Sylona Mohapatra and Srishti Kapoor

I. Introduction:

The essence of Insolvency and Bankruptcy Code, 2016[1] (“Code”) is to manage the asset deficit in a case of insolvency in a manner that is fair to all the stakeholders. The National Company Law NCLAT(“NCLAT”) in Binani Industries Ltd. v. Bank of Baroda[2], has extensively dealt with the objective and purpose of the Code. The Code gives ‘Resolution’ primacy over ‘Liquidation’. Resolution favours maximisation of value of assets of the Corporate Debtor in order to promote entrepreneurship, availability of credit, and balancing the interests of all stakeholders, instead of allowing an individual creditor from maximizing his / its own interest. Thus, the Code bars preferential treatment to any one type of creditor and prevents him / it from maximising his / its individual recovery and provides for taking into account the debt owed to all the creditors (including Operational Creditors); even those who are not part of the Committee of Creditors (“CoC”). Further, the entire Resolution process should also be completed in a time bound manner.

Therefore, once an Insolvency Application was filed under the Code the process thereafter will have to ensure that the interests of all stakeholders are protected having regard to the objects and purpose of the Code.

However, it was seen that in a number of cases an applicant who had filed the Insolvency Application sought its withdrawal before such application was admitted (and in some cases even after its admission) after securing recovery of his / its debt. Any such recoveries obtained through settlements outside the court unduly favoured the applicant to the exclusion / detriment of other creditors.

II. Prior to the Introduction of Section 12A:

The Courts were called upon to balance the rights of various stakeholders in Insolvency proceedings in such cases before the legislature stepped in. The Code provided for withdrawal of an Insolvency Application under Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, provides:

“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.”

However, the Code was silent on whether an application once admitted could be withdrawn or settled by the corporate debtor. This issue arose for the first time in the case of Mother Pride Dairy India Pvt. Ltd. v. Portrait Advertising & Marketing Pvt. Ltd [3] the NCLAT while interpreting Rule 8 held that-

“ …once an application is admitted, it cannot be withdrawn even by the Operational Creditor, as other creditors are entitled to raise claim pursuant to public announcement under Section 15 read with Section 18 of the I&B Code, 2016.”

Therefore, the NCLAT was of the view that post admission of Insolvency Petition all the creditors are eligible to join the process of resolution, therefore the satisfaction of the debt of the Applicant Creditor is not enough to permit withdrawal / settlement and any decision to settle, has to be taken collectively by all the creditors.

An appeal against the decision of the NCLAT was preferred to the Honourable Supreme Court by the applicant creditor. The Honourable Supreme Court while overturning the decision of the NCLAT accepted the settlement between the applicant creditor and the corporate debtor by exercising its inherent power under Article 142 of the Constitution of India.[4]

A similar issue arose again in the matter of Lokhandwala Kataria Construction Limited v. Nisus Finance and Investment Managers, LLP [5].The Financial Creditor in this case approached the NCLATfor withdrawal of Section 7 application[6] on account of an out-of-court settlement with the corporate debtor post admission of the Section 7 application by the NCLT.  The NCLAT held that such a settlement cannot interfere with the order of the NCLT admitting the Insolvency Application in the absence of any infirmity in the admission process. The NCLATdid not deem this to be a fit case for exercise of its inherent powers under Rule 11 of the NCLAT Rules, 2016 [7] The NCLAT held that while it was open for the Apex Court in the case of Mother Pride Dairy to accept a similar settlement by use of its discretionary power under Article 142 of the Constitution of India, the NCLAT had no such power and hence, it could not disturb the order of the NCLT admitting the insolvency application.

In view of the fact that a number of similar appeals were being filed before the Honourable Apex Court praying for the exercise of its inherent powers under Article 142 of the Constitution of India, the Court noted that there was a lacunae in the Code and the attendant Regulations.The Honourable Apex Court directed the Competent Authority to amend the law and made the following observations in Uttara Foods and Feeds Private Limited v. Mona Pharmachem[8]:

“We are of the view that instead of all such orders coming to the Supreme Court as only the Supreme Court may utilise its powers under Article 142 of the Constitution of India, the relevant Rules be amended by the competent authority so as to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached.”

