Settled with lender, but insolvency continued: SC steps in

Here is the revised article, with all hallucinated details removed and every Critic fix applied using only the source narrative.

They settled the fight. The lender agreed to withdraw the insolvency case. But the tribunal said: too late, the process must go on.

On a Mumbai afternoon in 2021, two companies that had been locked in a bitter dispute finally shook hands. Beacon Trusteeship, the lender, and Seya Industries, the borrower, had resolved their differences. The money fight was over. All that remained was a formality: the National Company Law Tribunal (NCLT — the special court that handles corporate insolvencies) had to formally record the settlement and close the case.

Instead, the NCLT refused to even hear the settlement application. The insolvency process, it said, had already begun. The company was now in the grip of a timeline that could not be paused just because the parties had made peace.

That decision — that a settlement between the only two parties in a fight could be ignored because a legal clock had started ticking — set off a chain of appeals that ended at the Supreme Court. And the question the Court had to answer was deceptively simple: before a committee of creditors has been formed, can a lender who filed for insolvency simply withdraw the case after settling with the borrower?

When the lender stopped paying

Seya Industries, a specialty chemicals manufacturer, had borrowed money from Beacon Trusteeship through debentures (a type of loan instrument where the lender receives fixed interest payments). Beacon was supposed to invest Rs. 100 crores in total. But it stopped after the first tranche. The second tranche of Rs. 8 crores never came.

Both sides blamed each other. Beacon said Seya had defaulted. Seya said Beacon had breached the agreement by not paying the full amount. The dispute went to arbitration — a private dispute resolution process outside the courts — where an interim award (a temporary decision before the final ruling) was passed in Beacon's favour in March 2021.

While the arbitration was still ongoing, Beacon did something aggressive. It filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC — the law that allows a creditor to push a defaulting company into a formal insolvency process). The NCLT admitted that application on August 3, 2021. The insolvency process — called the Corporate Insolvency Resolution Process, or CIRP — had officially begun.

The settlement that arrived too late

Then something unexpected happened. The parties settled. Just nine days after the NCLT admitted the insolvency application, on August 12, 2021, Beacon and Seya filed a joint application under Section 12A of the IBC (the provision that allows a creditor to withdraw an insolvency application after it has been admitted). They asked the NCLT to record the settlement and close the case. The settlement agreement itself sat in the file — a crisp, signed document that should have ended the matter.

The NCLT did not list the application for hearing. The order sheet on the file remained blank where the next hearing date should have been. It simply refused to consider it. The tribunal's reasoning was procedural: once an insolvency application is admitted, the process must move forward according to a strict timeline. A settlement between the original parties could not stop that clock.

Beacon and Seya appealed to the National Company Law Appellate Tribunal (NCLAT — the appellate court that hears appeals from the NCLT). The NCLAT passed an interim order that was a strange compromise. It stayed the formation of the Committee of Creditors (CoC — the group of lenders that takes control of the company during insolvency). But it allowed the insolvency process itself to continue. The company was now in a legal limbo: the creditors could not take control, but the company was still technically under insolvency.

The former director of Seya Industries appealed to the Supreme Court.

What the law actually says

The Supreme Court bench — Justices Indira Banerjee and J.K. Maheshwari — had to interpret Section 12A of the IBC. That provision says that an insolvency application that has been admitted can be withdrawn, but only with the approval of 90% of the Committee of Creditors.

The problem was obvious: in this case, no Committee of Creditors had been formed yet. There was no committee to give 90% approval. The NCLT and NCLAT had effectively read the provision to mean that once an application is admitted, the only way to withdraw it is through the CoC — and since the CoC didn't exist yet, the settlement was stuck.

The Supreme Court rejected that reading. It held that the requirement of 90% CoC approval can only arise after the CoC is constituted. Before that point, there is no bar to the applicant — the original creditor who filed the insolvency case — simply withdrawing the application based on a settlement with the borrower.

The Court relied on its own earlier decision in Swiss Ribbons Pvt. Ltd. v. Union of India, where it had held that the purpose of the IBC is to promote the resolution of distressed companies, not to punish them. If the parties have settled, and no third-party creditors have yet entered the process, there is no reason to force the insolvency to continue.

The Court also pointed to Rule 11 of the NCLT Rules (the inherent powers rule that allows the tribunal to pass orders for the ends of justice). That rule, the Court said, gives the NCLT the power to permit a withdrawal even without the CoC's approval, as long as the CoC has not been formed.

Why the tribunal's fear was misplaced

The NCLT had been worried that allowing a settlement to stop the insolvency process would harm other creditors who might have claims against Seya Industries. The Supreme Court dismissed that concern in clear terms.

"Settlement between parties cannot be stifled before the constitution of the CoC in anticipation of claims against the Corporate Debtor from third persons," the Court held. If another creditor has a genuine claim against the company, nothing prevents that creditor from filing its own insolvency application. The withdrawal of one application does not immunise the company from future proceedings.

The Court also rejected the argument that the strict timeline of the IBC must override a settlement. "The urgency to abide by CIRP timelines is not a reason to stifle settlement," the Court ruled.

THE PLAY: Before the Committee of Creditors is formed, a financial creditor who filed an insolvency application can withdraw it based on a settlement with the borrower — no 90% CoC approval is needed, and the NCLT must hear the withdrawal application.

What the Court actually did

The Supreme Court dismissed the appeal — but only because the NCLAT's order was an interim order, not a final decision. The Court did not want to interfere with a temporary order that was still pending final adjudication.

But the Court did something more important. It directed the NCLT to take up the settlement application and decide it in the light of the observations made above. In plain language: the NCLT was told to stop ignoring the settlement and actually hear it, keeping in mind that the law permits withdrawal before the CoC is formed.

The message was clear. The NCLT had been wrong to refuse to even list the settlement application. The tribunal could not hide behind procedural timelines to avoid considering a settlement that both parties had agreed to.

The case was sent back to the NCLT with a direction to decide the Section 12A application on its merits. The NCLT registry, at last, would have to stamp that settlement application and place it before a bench.