Settlement Come in Record if Nclt Bench Have Passed CIRP Order
“The intent of the Code cannot be questioned and the hurdles arising can be said to be teething problems as it is in its infancy.”
– Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)
The Insolvency and Bankruptcy Code, 2016 (Code) is a Codification of Sections of various previous Acts to deal with corporate insolvency and bankruptcy. Hailed as a comprehensive economic reform, IBC was hailed as the fastest and most effective tool to recover bad debt.
In its initial years itself, things turned out to be otherwise as diverse cases were caught in the ambiguity or lack of clarity in the Code. One such issue that popped up in many cases was that the Code had no provision of withdrawal of an application after it has been admitted or after the Corporate Insolvency Resolution Process (CIRP) has been passed.
The silence of Section 12 on Withdrawal
The Code permits withdrawal of a case only before the admission of the petition but not afterward. Section 12 was completely silent on this and the rationale behind this being that a collective mechanism commences once the resolution process is triggered, and this naturally places all creditors at par.
Thus, to permit the applicant or a bunch of applicants to settle the dispute post-admission would adversely impact the interests of other creditors, whereas, the resolution process would have protected the rights and interests of all creditors.
NCLAT’s Refusal to Intervene
The first case that raised the issue of withdrawal after admittance was of Lokhandwala Kataria Construction Private Limited Vs Nisus Finance and Investment Managers LLP.
An application was filed by the financial creditor, Nisus Finance and Investment under section 7 of the Code and was admitted by the National Company Law Tribunal (NCLT), Mumbai Bench.
Appealing against the order passed by the NCLT, the appellant approached National Company Law Appellate Tribunal (NCLAT) praying to set aside the order of NCLT. It further stated that the parties had settled the dispute between themselves and the part amount had already been paid.
NCLAT refused to oblige and observed that “before admission of an application under Section 7, it is open to the Financial Creditor to withdraw the application but once it is admitted, it cannot be withdrawn and is required to follow the procedures laid down under Sections 13, 14, 15, 16 and 17 of I&B Code, 2016. Even the Financial Creditor cannot be allowed to withdraw the application once admitted, and matter cannot be closed till claim of all the creditors is satisfied by the corporate debtor.”
Apex Court: Decoding the Code!
In the very first year, cases pertaining to this matter, reached the Supreme Court and the burden of judicial uprightness lay on its shoulders. It was up to the Apex Court to decode the intricacies and at the same time balance the judgement in a way as to keep the essence and spirit of the Code intact.
After the plea of Nisus Finance and Investment was turned down by the NCLAT, the aggrieved approached the Supreme Court. In the absence of any provision under the Code, the Supreme Court exercised its power under Article 142 of the Constitution of India and allowed settlement.
Article 142 of the Constitution gives the power to the Supreme Court to “pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it.”
After this judgement the Apex Court delivered a similar decision in at least two more cases:
1) Sysco Industries
2) Uttara Foods and Feeds
Insertion of 12A: IBC’s Unique Withdrawal Policy
On the recommendation of the Apex Court, Section 12A along with Regulation 30A and 36A was inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018 with retrospective effect from 06.06.2018.
This step was taken on the recommendation of the Insolvency Law Committee Report that was submitted in March 2018 and which laid down provisions to withdraw application made under section 7, 9 or 10 on a settlement, even if CIRP has been initiated.
Different Stages of Withdrawal Applicability
After the implementation of 12A an application under Sections 7 or 9 or 10 can be withdrawn at four stages and the matter can be settled between the parties.
The four stages are:
1. Before admission of application under Sections 7 or 9 or 10
2. After admission but before the constitution of a committee of creditors (CoC)
iii. After constitution of CoC but before issue of invitation for expression of interest
- After issue of invitation for expression of interest
#Withdrawal application before admission of application u/s 7, 9 or 10:
Rule 8. Withdrawal of application: The Adjudicating Authority may permit withdrawal of the application made under rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission.
