Unfolding the Withdrawal of Insolvency Resolution Process: Section 12A of IBC

Introduction

Section 12A was inserted in the Insolvency and Bankruptcy Code, 2016 through its Second Amendment Act in 2018, in accordance with the recommendations made by the Insolvency Law Committee. This section has introduced the provision for withdrawal of applications made under Sections 7, 9 and 10 of the Code. Now, application for initiation of corporate insolvency resolution process can be withdrawn by the applicant on reaching a settlement between the creditors and the corporate debtor even after the initiation of the insolvency resolution process.

Corporate Insolvency Resolution Process

The corporate insolvency resolution process (CIRP) is a recovery mechanism under the Insolvency and Bankruptcy Code, 2016, under which, when a company defaults on making payment to its creditors, the National Company Law Tribunal initiates a corporate insolvency resolution process. After the initiation of the process, an interim resolution professional is appointed, who is given the power to take charge of the defaulting company. The resolution professional is granted 180 days to find a resolution, which can be extended by 90 days. If a resolution is not found, the company is liquidated and the creditors are paid.

According to Section 6 of the Insolvency and Bankruptcy Code, when a corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process.[1] Section 5 (7) of the Code defines a ‘financial creditor’ as any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.[2] Section 5 (20) of the Code defines an ‘operational creditor’ as a person to whom operational debt is owed, legally assigned or transferred to.[3] Section 5 (5) of the Code defines a ‘corporate applicant’ as a corporate debtor or a person who is authorised to make application for insolvency resolution.[4]

Section 7 of the Code deals with the initiation of the corporate insolvency resolution process by financial creditors.[5] Section 9 deals with the initiation of the corporate insolvency resolution process by operational creditors.[6] And, Section 10 deals with the initiation of the corporate insolvency resolution process by corporate applicants.[7] Therefore, application for initiation of CIRP can be filed under sections 7, 9 and 10 of the Code.

Withdrawal of CIRP Application

Earlier, there was no provision in the Code regarding withdrawal of resolution process once it is initiated. Every case of withdrawal had to go to the Supreme Court of India as the Code was silent on withdrawal and it was considered a question of law. The apex court had to invoke Article 142 of the Constitution of India, which gives extra power to the Supreme Court to deal with any matter which does not fall under any law or regulation which is in force.[8] Later, IBC was amended in respect of the same and Section 12A and Regulations 30A and 36A were included.

Now, creditors and applicants can withdraw their CIRP applications under Section 12A of the Code. As per Section 12A of the Code, the Adjudicating Authority may allow the withdrawal of application admitted under Section 7 or Section 9 or Section 10, on an application made by the applicant with the approval of ninety per cent voting share of the committee of creditors, in such manner, as may be specified.[9]

Regulation 30A deals with the procedure for making an application of withdrawal. An application for withdrawal should be submitted within 30 days of the submission of CIRP application, either before the appointment of the resolution professional, or after the appointment of the resolution professional. The application should be in Form FA of the Schedule. The application should be submitted along with a bank guarantee towards estimated cost incurred for purposes of expenses incurred on the interim resolution professional to the extent ratified by the committee of creditors as per Regulation 33. Therefore, costs would have to be incurred up to this stage for carrying out the Corporate Insolvency Resolution Process.

View of the Courts

In the case of Lokhandwala Kataria Construction Limited v. Nisus Finance and Investment Managers LLP,[10] the Financial Creditor had approached the NCLAT for withdrawal of application, post admission of the Section 7 application by the NCLT, on account of an out of court settlement with the corporate debtor. The NCLAT was of the view that withdrawal is permitted only before the admission of the petition. The parties had approached the apex court, which had allowed a settlement to be considered under Article 142 of the constitution. This case was before the insertion of Section 12A.

In the case of Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal,[11] settlement after admission was rejected by the NCLAT as it was of the view that it violated Regulation 30A as it was made after the stage of Expression of Interest. The Supreme Court had allowed the settlement and had annulled the insolvency proceeding. It also stated that the Regulation 30A has to be read with Section 12A.

In the case of Swiss Ribbons v. Union of India,[12] the Supreme Court upheld the constitutionality of Section 12A, and explained two scenarios with respect to the withdrawal or settlement after the admission of Insolvency Application, i.e. pre committee of creditors (CoC) formation; and post committee of creditors (CoC) formation. Parties can approach the Adjudicating Authority for settlement in case of pre CoC formation. But, after the formation of CoC, the Committee has to be consulted and settlement can be allowed only if it has received 90% voting approval from the committee.

In the case of Krishna Kumar Mintri v. Kamlesh Kumar Singhania,[13] there was only one financial creditor. Settlement was allowed once the sole creditor gave its consent to such settlement, after the submission of the resolution plan. In the case of Arjun Puri v. Kunal Prasad,[14] the NCLAT, after referring to the Swiss Ribbons case, allowed the settlement and set aside the order of admission of application.

Conclusion

By referring to the above discussed cases, it can be concluded that an application can be withdrawn before its admission, after its admission but before the formation of CoC, after the formation of CoC but before the issue of expression of interest, and after the issue of expression of interest. The courts have from time to time treated liquidation as the last resort in order to protect the interests of the stakeholders. Settlement between the parties and withdrawal of insolvency resolution process has been encouraged after the insertion of Section 12A in the IBC, 2016.

Insertion of section 12A has made the Insolvency and Bankruptcy Code flexible and has upheld the interests of both, the debtors and the creditors. It helps the creditors get a better deal and helps the debtors retain control and maximize assets. This Section by allowing settlement creates a win-win situation, where the debtors and the creditors get better options than what they would get if the company goes under insolvency resolution process. This section, therefore, upholds the objective with which the Code was enacted, i.e. maximization of the value of the assets and protection of interests of the stakeholders.


References

[1] S. 6, Insolvency and Bankruptcy Code, 2016. [2] S. 5 (7), Insolvency and Bankruptcy Code, 2016. [3] S. 5 (20), Insolvency and Bankruptcy Code, 2016. [4] S. 5 (5), Insolvency and Bankruptcy Code, 2016. [5] S. 7, Insolvency and Bankruptcy Code, 2016. [6] S. 9, Insolvency and Bankruptcy Code, 2016. [7] S. 10, Insolvency and Bankruptcy Code, 2016. [8] India Const. Art. 142. [9] S. 12A, Insolvency and Bankruptcy Code, 2016. [10] Lokhandwala Kataria Construction Limited v. Nisus Finance and Investment Managers LLP, Civil Appeal No. 9279 of 2017. [11] Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal, Civil Appeal No. 31557/2018. [12] Swiss Ribbons v. Union of India, W.P (C) 99 of 2018. [13] Krishna Kumar Mintri v. Kamlesh Kumar Singhania, (AT) (Insolvency) 456 of 2018. [14] Arjun Puri v. Kunal Prasad, (AT)(Ins) 52/19.


Author - Aditi Banerjee ,Chanakya National Law University, Patna.

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