III. Introduction of Section 12A of the Code:

As a direct consequence of the observations of the Honourable Apex Court in Uttara Foods the Insolvency Law Committee which was formed on 16.11.2017.to examine relevant issues in the administration of the corporate insolvency process was tasked with recommending a solution for the issues relating to withdrawal of an insolvency application post its admission. The Committee presented its report in March 2018[9]which analyses the aspect of settlement post admission of an Insolvency Petition in detail. The Report concludes that the proceeding post admission is not an individual one but a collective one. Therefore, any settlement and consequential withdrawal of insolvency proceedings have to be taken by the CoC collectively. It is for them to decide if the settlement offer by the Corporate Debtor will protect the interest of all the Creditors and hence, the CoC is best suited to discontinue the insolvency proceedings.

It is pertinent to mention that this view was in line with the view of the NCLAT in the Mother Pride Dairy case (supra).Further, the Report further clarified that Rule 11 of the NCLT Rules, 2016 should not be adopted to give effect to the recommendations of the Committee  as the legislature did not contemplate granting of such wide-ranging powers to the NCLAT through delegated legislation.

Thereafter, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 was promulgated on June 06, 2018 The Ordinance inserted Section 12A in the Code which provided for withdrawal of insolvency applications afterthey have been admitted by the Adjudicating Authority.According to the Press Information Note by the Ministry of Corporate Affairs dated June 06, 2018:[10]

“…the Ordinance lays down a strict procedure if an applicant wants to withdraw a case after its admission under IBC 2016. Henceforth, such withdrawal would be permissible only with the approval of the Committee of Creditors with 90 per cent of the voting share. Furthermore, such withdrawal will only be permissible before publication of notice inviting Expressions of Interest (EoI). In other words, there can be no withdrawal once the commercial process of EoIs and bids commences. Separately, the Regulations will bring in further clarity by laying down mandatory timelines, processes and procedures for the Corporate Insolvency Resolution Process. Some of the specific issues that would be addressed include non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximizing the value of assets.”

The Ordinance of 2018 received the assent of the President on August 17, 2018, with retrospective effect from June 06, 2018

The newly introduced Section 12A read as follows:

[12A. Withdrawal of application admitted under section 7, 9 or 10. – 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 CoC, in such manner as may be specified

In order to complement section 12A of the Code, Regulation 30 A of the Insolvency Bankruptcy Board of India (Insolvency Resolution Process for Corporate Regulations), 2016 (“CIRP Regulations”)was inserted with effect from July 04,2018 Regulation 30A provides for the process of withdrawal/settlement post admission. A withdrawal is permissible until the time Expression of Interest is not published under Regulation 36A of? CIRP Regulations

IV. Judicial Pronouncements after insertion of Section 12A:

1. Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal[11],settlement post admission was rejected by the Adjudicating Authority on the ground that it was made after the stage of Expression of Interest which is violative of Regulation 30A of the CIRP Regulation, against the said order a Special Leave Petition was filed before the Apex Court. The Apex Court annulled the insolvency proceeding and allowed the settlement with a finding that Regulation 30A has to be read with Section 12A which has no such stipulation. The stipulation under Regulation 30A is directory in nature depending on each case.

2. The Constitutional Validity of Section 12A was challenged before the Hon’ble Supreme Court in Swiss Ribbons v. Union of India[12]. The Apex Court while upholding the constitutional validity of Section 12A, explained two scenarios with respect to the withdrawal/settlement post admission of Insolvency Petition:

a) pre CoC formation; and

b) post CoC formation.

Before a CoC is formed, parties can approach the Adjudicating Authority for settlement, which in exercise of its inherent power under Rule 11 of the NCLT Rules, 2016 may allow or disallow the withdrawal/settlement. Post formation of CoC, it is the Committee which has to be consulted before the parties are allowed to settle and settlement can be allowed only if it has received ninety per cent voting approval from the CoC. The Apex Court also relied on the Insolvency Law Committee Report of March 2018 while explaining the high threshold of ninety per cent of Committee for approving the settlement.[13] Furthermore, if the parties feel the decision of Committee is arbitrary they can approach the NCLT or NCLAT under Section 60 of the Code.

The Apex Court also clarified the position with respect to its findings in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal[14]:

“…that 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 issuing the invitation for Expression of Interest under Regulation 36A.”

3. Arjun Puri v. Kunal Prasad[15], parties entered into a settlement before the constitution of the . The NCLAT relying on Swiss Ribbons (SC) set aside the order of admission S.7 application.

4. Krishna Kumar Mintri v. Kamlesh Kumar Singhania[16]: Settlement between the parties was allowed as Punjab National Bank was the sole Financial Creditor and gave its consent to the settlement after the Resolution Plan was submitted.

