Settled in two days, fought for sixteen months — and won.

Two Days to Settle, Sixteen Months to Unsettle

When Huhtamaki PPL Ltd. filed an insolvency petition against Manpasand Beverages Ltd. for an unpaid debt of about Rs.1.31 crore, it was a routine operational creditor claim. The NCLT, Ahmedabad Bench admitted the petition on 1 March 2021. Within two days, the parties had a settlement. Within a week, the full amount—Rs.95.72 lakhs—was paid. The suspended director of the company, Abhishek Singh, moved an application to withdraw the Corporate Insolvency Resolution Process (CIRP) before any Committee of Creditors (CoC) was even formed.

What should have been a straightforward closure turned into a sixteen-month legal battle. The NCLT rejected the withdrawal. The NCLAT stayed the formation of the CoC but did not decide the withdrawal. The Supreme Court finally stepped in on 28 March 2023, and in a crisp judgment authored by Justice Vikram Nath, with Justice B.R. Gavai concurring, set aside the NCLT order and allowed the withdrawal. The stakes were existential: a company with approximately 700 employees and a turnover of nearly Rs.985 crore was hanging in the balance because of a procedural dispute over whether a settlement reached before the CoC was formed could be honoured.

The Settlement That Came Too Fast for the Law

Huhtamaki PPL Ltd., the Operational Creditor (OC), had supplied packaging material to Manpasand Beverages Ltd. The debt was undisputed. Huhtamaki filed CP(IB) No. 503 of 2019 under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). The NCLT admitted the petition on 1 March 2021, appointing an Interim Resolution Professional (IRP) and imposing a moratorium under Section 14.

Then things moved fast. On 3 March 2021, the parties reached a settlement. Huhtamaki agreed to accept Rs.95.72 lakhs in full and final settlement. The amount was paid by 8 March 2021. On 10 March 2021, the IRP filed an application under Regulation 30A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2018, along with Huhtamaki's application under Section 12A of the IBC, seeking withdrawal of the CIRP.

The company also appealed the admission order before the NCLAT. On 26 March 2021, the NCLAT permitted the appeal to be withdrawn with liberty to restore if the settlement failed, and importantly, stayed the formation of the CoC. The withdrawal application was now the only thing standing between the company and normalcy.

Why the NCLT Said No

The NCLT, Ahmedabad Bench, heard the withdrawal application on 13 April 2021. It rejected it. The reasons were multiple and, as the Supreme Court later found, legally unsound.

First, the NCLT held that Regulation 30A of the IBBI Regulations was not binding on it. The Tribunal took the view that the regulation was merely procedural and could not override the substantive requirement of Section 12A, which mandates approval of 90% voting share of the CoC for withdrawal. Since no CoC had been constituted, the NCLT reasoned, the condition precedent for withdrawal under Section 12A could not be satisfied.

Second, the NCLT noted that the settlement involved payments made after the moratorium under Section 14 had been imposed. This, the Tribunal felt, was a violation of the moratorium and could not be countenanced.

Third, the NCLT was concerned about the claims of other creditors. It observed that allowing withdrawal would prejudice third-party creditors who might have claims against the corporate debtor. The Tribunal seemed to view the CIRP as a proceeding that, once triggered, could not be undone merely because the applicant creditor had settled its own claim.

The NCLT also invoked Rule 11 of the NCLT Rules, 2016—the inherent powers rule—but used it to reject the application rather than to do justice. The Tribunal held that allowing withdrawal would be an abuse of the process of the Tribunal.

The Arguments: A Clash of Two Worlds

Before the Supreme Court, the appellant—Abhishek Singh, the suspended director of Manpasand Beverages—argued that the NCLT had fundamentally misunderstood the law. The settlement was reached before the CoC was constituted. Regulation 30A specifically provides for withdrawal applications filed before the CoC is formed. The NCLT could not ignore a regulation framed under statutory powers.

The appellant relied heavily on the landmark judgment in Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17. In paragraph 82 of that judgment, the Supreme Court had explicitly recognised that before the CoC is constituted, a party can approach the NCLT directly, and the NCLT may, under Rule 11 of the NCLT Rules, allow or disallow withdrawal after hearing all parties. The appellant argued that this was precisely the situation here.

The appellant also cited Ashok G. Rajani v. Beacon Trusteeship Ltd. & Ors., (2022) SCC Online SC 1275, where the Supreme Court had held that a settlement cannot be stifled before constitution of the CoC in anticipation of third-party claims. The Court in that case had also noted that withdrawal of the CIRP application would not prevent other financial creditors from initiating separate proceedings under the IBC.

Huhtamaki, the Operational Creditor, supported the appellant. It had been paid in full. It had no interest in continuing the CIRP. The settlement was genuine and had been fully executed.

The intervenors—other creditors of Manpasand Beverages—opposed the withdrawal. They argued that the settlement violated the moratorium under Section 14 because payments were made after the CIRP was admitted. They relied on P. Mohanraj v. Shah Bros. ISPAT (P) Ltd., (2021) 6 SCC 258, and Dena Bank (Now Bank of Baroda) v. Shivakumar Reddy & Anr., (2021) 10 SCC 330, to argue that settlements in violation of the moratorium should not be permitted. They also contended that allowing withdrawal would leave them without a remedy, as the corporate debtor would escape the CIRP process.

What the Supreme Court Actually Held

The Supreme Court allowed the appeal in its entirety. The operative order was clear: the impugned order of the NCLT dated 13 April 2021 was set aside. The application under Regulation 30A and the Section 12A application were allowed. The Section 9 application filed by Huhtamaki stood withdrawn.

