Categories: Insolvency

12A CIRP Withdrawal can’t be postponed until CoC Constituted

12A CIRP withdrawal application cannot be kept pending for constitution of CoC

Indeed, the Insolvency and Bankruptcy Code (IBC) was introduced with the aim of creating a robust mechanism for the resolution of stressed assets in a timely manner. Its primary objectives were to promote entrepreneurship, facilitate efficient allocation of resources, and maximize the value of distressed assets.

However, following its enactment, concerns emerged regarding the possibility of viable companies being forced into liquidation under the IBC process, potentially overlooking opportunities for their revival through other means. Recognizing these concerns and the need for flexibility in the resolution framework, the government introduced several amendments to the IBC.

One significant amendment was the insertion of Section 12A, which provided a mechanism for the withdrawal of insolvency applications under certain conditions. This amendment aimed to strike a balance between the need for expeditious resolution of insolvency cases and the preservation of viable businesses.

Objective to allowing for withdrawals, Section 12A

By allowing for withdrawals, Section 12A provided an avenue for stakeholders to explore alternative resolution mechanisms outside the formal insolvency process. This amendment reflected a willingness to adapt the IBC framework to address practical challenges and ensure that the interests of all stakeholders, including creditors, debtors, and employees, are considered in the resolution process.

Overall, the introduction of Section 12A underscored the government’s commitment to refining the IBC framework to achieve its objectives of promoting entrepreneurship, maximizing asset value, and preserving viable businesses.

It’s important to recognize that the withdrawal of a company from the insolvency process is not a right but a privilege, contingent upon specific conditions. The Committee of Creditors (CoC) must be convinced that the withdrawal is in the best interest of all stakeholders, including financial creditors, operational creditors, and employees. If the CoC does not approve the withdrawal, the company must continue with the insolvency process.

Section 12A of the Insolvency and Bankruptcy Code (IBC) provides an opportunity for companies to withdraw from the insolvency process and seek resolution through alternative means. This provision is beneficial as it prevents unnecessary costs associated with the resolution or liquidation of companies and ensures that all stakeholders are given a fair chance to resolve their issues.

Withdrawal Application under Section 12A:

According to Section 12A of the IBC, an application for withdrawal of an admitted insolvency resolution process under Sections 7, 9, or 10 may be allowed by the AA if the applicant files such an application with the approval of 90% of the voting share of the CoC, as per the specified manner.

Who Can File the Withdrawal Application:

In the case of Sukhbeer Singh vs. Dinesh Chandra Agarwal, (Resolution Professional), Maple Realcon Pvt. Ltd. & Ors. (2019), the National Company Law Appellate Tribunal held that promoters could settle the matter with all financial and operational creditors, including allottees. The National Company Law Appellate Tribunal  clarified that a person other than the original applicant can propose the withdrawal of the insolvency resolution process under Section 12A, and the Resolution Professional is obligated to present the proposal to the Committee of Creditors for consideration. so, Section 12A does not limit the applicant for withdrawal to only the original applicant, and any person can propose the withdrawal of an insolvency resolution process under this section.

Withdrawal Before the Constitution of CoC:

If an application for withdrawal under Section 12A is filed before the constitution of Committee of Creditors, the IRP must present it directly before the Adjudicating Authority for approval.

In Anuj Tejpal v. Rakesh Yadav (2021, the National Company Law Appellate Tribunal  held that Rule 11 of the NCLAT Rules, 2016 allows the Appellate Tribunal to make necessary orders for the ends of justice or to prevent the abuse of its process. The Supreme Court in Swiss Ribbons (P) Ltd. (supra) clarified that a party can approach the National Company Law Appellate Tribunal directly when the CoC is not yet constituted, and the National Company Law Tribunal may use its inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016 to allow or disallow an application for withdrawal or settlement.

Withdrawal After the Constitution of Committee of Creditors:

According to the procedure prescribed by the Code, an application for withdrawal under Section 12A must be forwarded by the interim resolution professional to the Committee of Creditors for approval. Approval requires a majority vote of 90%, and if the proposal is approved by the Committee of Creditors. it is presented to the adjudicating authority, which can decide to allow or dismiss such applications.

In Vallal RCK v. Siva Industries and Holdings Ltd. (2022) ibclaw.in 63 SC, the Supreme Court emphasized that the requirements for withdrawal under Section 12A are more stringent than those for approving a resolution plan u/s 30(4). When 90% or more of the creditors find that permitting settlement and withdrawing CIRP is in the interest of all stakeholders, the adjudicating authority or appellate authority cannot sit in an appeal over the commercial wisdom of the Committee of Creditors. Interference is warranted only when the decision of the Committee of Creditors is capricious, arbitrary, irrational, or dehors the provisions of the statute or the rules.

