I &B Code 2016 allows a creditor (financial/operational) of a Company under Section 7 and 9 of IBC and the Company ("Corporate Debtor") itself under Section 10 of IBC to file an application before the National Company Law Tribunal ("NCLT") to initiate Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor in case of default, that is non-payment of debt, of INR 1 Lakh (Rupees One Lakh Only) or above. In case of failure of submission of a viable Resolution Plan as approved by 66% majority of the Committee of Creditors ("COC") to revive or restructure the Corporate Debtor, an order of Liquidation of the Corporate Debtor, as a last resort may be passed by the Ld' Adjudicating Authority i.e. Ld' NCLT.
Since the enactment of IBC, a numerous application has been filed under I & B Code 2016 to initiate CIRP against the Corporate Debtors. IBC has been amended time and again in order to simplify the process, remove any fallacies and promote ease of doing business.
However, I&B Code 2016 for the longest time did not contain any provisions that allowed withdrawal of the application from the NCLT for initiation of CIRP. The only provision that was available was under Rule 8 of The Insolvency and Bankruptcy (Adjudicating Authority) Rules, 2016, wherein the NCLT could allow withdrawal of application on a request made by the applicant before its admission. Since the scope of these provisions is limited till the stage of acceptance of the application, hence it did not prove to be beneficial in this aspect.
Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP (Civil Appeal No. 9279 of 2017) was first of its kind matter, in which the Hon'ble Supreme Court allowed a settlement between the corporate debtor and the creditors using its inherent powers under Article 142 of the Constitution of India, which states that the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it. The Apex court set aside the order of the Ld' NCLAT, whereby the Appellate Authority refused to exercise its inherent powers under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 that provides 'inherent powers' to the Tribunals to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of process of the Tribunal. The same stand was subsequently taken by the Hon'ble Supreme Court in the matters of Mothers Pride Dairy India Private Limited v. Portrait Advertising and Marketing Private Limited (Civil Appeal No. 9286/2017) and thereafter in Uttara Foods and Feeds Private Limited v. Mona Pharmachem (Civil Appeal No. 18520/2017), wherein the Apex Court held,
"We are of the view that instead of all such orders coming to the Supreme Court as only the Supreme Court may utilize its powers under Article 142 of the Constitution of India, the relevant Rules be amended by the competent authority to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached."
The Court also ordered a copy of the order to be sent to the Ministry of Law & Justice.
Needless to say, the Promoters of a Corporate Debtor would not want to lose control over the affairs of the company, as it would have an immensely adversarial effect on their interests. In addition to this, keeping in mind that if a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted and not just the applicant creditor and the debtor, the Insolvency Law Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post-admission if the CoC approves of such action by a voting share of ninety percent.
In view of the above, Section 12A was inserted w.e.f 06.06.2018.
The Report of the Insolvency Law Committee, published in March 2018, dealing with the issue of 'Withdrawal of CIRP Proceedings Pursuant to Settlement.' The ILC Report observed as follows:
"Under rule 8 of the CIRP Rules, the NCLT may permit withdrawal of the application on a request by the applicant before its admission. However, there is no provision in the Code or the CIRP Rules in relation to the permissibility of withdrawal post admission of a CIRP application. It was observed by the Committee that there have been instances where on account of settlement between the applicant creditor and the corporate debtor, judicial permission for withdrawal of CIRP was granted. This practice was deliberated in light of the objective of the Code as encapsulated in the BLRC Report, that the design of the Code is based on ensuring that "all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution."
Thus, it was agreed that once the CIRP is initiated, it is no longer a proceeding only between the applicant creditor and the corporate debtor but is envisaged to be a proceeding involving all creditors of the debtor. The intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors.
On a review of the multiple NCLT and NCLAT judgments in this regard, the consistent pattern that emerged was that a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted, and not only the applicant creditor and the debtor. On this basis read with the intent of the Code, the Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post-admission if the CoC approves of such action by a voting share of ninety percent..."
Section 12A reads as follows:
"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 percent. voting share of the committee of creditors, in such manner, as may be specified."
Section 12A was to be read with Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which provided that an application for withdrawal under section 12A shall be submitted to the interim resolution professional or the resolution professional before issue of invitation for expression of interest under regulation 36A.
Hence, on a plain reading of the above provisions, it was evident that an application filed under Section 7,9, and 10 of IBC could only be withdrawn before the issue of invitation for expression of interest.
Can withdrawal application be made after expression of interest or receipt of Resolution Plan
In the matter of Navaneetha Krishnan v Central Bank of India, Coimbatore & Another [Company Appeal (AT) (Insolvency) Nos. 288 & 289 of 2018], the Hon'ble National Company Law Appellate Tribunal vide its order dated 09.08.2018, held:
Taking into consideration the fact that the 'resolution plan' was submitted on 178th day and on the next day i.e. 179th day the 'Committee of Creditors' decided to go for liquidation as 180th day was to be completed and order under Section 31 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the 'I&B Code') was required to be passed and in absence of any good reason for extension of time, we are not inclined to grant any relief.
