Company settled with its creditor. NCLT said no. Supreme Court said —

The company settled with its creditor and paid within a week. But the NCLT said: 'You can't withdraw the insolvency case — other creditors have claims.' The Supreme Court disagreed.

Manpasand Beverages Ltd. owed Rs 1.31 crore to its packaging supplier Huhtamaki PPL Ltd. The supplier filed an insolvency petition. On 1 March 2021, the National Company Law Tribunal (NCLT) admitted the case — meaning it formally accepted the petition and triggered the insolvency process. Within two days, the two companies settled: Huhtamaki agreed to accept Rs 95.72 lakh. The company paid the full amount within a week.

But when the company's suspended director asked the NCLT to let them withdraw the insolvency case, the tribunal refused. Its reason: 35 other creditors had filed claims. The NCLT also noted that the suspended director may have violated the moratorium (a legal freeze on transferring company assets after insolvency is admitted) by moving company funds. And it held that the relevant regulation — Regulation 30A of the IBBI Regulations — was not binding on it.

The Supreme Court reversed that decision in March 2023. In doing so, it settled a question that had been nagging insolvency practitioners: can a company and its creditor settle a debt and walk away from insolvency proceedings before a committee of creditors is formed, even when other creditors are waiting in line?

When the supplier knocked on NCLT's door

Huhtamaki PPL Ltd. was an operational creditor — a supplier of goods or services, not a bank or financial institution. Under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016, an operational creditor can file an insolvency petition against a company that fails to pay its dues. Huhtamaki did exactly that. The NCLT, Ahmedabad Bench, admitted the petition on 1 March 2021. The order was typed, stamped, and the case file — thin at first — began to grow.

Admission is a serious step. Once a case is admitted, a moratorium kicks in: the company cannot transfer assets, sell property, or make payments outside the ordinary course of business. An Interim Resolution Professional (IRP) — a licensed insolvency professional — takes control of the company's management. The goal is to keep the company alive while a resolution plan is worked out, or to liquidate it if no plan succeeds.

But something unusual happened here. Within two days of admission, Huhtamaki and Manpasand Beverages settled. The company paid Rs 95.72 lakh — about 73% of the original debt — and Huhtamaki accepted. The payment was completed by 8 March 2021, exactly a week after admission. The settlement cheque, signed and cleared, marked the end of the dispute between the two parties — or so it seemed.

The application that the NCLT rejected

On 10 March 2021, the suspended director of Manpasand Beverages filed an application under Regulation 30A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2018, read with Section 12A of the IBC. Section 12A allows withdrawal of an insolvency application after it has been admitted, but only if the NCLT approves. Regulation 30A lays down the procedure for such withdrawal, including when it can be filed before or after the committee of creditors (CoC) is formed.

The NCLT rejected the application on 13 April 2021. Its reasoning had three parts. First, 35 other creditors had filed claims against the company. Second, the suspended director may have violated the moratorium by transferring company funds — which could amount to fraudulent trading under Section 66 of the IBC. Third, the tribunal held that Regulation 30A was not binding on it, and that it could use its inherent powers under Rule 11 of the NCLT Rules, 2016, to reject the withdrawal. The courtroom in Ahmedabad fell silent as the order was read out; the suspended director's legal team exchanged glances. The file on the judge's desk had grown thicker with creditor claims.

The company appealed to the National Company Law Appellate Tribunal (NCLAT), but withdrew that appeal with liberty to restore it later. Meanwhile, the NCLAT stayed the formation of the committee of creditors. The company then filed a Special Leave Petition before the Supreme Court.

What the Supreme Court was asked to decide

The question before the Supreme Court was narrow but consequential: can an insolvency case be withdrawn after admission but before the committee of creditors is formed, even when other creditors have filed claims?

The company argued that Section 12A does not require the committee of creditors to be formed before a withdrawal application can be considered. Regulation 30A, it said, specifically contemplates withdrawal before CoC constitution — and that regulation is binding on the NCLT because it was framed under Section 240 of the IBC, which gives the Insolvency and Bankruptcy Board of India the power to make regulations.

The NCLT's position, in effect, was that once other creditors appear, the settlement between the original parties loses its primacy. The tribunal seemed to view itself as a guardian of all creditors, not just the one who filed the petition.

Why the Supreme Court reversed

A bench of Justice Vikram Nath and Justice B.R. Gavai allowed the appeal on 28 March 2023. The court's reasoning was crisp and decisive. As the judges took their seats in Court No. 6, the registry clerk handed up the case file — the same one that had travelled from Ahmedabad. Justice Nath leaned forward as the arguments began.

First, the court held that Section 12A of the IBC does not debar entertaining applications for withdrawal before the committee of creditors is constituted. An application under Section 12A cannot be kept pending just so that a CoC can be formed first. If the parties have settled before the CoC is in place, the NCLT must consider the withdrawal application on its merits.

Second, the court ruled that Regulation 30A of the IBBI Regulations is binding on the NCLT. The regulation was framed under the statutory power conferred by Section 240 of the IBC. It carries "statutory flavour," the court said — meaning it is not a mere guideline that the NCLT can ignore. The NCLT had erred in holding that Regulation 30A was not binding. Justice Gavai nodded as the judgment was delivered; the phrase "statutory flavour" would become the key takeaway for practitioners.

Third, and most importantly for future cases, the court held that a settlement between the applicant creditor and the corporate debtor cannot be stifled before CoC constitution simply because other creditors have filed claims. The court acknowledged that third-party creditors exist, but said they retain independent remedies. They can pursue their claims in separate proceedings. Their presence does not give the NCLT the power to block a pre-CoC settlement that the original parties have voluntarily reached.

On the question of alleged moratorium violations, the court held that even if transactions during the moratorium amounted to wrongful trading under Section 66 of the IBC, the remedy lies in separate proceedings. Such a violation does not, by itself, bar the settlement or the withdrawal of the Corporate Insolvency Resolution Process (CIRP — the formal name for the insolvency process under the IBC).

What this means for companies and creditors

The judgment clarifies a critical point of timing in insolvency law. If a company and its creditor settle before the committee of creditors is formed, the NCLT cannot refuse withdrawal simply because other creditors have appeared. The settlement is between the parties who started the process, and the tribunal must respect it.

For practitioners, the message is clear: move fast. If you are a corporate debtor and you want to settle with an operational creditor who has filed an insolvency petition, do it before the CoC is constituted. Once the CoC is formed, the dynamics change entirely — the committee, not the original creditor, controls the process, and withdrawal becomes far more difficult. One insolvency practitioner noted that the ruling effectively creates a "window period" — those critical days between admission and CoC formation — during which a settlement can still save the company from a full-blown resolution process.

THE PLAY: Settle with the petitioning creditor before the committee of creditors is formed — after that, withdrawal requires the committee's consent and the calculus shifts entirely.

The Supreme Court allowed the withdrawal. The NCLT's order was set aside. The application under Section 9 of the IBC — Huhtamaki's original insolvency petition — stood withdrawn. The court left the door open for other creditors to raise their claims in appropriate proceedings. But for Manpasand Beverages and Huhtamaki, the matter was closed.

The 35 other creditors would have to find their own way to court.