There are substantial questions about the legal framework governing the withdrawal of a CIRP; the settlement of claims after the admission of an application instituted by a debtor; and the scope of the inherent powers vested in the NCLAT under Rule 11 of the NCLAT Rules.
When a settlement is reached between the applicant creditor and the corporate debtor, questions arise as to whether the initiation of the Corporate Insolvency Resolution Process (CIRP) can be withdrawn without involving other creditors. Additionally, under the Insolvency and Bankruptcy Code (IBC), it remains a point of discussion as to who holds the authority to validate such a settlement and whether this settlement implies a preferential payment to the initiating creditor.
Legal Framework Governing the IBC
1. The Insolvency and Bankruptcy Code (IBC) emphasizes sound corporate governance, advocating adherence to the rule of law as a cornerstone in the resolution of corporate insolvencies.
2. Corporate insolvency, as perceived under the IBC, is not merely an isolated challenge faced by individual businesses but rather a broader issue within a framework designed to support public interest. This approach aids in promoting economic growth by balancing the varied interests of stakeholders.
3. The IBC places significant weight on decisions made by creditors acting collectively. This collective approach is based on the premise that the timely resolution of corporate insolvency is crucial for the development of credit markets and serves to encourage investment.
4. Through its diverse provisions, the IBC ensures that the interests of corporate entities are not conflated with the interests of their promoters. It recognizes that the economic value of corporate structures extends beyond the personal interests of their management.
Proceedings Following the Admission of an Insolvency Application
Chapter II of the IBC provides that a Corporate Insolvency Resolution Process (CIRP) can be initiated in three ways:
- By a financial creditor under Section 7,
- By an operational creditor under Section 9, and
- By the corporate debtor itself under Section 10.
Once an application is admitted, the CIRP commences, during which the National Company Law Tribunal (NCLT) declares a moratorium, issues a public announcement regarding the initiation of CIRP and invites claim submissions, and appoints an Interim Resolution Professional (IRP). The IRP then assumes responsibility for managing the affairs of the corporate debtor, which includes receiving and collating all claims submitted by creditors following the public announcement.
Following the collation of claims and assessment of the corporate debtor’s financial position, the IRP establishes a Committee of Creditors (CoC) comprising all financial creditors. The CoC subsequently appoints a Resolution Professional (RP) to oversee the continuation of the CIRP as stipulated by the Code.
The scheme under Chapter II of the IBC establishes two pivotal principles:
1. In Rem Proceedings: Upon the admission of an insolvency petition, the process becomes in rem, meaning it is no longer confined to the applicant creditor and debtor but includes all creditors of the corporate debtor as stakeholders.
2. Transfer of Management: With the admission of the petition, the corporate debtor’s management is transferred to the IRP, and eventually to the RP. This transfer signifies that the corporate debtor ceases to operate in its prior form. During CIRP, the interests of the former management are to be distinctly separated from the broader interests of the corporate debtor itself.
Legal Framework for Withdrawal and Settlement of Claims
When the Insolvency and Bankruptcy Code (IBC) was enacted in 2016, it lacked explicit provisions in its text or its associated rules and regulations regarding the withdrawal of the Corporate Insolvency Resolution Process (CIRP) after an application had been admitted. Despite the absence of such a provision, the Supreme Court invoked its powers under Article 142 of the Constitution in various cases, allowing for the withdrawal of CIRP when a settlement was reached between the creditor and the corporate debtor after the National Company Law Tribunal (NCLT) had admitted the application.
In the case of Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers LLP, the Court preliminarily agreed that the National Company Law Appellate Tribunal (NCLAT) could not exercise its inherent powers under Rule 11 of the NCLAT Rules, 2016 to permit a settlement or withdrawal after the admission of the application, given the presence of Rule 8 of the CIRP Rules.
Another significant decision, Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem, allowed a post-admission settlement under Article 142. Here, the Court observed that rather than relying on its extraordinary powers for each case of post-admission settlement, relevant amendments could be made to the IBC rules to accommodate situations where a settlement was reached after admission. This observation led the Ministry of Corporate Affairs to establish the Insolvency Law Committee (ILC) to address initial challenges and ambiguities arising from the implementation of the IBC.