However, in view of Section 12A even during the liquidation period if any person, not barred under Section 29A, satisfy the demand of 'Committee of Creditors' then such person may move before the Adjudicating Authority by giving offer which may be considered by the 'Committee of Creditors', and if by 90% voting share of the 'committee of creditors', accept the offer and decide for withdrawal of the application under Section 7 of the I&B Code, the observation as made above or the order of liquidation passed by the Adjudicating Authority will not come in the way of Adjudicating Authority to pass appropriate order.
Similarly, in Satyanarayan Malu v. SBM Paper Mills Ltd. [M.A. 1396/2018, 827/2018, 1142/2018, & 828/2018 in C.P. (IB)-1362(MB)/2017], NCLT Mumbai allowed withdrawal of CIRP application, when resolution plan was pending approval of the Ld' NCLT, after acceptance by CoC. Ld' NCLT allowed the one-time settlement made by the corporate debtor to the financial creditor, which was more economical than the resolution plan.
However, it has been seen that the Adjudicating and the Appellate Authorities allowed the withdrawal of such applications even after issuing of invitation for expression of interest in various instances.
In the matter of Mr. Vimal Chandrunwal v. Brilliant Alloys Private Limited [MA/536/2018 in CP/582/IB/ CB/2017], NCLT, Chennai vide its order dated 01.11.2018, refused to admit the application filed by the RP for withdrawal of the application filed after the issue of invitation for EOI, stating that Regulation 30A envisages that an application for withdrawal under Section 12A shall be submitted to the RP before the issue of invitation for EOI under Regulation 36A. In view of the aforesaid, Ld' NCLT dismissed the application.
However, in this regard, the Hon'ble Supreme Court vide its order dated 14.12.2018 in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors., SLP [Civil No. 31557/2018] allowed a settlement and set aside the order of NCLT, Chennai stating that,
"...Regulation 30A must be read along with the main provision of Section 12A which contains no such stipulation. Accordingly, this stipulation can only be construed as directory depending on the facts of each case."
In addition, the celebrated judgment of Swiss Ribbons & Anr. v Union of India v Ors, given by the Hon'ble Supreme Court, the Apex Court while dealing with the question, "Whether Section 12A is violative of Article 14", referred the above order in Brilliant Alloys and reiterated the above position, stating that the Regulation 30A(1) is not mandatory but is directory for the simple reason that on the facts of a given case, an application for withdrawal may be allowed in exceptional cases even after issue of invitation for expression of interest under Regulation 36A.
In view of the above rulings, Regulation 30A was substituted vide Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2019 ("Regulation 30A") w.e.f 25.07.2019, which inter alia provided:
"An application for withdrawal under section 12A shall be submitted to the interim resolution professional or the resolution professional, as the case may be, in Form FA of the Schedule before the issue of invitation for expression of interest under regulation 36A."
The amendments made to Regulation 30A specified the process for withdrawal of applications before the constitution of CoC, after the constitution of CoC but before the issue of invitation for expression of interest, and after the issue of invitation for expression of interest, stating the reasons justifying withdrawal after the issue of such invitation.
Section 29A of the Code is not applicable while deciding on the withdrawal of application under Section 12A of the I&B Code 2016.
In Andhra Bank v. Sterling Biotech & Ors (08.05.2019 - NCLT - Mumbai), the Promoters approached the members of COC with an OTS. On discussion, it was decided that the COC shall put to vote the OTS and if it did not receive enough votes (90%), then a resolution plan submitted by ACG Associated Capsules Pvt. Ltd. would be put to vote and if it also did not receive enough votes, then a resolution for liquidation will be put forth. However, neither plan received requisite votes. Thereafter, a fresh OTS proposal was put to vote which received 90% votes, pursuant to which an application under Section 12A was filed. The application under Section 12A was rejected by Ld' NCLT on the grounds that, (i) the Promoter was ineligible under Section 29A to present a resolution plan and (ii) the OTS is also a type of resolution plan, which implied that the promoters were ineligible to present an OTS and file application under 12A. Hence, the NCLT ordered liquidation.
