditors or corporate debtors seeking swift compromise. However, it solidifies the IBC’s intent to uphold a transparent, stakeholder-inclusive process rather than expediency.
3. Strengthening CoC Authority and Stakeholder Safeguards: This ruling affirms the CoC’s decisive role in settlement approvals, reinforcing the IBC’s in rem nature. By disallowing deviations from Section 12A’s pathway, the judgment discourages individual creditor settlements that do not account for broader stakeholder interests.
4. Ambit of Section 60 of IBC- This ruling affirms the finding of Swiss Ribbons to the extent of invocation of Section 60 of IBC in case the settlement agreement is rejected by the CoC despite a reasonable effort.
5. Impact on Future Judicial Interpretation: Can Flexibility and Rigidity Coexist? The Supreme Court has now set clear expectations for the role of tribunals in insolvency, signalling caution against overusing inherent powers where procedural statutes apply. Previous cases often permitted tribunals to approve settlements via Rule 11 for expediency, but BYJU Raveendran judgment brings a paradigm shift, asserting that procedural rules take precedence.

As a result, this judgment raises questions that warrant reflection by practitioners and policymakers alike:

• Does rigid adherence to procedure serve the evolving needs of insolvency law, or could it hinder practical settlement solutions, especially at the Appellate stage?

• Could an alternative mechanism, blending flexibility with procedural compliance, address the balance between expediency and creditor protection?

• Is the CoC’s 90% threshold too stringent, or does it rightfully guard collective interests?

• Does rejection of a settlement by 90% of voting share of CoC under Section 60 of IBC a departure from the 12A procedure or not?

Concluding Thoughts

BYJU Raveendran Judgment is a reassertion of procedural sanctity in insolvency law more than a decision on inherent powers. As the judiciary restricts inherent powers by statutory regime, the legal community remains with the aforementioned questions as to support both efficient resolutions and creditor protections. This judgment also calls upon lawmakers to consider adaptive amendments, ensuring that the IBC remains resilient and responsive to the complex landscape of corporate insolvency.