Supreme Court Reinforces IBC Withdrawal Framework, Protects Collective Creditor Rights

The case of GLAS Trust Company LLC v. BYJU Raveendran & Ors. (2024 INSC 811) centers on the Insolvency and Bankruptcy Code (IBC), 2016, specifically addressing the withdrawal of the corporate insolvency resolution process (CIRP) post-admission. The National Company Law Tribunal (NCLT) initiated CIRP against Think and Learn Pvt Ltd, the Corporate Debtor, based on a petition by the Board of Control for Cricket in India (BCCI), an operational creditor. The National Company Law Appellate Tribunal (NCLAT) approved a settlement between them under Rule 11 of the NCLAT Rules, 2016, setting aside the CIRP. GLAS Trust, a financial creditor, challenged this, alleging procedural irregularities and concerns over the source of settlement funds.

The key legal questions were whether GLAS Trust had locus to challenge the NCLAT’s order, whether the NCLAT erred in invoking Rule 11 despite the procedure under Section 12A and Regulation 30A, and whether it adequately addressed GLAS Trust’s objections. GLAS Trust argued that the NCLAT bypassed mandatory procedures, while the respondents contended that Rule 11 could be invoked before the Committee of Creditors (CoC) was formed, and GLAS Trust lacked standing. The Supreme Court, on October 23, 2024, allowed the appeal, holding that the NCLAT’s use of Rule 11 was unwarranted as Section 12A and Regulation 30A provide an exhaustive framework for CIRP withdrawal. It criticized the NCLAT for summarily dismissing GLAS Trust’s concerns about fund sources, emphasizing that CIRP is a collective proceeding requiring consideration of all creditors’ interests.

The Court clarified that Section 12A and Regulation 30A mandate that withdrawal applications be routed through the Interim Resolution Professional and adjudicated by the NCLT, even before CoC formation, rejecting the use of inherent powers under Rule 11 to circumvent this process. It emphasized that the NCLT must conduct an adjudicatory exercise, hearing all stakeholders, as CIRP becomes in rem post-admission. The Court directed the settlement amount of Rs 158 crore to be held in escrow by the CoC, pending NCLT directions, to ensure transparency. This ruling reinforces the IBC’s objective of balancing creditor interests and preventing preferential settlements, clarifying that statutory procedures cannot be bypassed by discretionary powers. It further underscores that the NCLT’s role is not merely administrative but involves scrutinizing settlements to protect all creditors. This case is pivotal as it upholds the IBC’s structured framework, ensuring fairness and protecting collective creditor rights in insolvency proceedingS.