Settlements have long been a staple of commercial negotiations, offering a practical route to resolve disputes. Typically confined to the parties at odds, settlements, if pursued timely, can steer both sides toward mutually beneficial outcomes. Yet, more often than not, the ship of settlement sails past, leaving parties adrift in turbulent litigation waters, where, sometimes, new stakeholders emerge, altering the course entirely.

This analogy is most suited for insolvency law in India. This is because the moment a company is admitted to the Corporate Insolvency Resolution Process (CIRP), settlements cease to be a matter of bilateral arrangement. They become a collective affair, governed by the Insolvency and Bankruptcy Code, 2016 (IBC), and steered by the Committee of Creditors (CoC) that holds the helm in navigating the CIRP. Such was the case recently before the Telangana High Court in Mandava Holdings Pvt. Ltd. v. PTC India Financial Services Ltd. (W.P. No.20620/2024).

The dispute arose when a One-Time Settlement (OTS) proposal for INR 90 crores was submitted by Mandava Holdings, the promoter of NSL Nagapatnam Power and Infratech Ltd. to its sole financial creditor, PTC India Financial Services during the pendency of CIRP. The offer was rejected during the pendency of CIRP, making the petitioner approach the High Court and argue that the rejection violated the RBI's Framework for Compromise Settlements dated June 8, 2023. The petitioner contended that the Respondent, being a regulated financial entity, was bound to consider the proposal in accordance with a board-approved policy and RBI Framework. However, the Court dismissed the writ petition, making it clear that once CIRP has commenced, the IBC framework overrides any external guidelines or settlement offers.

The Court held that insolvency proceedings under the Code are not ordinary debt recovery mechanisms; they are comprehensive and collective processes designed to balance the interests of all stakeholders. Once the CIRP is initiated, the debtor's fate is no longer in the hands of individual creditors. Instead, the CoC assumes control of the resolution process. The IBC mandates that any withdrawal of CIRP proceedings must be done through Section 12A, which requires the consent of at least 90% of the CoC. The Court rightly observed that allowing a single creditor to consider an OTS proposal independently would undermine the collective nature of the resolution process.

The Court found the petitioner’s reliance on the RBI Framework for Compromise Settlements as equally misplaced, and noted that while the RBI guidelines may impose procedural obligations on financial institutions, they cannot override the statutory provisions of the IBC. The RBI Framework itself acknowledges that compromise settlements must be “without prejudice to the provisions of any other statute.”

The maintainability of the writ petition was another key issue addressed by the Court. The petitioner, instead of approaching the National Company Law Tribunal (NCLT) under Section 60(5) of the IBC, sought relief directly from the High Court under Article 226 of the Constitution. The Court reiterated that the NCLT is the appropriate forum for resolving disputes arising from insolvency proceedings and the IBC provides a comprehensive framework for adjudicating such disputes, and bypassing the statutory mechanism to invoke writ jurisdiction is impermissible.

This judgment firmly establishes that once a corporate debtor is admitted into CIRP, the resolution process must follow the statutory framework of the IBC, leaving no room for independent settlements with individual creditors. This is to maintain transparency and fairness in insolvency proceedings, ensuring that the interests of all stakeholders are balanced within the framework.

By - Vaibhav Mehra