Consent Terms under IBC and Revival of CIRP on its Breach
[Nakshatra Gujrati is a student at National Law University Odisha.]
Civil cases often strain the resources of the involved parties, prompting them to seek resolution through compromise. In such cases, parties reach agreements known as "consent terms," which serve as written acknowledgments of liability and include undertakings to fulfil their respective responsibilities. In the context of the Insolvency and Bankruptcy Code 2016 (IBC or Code), consent terms have emerged as a recent development. The IBC aims to resolve corporate insolvency within a specified timeframe through a corporate insolvency resolution process (CIRP). While the Code allows 270 days for resolution, extensions of up to 330 days are commonly granted, and some cases even take 400 days to complete. Given the challenges in adhering strictly to these timelines, corporate debtors and financial creditors have found a workaround.
In cases of default, the financial creditor initiates CIRP by approaching the adjudicating authority. However, there are instances where the corporate debtor requests the financial creditor to withdraw the application and instead enter into a settlement regarding the debt amount. This settlement is formalized through "consent terms," which involve reciprocal promises between the corporate debtor and the financial creditor. An application for initiation of CIRP filed by the creditor can be withdrawn before or after admission by the adjudicating authority. The National Company Law Tribunal (NCLT) Rules 2016 provide provisions for restoring and reviving disposed-off applications.
The article addresses the situation where a settlement is reached, the application for CIRP is withdrawn by the creditor, and there is a risk of the debtor defaulting on payment. The article explores whether the creditor loses the right to take action against the debtor after signing a consent term and whether a CIRP application that was filed and subsequently withdrawn due to a consent term can be revived.
The Early Problems in Recognition of Consent Terms under IBC
The IBC does not prohibit consent terms, although it lacks specific provisions regarding them. The only supporting provisions can be found in Rules 48 and 49 of the NCLT Rules 2016. Rule 48 permits restoration of an application dismissed for default or decided on merits in the absence of the applicant; and, Rule 49 permits restoration of an application decided ex parte. The provisions relating to consent terms are to be found in the Civil Procedure Code 1908 (CPC). Order XXIII, Rules 1 and 3A deal with recording of compromise and withdrawal of suits. Under Rule 1(3), a fresh suit can only be instituted on the same cause of action if there is a formal defect in plaint but does not allow re-institution of withdrawn suits out of compromise. The only case fit for re-institution of such suits is provided under Rule 3A of Order XXIII which allows re-institution in case of compromise attained by fraud or misrepresentation.
If the rule of compromise from the CPC is applied to the IBC, then in the event that a consent term is signed by the corporate debtor and the creditor and the corporate debtor later defaults, the creditor would lose its recourse against the debtor under the IBC. This means that neither a fresh application can be filed nor can the original application be revived.
The NCLT in the case of AVANT Garde Private Limited v. HLL Bio Tech Privae Limited did not allow restoration of application in event of breach of consent terms following the compromise rule imported from CPC. The NCLT went on to rule that breach of consent term does not tantamount to default which is a requirement under Section 7 or Section 9 of the IBC to file an application for CIRP. However, this reasoning is flawed as the liability of the corporate debtor towards the creditor still exists. In the case of Sesh Nath Singh v. Baidyabati Sheoraphuli Co-operative Bank Limited, the Supreme Court held that “consent terms serve as a formal acknowledgment of liability”. Thus, the rule of compromise from CPC is a bad rule if applied in cases of IBC.
The Departure from Compromise Rule and the Need for Revival of CIRP Application
Earlier in this article, it is established that the process of CIRP which ought to be timebound faces challenge to adhere to strict timelines. In an event of default, if the corporate debtor and the creditor are allowed to enter into a settlement, it will be in furtherance of the foremost principle of IBC, i.e. resolution of entity without going into liquidation. Thus, it becomes very crucial to recognise the right of a creditor to proceed against corporate debtor in event of breach of consent terms.
Recently, in the case of Priyal Kantilal Patel v. IREP Credit Capital Private Limited (Priyal), the appellants went against the order of NCLT that had allowed revival of CIRP application on breach of consent terms. The appellants argued that the breach of consent terms does not amount to financial debt and thus the creditor has no right to file a petition for revival of CIRP. They relied on the ruling of National Company Law Appellate Tribunal (NCLAT) in Amit Kumar Agrawal v. Tempo Appliances Private Limited, that stated “merely breaching the terms of any agreement, including a settlement agreement by a party whereby some payment was due, would not fall within the scope of section 5(8) of IBC, so as to constitute a ‘financial debt’.”
The NCLAT rejected the ruling and observed that “once the parties have arrived at a consent term it would not mean that the liability of corporate debtor has been wiped out. In case of breach of consent terms, the creditor is allowed to revive the application of CIRP and not allowing it by the adjudicating authorities would mean a loophole for corporate debtors to escape their liability”. Further, in IDBI Trusteeship Limited v. Nirmal Lifestyle Limited (IDBI), NCLAT rejected the contention of corporate debtor that breach of consent terms cannot lead to revival of original CIRP application.
In the cases of Ahluwalia Contracts (India) Limited v. Logix Infratech Private Limited, Nidhi Rekhan v. Samyak Projects Private Limited, AVANT Garde Private Limited v. HLL Bio Tech Private Limited, the respective NCLTs have held that “a debt obligation arising out of a settlement agreement cannot be attributed as a financial debt”. Curiously, a debt that was financial in nature remained no longer the same after arriving at a consent term. This position was flawed legally and rendered the creditors powerless in case of breach of consent terms by the corporate debtor.
The recognition of consent terms under the IBC, as seen in the Priyal case and the IDBI case, represents a significant development in the Indian insolvency regime. These cases have established that consent terms between the corporate debtor and the creditor have legal validity and can serve as a basis for resolving the debt-related issues. In light of this development, it is essential for adjudicating authorities to consider allowing of revival of applications for CIRP in cases where the corporate debtor breaches the consent terms.
By permitting the revival of CIRP applications, the adjudicating authorities can ensure that the rights of the creditor are protected. This approach also reduces the burden on the authorities by encouraging parties to resolve their disputes through settlements, rather than resorting to lengthy and costly insolvency proceedings. Clear and unequivocal recognition of the creditor's right to revive the CIRP application in case of a breach of consent terms will act as an important safeguard to discourage corporate debtors from disregarding their obligations.