How to Apply for Restoration of Insolvency Proceedings After Settlement Default Under the IBC

When a Corporate Insolvency Resolution Process (CIRP) is closed on the basis of a settlement between the financial creditor and the corporate debtor, the settlement may include a liberty clause allowing the creditor to revive the proceedings if the debtor defaults. This guide explains the step-by-step process for a financial creditor to apply for restoration of insolvency proceedings when the corporate debtor breaches the terms of a court-recorded settlement.

Step 1: Confirm the Existence of a Liberty Clause

Before filing a restoration application, verify that the order closing the insolvency proceedings contains an express liberty clause granting you the right to revive the appeal or proceedings in the event of default. This clause is typically found in the operative portion of the NCLT or NCLAT order that recorded the settlement.

The liberty clause may be worded as "liberty is granted to the applicant to revive the appeal in the event of any default" or "the applicant is at liberty to restore the matter in case of breach of settlement terms." If no such clause exists, you may need to file a fresh Section 7 application under the IBC rather than a restoration application, which is a longer and more cumbersome process.

In practice, always insist on the inclusion of a liberty clause when negotiating a settlement during insolvency proceedings. Without it, a breach of settlement leaves you with no expedited remedy and requires starting the process afresh.

Step 2: Document the Default

Compile evidence of the corporate debtor's default. This should include the settlement agreement or the terms as recorded in the tribunal's order, a payment schedule showing the dates and amounts due, bank statements or payment records showing what was actually received, demand notices or reminders sent to the corporate debtor (if any), and a calculation of the total shortfall.

The default should be material and continuing. A one-time delay of a few days in a single instalment may not constitute a material breach sufficient to warrant restoration. However, a sustained pattern of non-payment or a significant shortfall (such as paying Rs 70 lakh against Rs 3.30 crore due, as in the recent NCLAT Chintamani Jewellery Arcade case) would clearly qualify.

Step 3: Draft and File the Restoration Application

File a restoration application (also called a revival application or recall application) before the same tribunal that passed the settlement order. If the settlement was recorded by the NCLT, file before the NCLT bench that passed the order. If it was recorded by the NCLAT during an appeal, file before the NCLAT.

The application should include a prayer to recall the order dated [date] that closed the insolvency proceedings, a prayer to restore the CIRP or the appeal (as applicable) to its original position, a clear statement of the settlement terms, a detailed account of the default with supporting evidence, and a reference to the liberty clause in the original order. There is no prescribed form for this application. It is typically filed as an interlocutory application (IA) in the original case.

Step 4: Serve Notice on the Corporate Debtor

The tribunal will issue notice to the corporate debtor, giving it an opportunity to respond to the restoration application. The corporate debtor may contest the application by arguing that no default has occurred, that the default is not material, or that it has cured the default before the hearing date. Ensure that service is completed properly, as defective service can delay the proceedings.

Step 5: The Hearing and Order

At the hearing, the tribunal will examine whether the default is established on the evidence, whether the default is material and continuing, and whether the liberty clause in the original order covers the situation. If satisfied, the tribunal will recall its earlier order and restore the CIRP to its original position. This means the insolvency proceedings resume from the stage at which they were paused when the settlement was recorded.

The legal basis for this power is Rule 11 of the NCLAT Rules, 2016 (for the NCLAT) and the inherent powers of the NCLT under Rule 11 of the NCLT Rules, 2016, which empower the tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process. The Supreme Court in Facit Engineering v. State Bank of India (Neeraj Srivastava), 2023, recognised this power in the context of insolvency settlements.

Step 6: Post-Restoration Next Steps

Once the CIRP is restored, the insolvency resolution process resumes. The key steps include the appointment of an Interim Resolution Professional (IRP) if one has not already been appointed, the constitution of the Committee of Creditors (CoC), the invitation of resolution plans, and the standard CIRP timeline under Section 12 of the IBC (180 days, extendable by 90 days). If the CIRP had progressed significantly before the settlement, some of these steps may already be complete.

In practice, the restored CIRP may face practical challenges. The corporate debtor's financial position may have deteriorated further during the settlement period. Assets may have been dissipated. The CoC will need to assess the current state of affairs afresh. Financial creditors should be prepared for the possibility that the resolution value has declined since the original proceedings.

Key Points to Remember

• A restoration application is not a fresh insolvency petition. It does not require meeting the threshold under Section 7 afresh. It is an application to recall an existing order and restore proceedings that were paused, not terminated.

• File promptly after the default materialises. Delay may weaken the application, as the tribunal may question why the creditor waited if the breach was material.

• If the settlement was reached under Section 12A (withdrawal with CoC approval), the restoration route may not be available. Section 12A withdrawals are final and do not typically carry liberty clauses. A fresh Section 7 application would be required.

• The limitation period for the restoration application is governed by the terms of the liberty clause and general principles of limitation. There is no prescribed limitation for restoration applications, but unreasonable delay may be treated as acquiescence in the breach.

Sources and References

• Insolvency and Bankruptcy Code, 2016, Section 7 (Application by financial creditor), Section 12 (Time limit for CIRP), Section 12A (Withdrawal after admission)

• NCLT Rules, 2016, Rule 11 (Inherent powers)

• NCLAT Rules, 2016, Rule 11 (Inherent powers)

• Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 (IBC as beneficial legislation; settlements encouraged)

• NCLAT Order in Axis Bank v. Chintamani's Jewellery Arcade Pvt Ltd (Restoration of CIRP after settlement breach)

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.