In the view of the above judicial pronouncements, CIRP Regulations were amended, vide Notification dated 25.07.2019[17], to allow withdrawal of application under section 7, 9 and 10 of the Code at any time; a) one before the constitution of the CoC b) after constitution of the CoC but before the invitation of the EoI or c) after the invitation of the EoI in exceptional cases, on application made by the applicant. The amended regulations further mandates the requirement of the bank guarantee in support of the application made under Form FA for the withdrawal, both for application filed prior to the constitution of the CoC and ones filed after constitution of the CoC.

Pursuant to the advent of the Section 12 A to the Code, the statics are a proof to show that out of 586 cases resolved at the end of December 2018, 63 cases were withdrawn under Section 12A.In comparison, resolution plans were approved only in 79 cases. Section 12 A of the Code, can also be seen as an opportunity for the Financial Creditors, who form the CoC, may agree to such a proposal from the corporate debtor if the settlement amount offered is greater than the value they expect to receive through the Insolvency Resolution Process.

V. Conclusion:

Whether Section 12A is beneficial in the resolution process is debatable. Section 12A has proved to be beneficial only in cases where the amount in dispute is very less or wherever it is possible the Corporate Debtors makes an effort to settle it with the Creditors and this way the Creditors get the whole amount of claim or a better deal than what he might get if the company goes into insolvency, also the Corporate Debtor is able to retain control over the company.

Though Section 12A passed the muster of constitutional validity and the Apex Court clarified that in exceptional circumstances the Insolvency Petition can be withdrawn even after issuance of Expression of Interest, but the guidelines to determine exceptional circumstances has not been answered. As the position with respect to exceptional circumstances is not clear, in some cases the Promoters try to misuse the power to settle by floating settlement proposals after the Resolution Plan has been approved by the CoC and Resolution Professional is about to submit the Resolution Plan before the Adjudicating Authority and on rejection by CoC they take recourse to Section 60 of the Code on the ground of arbitrariness, which is nothing but a delaying tactics resulting in violation of the very objective of the Code i.e. Resolution of the Corporate Debtor in a time bound manner. Therefore, it is necessary for the Courts or the Competent Authority to draw the red line to clarify the stage after which withdrawal/settlement is not permissible.

[1]Hereinafter, referred to as the Code.

[2]Binani Industries Ltd. v. Bank of Baroda, Company Appeal(AT) (Ins) No. 82 of 2018 (NCLAT, 14.11.19).

[3]Mother Pride Dairy India Pvt. Ltd. v. Portrait Advertising & Marketing Pvt. Ltd., Company Appeal (AT) (Ins) No.94 of 2017 (NCLAT, 27.6.17).

[4] Mother Pride Dairy India Pvt. Ltd. v. Portrait Advertising & Marketing Pvt. Ltd., Civil Appeal No. 9286 of 2017 (Supreme Court, 24.7.17).

[5]LokhandwalaKataria Construction Limited v. Nisus Finance and Investment Managers, LLP, Civil Appeal No. 9279 of 2017 (Supreme Court, 20.11.17).

[6] A statutory Right given to the financial creditor by the code to initiate Corporate Insolvency process against the Corporate Debtor in occurrence default.

[7] Rule 11 of NCLAT Rules: Inherent Powers Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.

[8] Uttara Foods and Feeds Private Limited v. Mona Pharmachem, Civil Appeal No. 18520 of 2017 (Supreme Court, 17.11.17)

[9] Report of Insolvency Law Committee, March 2018, https://ibbi.gov.in/uploads/resources/ILRReport2603_03042018.pdf.

[10] Press Information Note by the Government of India, dated 06.06.2018, http://ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jun/President%20Approves%20Promulgation%20of%20the%20Insolvency%20and%20Bankruptcy%20Code%20(Amendment)%20Ordinance,%202018__2018-06-06%2021:10:49.pdf.

[11]Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal &Ors., SLP (Civil) No. 31557/2018(Supreme Court 14.12.18).

[12]Swiss Ribbons v. Union of India, W.P (C) 99 of 2018, (Supreme Court, 25.1.19).

[13]Supra note 7.

[14]Supra note 10.

[15]Arjun Puri v. Kunal Prasad, Company Appeal(AT)(Ins) 52/19, (NCLAT, 31.1.19).

[16]Krishna Kumar Mintri v. Kamlesh Kumar Singhania, Company Appeal (AT) (Insolvency) 456 of 2018 (NCLAT, 27.2.19).

[17] Notification No. IBBI/2019-20/GN/REG048, dated 25th July, 2019 (w.e.f. 25-07-2019).

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