In an appeal filed before Hon'ble NCLAT against the aforesaid Ld' NCLT order in Shweta Vishwanath Shirke & Ors V The Committee of Creditors & Anr. [Company Appeal (AT) (Insolvency) No. 601 of 2019], passed on 28.08.2019, it was observed that Section 29A of the Code is not applicable for entertaining/ considering an application under Section 12A of the Code as the Applicants are not entitled to file application under Section 29A as 'resolution applicant'. Hon'ble NCLAT set aside the order of 'Liquidation' passed by the Adjudicating Authority and allowed the Appellant (who filed the application of Section 7 – 'Andhra Bank') to withdraw the application. As a result, the 'Corporate Insolvency Resolution Process' initiated against the 'Corporate Debtor' namely— 'M/s. Sterling Biotech Ltd.' was set aside subject to the payment of the amount as payable by the Promoters/Shareholders to all the stakeholders/financial creditors' operational creditors in terms of Section 12A of the Code as approved with 90% voting share of the 'Committee of Creditors'. Similarly, recently in the matter of Café D Lake Private Limited [IA No. 1113 of 2019 in CP (IB) No. 202/07/HDB/2018] passed on 10.01.2020 by NCLT Hyderabad, the resolution plans were received and rejected by the COC (consisting of the sole financial creditor), which then passed a resolution for withdrawal of CIRP and accept the OTS offered by the Corporate Debtor, and the application of withdrawal was allowed by the Adjudicating Authority.
What is pertinent to note here is that even though Section 29A of the Code restricts certain persons from submitting a resolution plan for the Corporate Debtor, however, in case of withdrawal of application under Section 12A, the applicability of Section 29A is nullified. Meaning thereby, when the COC approves the withdrawal of the application and accepts the settlement offered by the corporate debtor by 90% votes, in such a case the provision of section 29A restricting the old management to regain the control of the corporate debtor does not apply and the control and approval of COC trump the provisions of section 29A.
In the matter of Shaji Purushottaman V. Union Bank of India [Company Appeal (AT) (Insolvency)No. 921 of 2019] passed on 06.09.2019, the Corporate Debtor was willing to settle its claims with the Union Bank of India (Financial Creditor under Section 7 of IBC). Hon'ble NCLAT stated that the order of admission cannot be set aside, except where an application u/s 12A is filed, by settling the matter with all the Creditors with approval of 90% of the voting share of the 'Committee of Creditors' subject to filing of an application by 'Union Bank of India' for withdrawal of application u/s 7 of IBC. The Counsel appearing on behalf of the Union Bank of India submitted that the 'Resolution Plan' had already been approved by the 'Committee of Creditors' after taking into consideration the claim of the 'M/s. Edelweiss Asset Reconstruction Company Ltd(in whose favor guarantee was given by the 'Corporate Debtor').'
However, Hon'ble NCLAT allowed the Appellant to move an application u/s 12A for settling the claims of all the Creditors including the guarantors. In this regard, the Appellate Authority held,
"If an application u/s 12A is filed by the Appellant, the 'Committee of Creditors' may decide as to whether the proposal given by the Appellant for settlement in terms of Section 12A is better than the 'Resolution Plan' as approved by it, and may pass appropriate order. However, as such a decision is required to be taken by the 'Committee of Creditors', we are not expressing any opinion on the same."
Further, in Jai Kishan Gupta v. Green Edge Buildtech LLP and Ors. [Company Appeal (AT) (Ins) Nos. 969-970 of 2019], decided on 06.12.2019, the Hon'ble NCLAT referred to the judgment of Swiss Ribbons to hold that,
"...the Hon'ble Supreme Court has in the above para - 82 left discretion with the Adjudicating Authority to allow or disallow an Application for withdrawal or settlement. The last sentence of the paragraph states that "this will be decided after hearing of the parties concerned and considering all relevant factors on the facts of each case." Thus, the Adjudicating Authority has to consider all relevant factors on the facts of each case and to make a decision. Para - 83 of the Judgement in the matter of "Swiss Ribbons" has dealt with a decision being taken by COC under Section 12A and left the door open that if COC arbitrarily rejects a just settlement and/or withdrawal claim the NCLT, and thereafter NCLAT can set aside such decisions under Section 60 of the Code."
In view of the above, what can be seen and concluded is that the Adjudicating Authorities are allowing withdrawal of applications filed under IBC, not only after issuing an invitation of EOI but in some cases, even after receiving resolution plans. It is without a doubt, evident that such a withdrawal is being allowed for the maximization of assets of the corporate debtor. The Courts of law have, over time, distinctly upheld the importance of protecting the interests, not only of the creditors but also of the corporate debtor, wherever possible. It has been one of the most prominent opinions of the Courts that ordering Liquidation of a corporate debtor is to be treated as a last resort and should be avoided to the maximum extent possible.
A few persons possessing knowledge in this arena have raised questions in this regard, stating that such actions of allowing withdrawal results in waste of time and effort that has been invested during the whole CIRP period. However, it is pertinent to note here, that such flexibility may go a long way in protecting the value of the assets of the corporates and various stakeholders. The original promoters with vested interests in the companies are better aware of the nitty-gritty involved in managing their company and these provisions further uphold the notion with which IBC was enacted, that is, protection of interests of the stakeholders and maximization of the value of the assets of the corporate debtor.
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