The Court directed that any claim for expenses incurred by the IRP would be dealt with by the NCLT in accordance with law. It also clarified that its observations would not affect the claims of other creditors, who remained free to pursue independent proceedings against the corporate debtor.

But the real significance of the judgment lies in the four legal principles the Court laid down.

The Four Doctrines That Matter

First: Pre-CoC Withdrawal Applications Are Permissible Under Section 12A

The Court held that Section 12A of the IBC does not debar entertaining applications for withdrawal even before the constitution of the CoC. The provision requires the approval of 90% voting share of the CoC, but that condition applies only when a CoC exists. Where no CoC has been constituted, the NCLT can entertain the application directly. An application under Section 12A for withdrawal cannot be kept pending awaiting constitution of the CoC where such application was filed before the CoC was formed.

This is a crucial clarification. The text of Section 12A, read literally, seems to require CoC approval. But the Supreme Court, following Swiss Ribbons, held that the provision must be read harmoniously with the scheme of the Code. The purpose of Section 12A is to allow withdrawal. If the parties settle before the CoC is formed, there is no CoC to give approval. The NCLT must step in and decide the application on its merits.

Second: Regulation 30A Is Binding on the NCLT

The NCLT had held that Regulation 30A of the IBBI Regulations was not binding on it. The Supreme Court rejected this view emphatically. Regulation 30A was framed under Section 240 of the IBC, which confers statutory power on the IBBI to make regulations. Such regulations carry statutory flavour and are binding on the NCLT. The NCLT cannot pick and choose which regulations to follow.

The Court noted that Regulation 30A specifically provides for the procedure for withdrawal of applications admitted under Sections 7, 9, or 10 before the constitution of the CoC. The regulation fills the gap in Section 12A, which only deals with post-CoC withdrawal. To hold that Regulation 30A is not binding would render the regulation meaningless and defeat the purpose of the Code.

Third: Third-Party Claims Cannot Stifle Pre-CoC Settlement

The intervenors had argued that allowing withdrawal would prejudice other creditors. The Supreme Court rejected this argument. A settlement between the applicant creditor and the corporate debtor cannot be stifled before constitution of the CoC in anticipation of claims from third-party creditors. Such creditors retain independent remedies. They can file their own applications under the IBC or pursue other legal remedies. The withdrawal of one CIRP does not bar them from initiating their own proceedings.

The Court relied on Ashok G. Rajani for this proposition. The message is clear: the IBC is not a one-way street. If the only creditor who triggered the CIRP settles its claim before the CoC is formed, the process can be withdrawn. Other creditors are not left remediless; they simply have to file their own cases.

Fourth: Alleged Moratorium Violations Do Not Bar Withdrawal

The intervenors had argued that the settlement payments were made after the moratorium under Section 14 was imposed, and that this violated the moratorium. The Supreme Court found this argument unpersuasive. Even if transactions during the moratorium period constitute wrongful trading, the remedy lies under Section 66 of the IBC in separate proceedings. Such allegations cannot bar the settlement or withdrawal of the CIRP proceedings.

The Court distinguished P. Mohanraj and Dena Bank, noting that in those cases, the NCLT had found that the moratorium was actually violated. Here, the NCLT itself was not satisfied that the moratorium was violated. The Court also noted that the NCLT had not recorded any finding of moratorium violation; it had merely expressed a suspicion. Suspicion is not a basis to reject a withdrawal application.

THE PLAY: If you settle with the operational creditor before the Committee of Creditors is formed, file the withdrawal application under Regulation 30A immediately—do not wait for the CoC to be constituted, and do not let the NCLT sit on the application.

Why the NCLT Got It Wrong

The Supreme Court did not mince words. The NCLT had erred in holding that Regulation 30A was not binding. It had erred in holding that Section 12A required CoC approval even before the CoC was formed. It had erred in allowing third-party claims to defeat a settlement between the parties. And it had erred in using its inherent powers under Rule 11 to reject the application rather than to do justice.

The Court also noted, in obiter, that the NCLT ought to have immediately decided the withdrawal application once the parties settled before the CoC was constituted. Instead, the NCLT allowed delay, which permitted other creditors to enter the fray and complicate a straightforward settlement. This is a signal to all NCLT benches: act with urgency on pre-CoC withdrawal applications.

The Court also observed that it could have exercised its powers under Article 142 of the Constitution to approve the settlement as an easy way out. But it chose to decide the substantive legal issues for future guidance. The message is that the legal framework under Section 12A and Regulation 30A is itself sufficient; no extraordinary constitutional power is needed for pre-CoC withdrawals.

What This Means for Practitioners

For advocates advising operational creditors or corporate debtors, this judgment is a game-changer. The key takeaway is procedural but critical: if you settle before the CoC is formed, move fast. File the withdrawal application under Regulation 30A immediately. Do not wait for the NCLT to constitute the CoC. Once the CoC is formed, the game changes completely—you then need 90% approval from the CoC, which is often impossible to obtain.

For CFOs and founders of companies facing insolvency, this judgment offers a clear path to settlement. If you can settle with the operational creditor before the CoC is formed, you can get the CIRP withdrawn without needing the approval of other creditors. The NCLT cannot reject your application merely because other creditors might have claims. Those creditors can file their own cases; they cannot hold your settlement hostage.

For startup founders, the lesson is even simpler. The IBC is designed to be a rescue mechanism, not a punishment. If you can pay your operational creditor quickly—within days of admission—you can escape the CIRP process entirely. The key is speed. The moment the CIRP is admitted, the clock starts ticking. Settle fast, pay fast, and file the withdrawal application before anyone else can intervene.

The Bottom Line

If you settle with the operational creditor before the Committee of Creditors is formed, the NCLT must allow withdrawal—third-party claims, moratorium concerns, and procedural technicalities cannot stand in the way.