Withdrawal After Issuance of Form G:

In Swiss Ribbons (P) Ltd. (supra), the Supreme Court held that Regulation 30A(1) of the CIRP Regulations, 2016 is not mandatory but only directory. In exceptional cases, an application for withdrawal may be allowed even after the issuance of an invitation for Expression of Interest under Regulation 36A of the CIRP Regulations, 2016.

This ruling was reaffirmed in Brilliant Alloys (P) Ltd. v. S. Rajagopal [2018], where the Supreme Court clarified that the expression “shall” in Regulation 30A should be read as “may,” making the provision only directory. Additionally, the National Company Law Appellate Tribunal in V. Navaneetha Krishnan v. Central Bank of India (2018) National Company Law Appellate Tribunal held that the application can be withdrawn only with the majority vote of 90% by the CoC.

Withdrawal After Approval of Resolution Plan:

In Hem Singh Bharana v M/s Pawan Doot Estate Pvt. Ltd. & Ors. (2023, the National Company Law Appellate Tribunal held that once the Committee of Creditors approves a resolution plan, it is not possible to consider a withdrawal application under Section 12A of Insolvency and Bankruptcy Code. The National Company Law Appellate Tribunal  stated that when the Committee of Creditors approves a resolution plan, the Resolution Applicant is prohibited from modifying or withdrawing from the plan. Similarly, the Committee of Creditors is not allowed to change its position once it has made a decision.

Withdrawal at the Stage of Liquidation:

IBC allows for the withdrawal of an insolvency application after its admission, but it does not specify the procedure for withdrawal after a liquidation order has been passed. However, the Hon’ble Supreme Court and National Company Law Appellate Tribunal have permitted withdrawal during the liquidation stage with the approval of the Committee of Creditors.

In the case of V. Navaneetha Krishna (supra), the National Company Law Appellate Tribunal observed that an application can be withdrawn under Section 12A even during the liquidation stage if the CoC approves it with 90% of votes. The National Company Law Appellate Tribunal stated that if a person, who is not barred under Section 29A, satisfies the Committee of Creditors demands during the liquidation period, they can offer to the Adjudicating Authority for consideration. If the Committee of Creditors approves the offer with a 90% voting share and decides to withdraw the application under Section 7 of Insolvency and Bankruptcy Code, the liquidation order passed by the Adjudicating Authority will not prevent it from making an appropriate order.

12A CIRP withdrawal application cannot be kept pending for constitution of CoC

The Hon’ble Supreme Court has clarified several issues regarding the settlement and withdrawal of Corporate Insolvency Resolution Process applications under Section 12A of the IBC. Specifically, the Court emphasized that a Corporate Insolvency Resolution Process withdrawal application under Section 12A of the IBC cannot be kept pending for the constitution of the CoC. Corporate Insolvency Resolution Process Regulation 30A provides a complete mechanism for entertaining withdrawal applications before the constitution of the CoC, and there is no requirement to hear any other concerned parties except the Operational Creditor, Financial Creditor, Corporate Debtor, and IRP.

The Supreme Court clarification

Judges’. Justice Bhushan Ramkrishna Gavai & Mr. Justice Vikram Nath made the judgments in Case Citation: (2023).  The Supreme Court clarified various issues on the settlement and withdrawal of Corporate Insolvency Resolution Process under Insolvency and Bankruptcy Code including:

  1. Settlement Prior to the Constitution of CoC and NCLT Rule 11: The Court discussed the procedures and legal standing of settlements before the CoC is constituted, along with the applicability of NCLT Rule 11.
  2. The availability and implications of alternative remedies in the context of Corporate Insolvency Resolution Process withdrawals and settlements.
  3. The Court examined whether the transactions made in the accounts of the CD for settlement violate the moratorium imposed under Section 14.
  4. The impact of settlements on the claims of other creditors and how these claims should be handled in the context of a Corporate Insolvency Resolution Process withdrawal.
  5. Section 12A of IBC and Regulation 30A of Corporate Insolvency Resolution Process Regulations, 2016: Detailed clarification on how Section 12A and Regulation 30A govern the process of Corporate Insolvency Resolution Process withdrawal and the conditions under which these provisions are applicable. Corporate Insolvency Resolution Process Regulation 30A provides a complete mechanism for withdrawal applications being entertained before constitution of CoC and no requirement to hear any other concerned parties except OC/FC, CD & IRP
  6. Whether the power under Rule 11 would be exercised for settlement after hearing all concerned parties.
  7. Cost/Fee/Expenses of Interim Resolution Professional/ Resolution Professional in Case of Settlement before Constitution of Committee of Creditors: Guidelines on the allocation and responsibility of costs, fees, and expenses incurred by the IRP/RP in case a settlement is reached before the Committee of Creditors is constituted.
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