Recent Precedent on CIRP Withdrawal and Deposit Refundability

In a significant ruling that clarifies the finality of settlements under the Insolvency and Bankruptcy Code (IBC), the National Company Law Appellate Tribunal (NCLAT) has established that withdrawals under Section 12A constitute full and final settlements, making deposited amounts generally non-refundable.

Background of the Case

The NCLAT Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, examined an appeal against an order by the National Company Law Tribunal (NCLT), Mumbai Bench. The case involved two interlinked Corporate Insolvency Resolution Processes (CIRPs) – one for M/s. Unimetal Castings Limited (UCL) and another for its sister concern, Joshi Deodhar Engineering Company Limited (JDECL).

The insolvency proceedings against UCL were initiated by TJSB Sahakari Bank Ltd. under Section 7 of the IBC and admitted on January 25, 2019. After the Committee of Creditors (CoC) voted unanimously for liquidation, the promoters proposed a settlement arrangement leading to the formation of M/s. Globmet Engineering Private Limited (the Appellant) as an investment vehicle.

The Settlement Arrangement

The parties executed a Memorandum of Understanding (MoU) on March 16, 2020, later revised on August 7, 2020. The revised MoU outlined a two-pronged approach:

• JDECL’s CIRP would be withdrawn under Section 12A
• UCL’s CIRP would be concluded through a Resolution Plan

The Appellant deposited ₹3 Crores for JDECL’s settlement and ₹25 Lakhs toward UCL’s resolution process. While JDECL’s CIRP was successfully withdrawn under Section 12A and closed on November 2, 2020, UCL’s resolution plan faltered due to non-deposit of the required Performance Security Deposit.

The NCLAT’s Reasoning

The NCLAT made a critical distinction between the two deposits:

On the ₹3 Crores deposit for JDECL: The Tribunal held that once a Section 12A withdrawal is approved and the CIRP is closed, the settlement becomes final and irreversible. The amount deposited forms part of a “full and final settlement” and cannot be reclaimed, even if other parts of the arrangement fail. Importantly, the Tribunal noted that the Appellant had knowledge of and did not object to the Section 12A withdrawal process, which undermined its subsequent claim for a refund.

On the ₹25 Lakhs deposit for UCL: The Tribunal allowed the refund of this amount because:

• The MoU contained no specific forfeiture clause for this deposit
• The Resolution Plan was not approved due to non-deposit of performance security
• This amount was essentially an initial deposit toward a process that did not complete

Key Takeaways for Legal Practitioners

This ruling has several important implications for insolvency practice:

• Finality of Section 12A Withdrawals: Once approved, a withdrawal under Section 12A constitutes a full and final settlement that cannot be legally reversed.

• Importance of Explicit Forfeiture Clauses: The refundability of deposits depends significantly on whether the agreement explicitly addresses forfeiture. Without such clauses, deposits may be refundable if the intended process does not complete.

• Conduct and Knowledge of Parties: The Tribunal considers a party’s knowledge and conduct during proceedings. The Appellant’s failure to object to the Section 12A withdrawal process weakened its later claim for a refund.

• Independence of Linked Transactions: Even when settlement arrangements involve multiple related entities, each component of the settlement is treated independently. Failure of one part does not necessarily invalidate another completed part.

Practical Considerations

When advising clients on settlement arrangements in insolvency proceedings, practitioners should:

• Clearly document the refundability or non-refundability of all deposits
• Include explicit forfeiture clauses if deposits are intended to be non-refundable
• Ensure clients understand the finality of Section 12A withdrawals
• Consider making separate agreements for different entities rather than linking them in a single MoU if there is concern about one part failing

This ruling reinforces the sanctity of settlements under the IBC and the importance of careful drafting in settlement agreements, particularly regarding the treatment of deposits and the conditions for their potential return.