In the matter of Lokhandwala Kataria Construction Private Limited Vs. Nisus Finance and Investment Managers LLP the Apex Court made it quite clear that that in view of Rule 8 of the Code (Application to Adjudicating Authority) Rules, 2016, NCLAT could not utilise the inherent power recognised by Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 to allow a compromise after the matter has been admitted.
#Allow withdrawal of application/CIRP after admission of application u/s 7,9 or 10:
Chapter II: Corporate Insolvency Resolution Process (CIRP)
Section 12A was inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (w.e.f. 06.06.2018).
Section 12A: 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 prescribed.
Regulation 30A of CIRP Regulation 2016, which was amended on 25.07.2019, lays down the guidelines of the process of making an application under section 12A.
Following steps are to be considered for withdrawal of an application:
| S. No. | Particular | Before constitution of CoC | After constitution of CoC but before issue of invitation for expression of interest | After issue of invitation for expression of interest |
|---|---|---|---|---|
| 1 | Application through | By the applicant through the IRP | By the applicant through the IRP or the RP, as the case may be | By the applicant through the IRP or the RPl and the applicant shall state the reasons justifying withdrawal |
| 2. | Application Form | Form FA | Form FA | Form FA |
| 3. | Bank Guarantee accompanied with the Form FA | Towards estimated expenses incurred on or by the IRP for purposes of regulation 33, till the date of filing of the application | Towards estimated expenses incurred for purposes of clauses (aa), (ab), (c) and (d) of regulation 31, till the date of filing of the application | Towards estimated expenses incurred for purposes of clauses (aa), (ab), (c) and (d) of regulation 31, till the date of filing of the application |
| 4. | Time limit for CoC | N.A. | CoC shall consider the application within 7 days of its receipt | CoC shall consider the application within 7 days of its receipt |
| 5. | Requirement of CoC Approval | N.A. | CoC approval with 90% voting share is required to consider the withdrawal | CoC approval with 90% voting share is required to consider the withdrawal |
| 6. | Time limit to submit the application to the Adjudicating Authority | IRP shall submit the application to the AA on behalf of the applicant, within 3 days of its receipt. | The RP shall submit an application along with 90% voting share approval of the CoC, to the AA on behalf of the applicant, within 3 days of such approval. | Where the application is approved by the CoC with 90% voting share, the RP shall submit to the AA on behalf of the applicant, within 3 days of such approval. |
| 7. | Approval of Application by AA | AA may, by order, approve the application.Once the application is approved, the applicant shall deposit the required amount, as determined by the IRP or RP, within 3 days of such approval, in the bank account of the corporate debtor, failing which the bank guarantee received shall be invoked, without prejudice to any other action permissible against the applicant under the Code. | ||
Case Laws
Withdrawal of CIRP after the issue of invitation for Expression of Interest [Regulation 30A (1)]: In the case of Brilliant Alloys Private Limited Vs Mr S. Rajagopal & Ors. the Supreme Court sanctioned withdrawal of CIRP even after the issue of invitation for expression of interest. Furthermore, it set aside the order of NCLT that opined that regulation 30A has to be read along with the main provision section 12A, which contains no such stipulation.
Withdrawal of CIRP when a Committee of Creditors (CoC) is not yet constituted: The Supreme Court in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs Union of India & Ors. specified that at any stage where the CoC is not yet constituted, a party can approach the NCLT directly.
Withdrawal of CIRP if Corporate Debtor is an MSME: In the case of Saravana Global Holdings Ltd. & Anr. Vs. Bafna Pharmaceuticals Ltd. & Ors NCLAT held that the company being MSME, it is not essential for the CoC to follow all the procedures under the CIRP.
“Since the insertion of Section 12A to the Code, the latest data shows that the number of cases withdrawn under it has gone up tremendously.”
–Shweta Gupta, Founder and CEO, MUDS