The ILC’s report highlighted that Rule 11 of the NCLAT Rules, 2016, should not be applied to permit CIRP withdrawal. Instead, it recommended an amendment to Rule 8 of the CIRP Rules to provide a clear framework for post-admission settlement and withdrawal. Accepting the ILC’s recommendation, the legislature introduced Section 12A in the IBC through the Insolvency and Bankruptcy (Second Amendment) Act, 2018, and Regulation 30A was subsequently incorporated into the CIRP Regulations.
After amendment in the IBC with the inclusion of Section 12A and Regulation 30A of CIRP Regulation, Withdrawal may be sought at four stages, all of which have a procedure prescribed under the existing framework:
| Stage | Description | Procedure |
| 1. Before NCLT Admission | Before the application under Sections 7, 9, or 10 is admitted by the NCLT. The CIRP process has not yet started, and proceedings remain in personam (between applicant and corporate debtor). | Covered under Rule 8 of the NCLT Rules. The applicant must approach the NCLT directly for withdrawal, and the NCLT may issue an order permitting withdrawal. |
| 2. Post-Admission, Pre-CoC Formation | After an application under Sections 7, 9, or 10 is admitted, but before the Committee of Creditors (CoC) is formed. The proceedings are now in rem, extending beyond the applicant creditor and corporate debtor. | Section 12A is silent, but Regulation 30A, amended post-Swiss Ribbons, allows withdrawal at this stage. The applicant files through the Interim Resolution Professional (IRP), who places the application before the NCLT. The NCLT, being a quasi-judicial body, must review all relevant factors before approving or rejecting the application. |
| 3. Post-Admission, Post-CoC Formation, Pre-Issue of EoI | After application admission and CoC formation, but before issuing the invitation for Expression of Interest (EoI). | Section 12A and Regulation 30A cover this scenario. The IRP or Resolution Professional (RP) submits the application to the CoC. If the CoC approves with a 90% voting share, the RP files the application with the NCLT. |
| 4. Post-Admission, Post-CoC Formation, Post-Issue of EoI | After application admission, CoC formation, and issuance of EoI. | Same as stage (3), but with an additional requirement per Regulation 30A(1) proviso. The applicant must provide reasons for withdrawal at this later stage. |
There is now a detailed procedure to deal with withdrawal or settlement at both stages post admission – before and after the CoC is constituted. In view of this detailed framework, the requirement to invoke discretionary power such as Rule 11 of the NCLT Rules, or Rule 11 of the NCLAT Rules or even the power of this Court under Article 142 no longer arises.
Conclusion
1. Involving Other Creditors (In Rem) Post-Admission of Application
Once an insolvency application under Sections 7, 9, or 10 is admitted by the NCLT, the nature of the proceedings shifts from being solely between the applicant creditor and the corporate debtor (in personam) to affecting all creditors (in rem). This shift underscores the IBC’s aim to ensure that corporate insolvency resolution benefits the broader spectrum of creditors rather than just the initiating party. Consequently, post-admission, any withdrawal or settlement of the CIRP requires the involvement of the Committee of Creditors (CoC), representing all creditors, with a high threshold of approval (90% voting share) to protect collective creditor rights. This requirement reinforces the principle that insolvency resolution must serve the interests of the entire creditor body and adhere to public interest considerations.
2. Inherent Power of NCLT Under Rule 11 of the NCLAT Rules, 2016
Initially, the absence of explicit provisions for withdrawal or settlement after CIRP admission led courts to rely on inherent powers under Rule 11 of the NCLAT Rules and, at times, Article 142 of the Constitution. However, through the introduction of Section 12A and Regulation 30A, the legislature has limited the discretionary powers of the NCLT in post-admission withdrawals. These provisions aim to provide a structured, transparent framework that respects collective creditor interests and minimizes arbitrary discretion. The approach limits the inherent power of the NCLT and ensures that judicial discretion is applied within a clear statutory framework, emphasizing the Code’s objective of procedural predictability and creditor protection.
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