“Explore the crucial role of the Committee of Creditors (CoC) and the withdrawal mechanism under the Insolvency and Bankruptcy Code (IBC). Understand Section 12A, its evolution, and the impact of judicial pronouncements. Delve into scenarios, regulations, and court clarifications for comprehensive insights.”
The Insolvency and Bankruptcy Code (IBC) was established to combine and modify laws associated with the reorganisation and insolvency resolution of various entities such as corporate persons, partnerships, and individuals. The main aim of the Code is to establish a system that is both efficient and timely in maximising the value of assets for these entities, while also encouraging entrepreneurship, increasing credit availability, and maintaining a fair balance of interests for all parties involved.[1] The Committee of Creditors (CoC) plays a vital role in the insolvency process given under the IBC. The CoC is a group of financial creditors that represent the interests of all stakeholders in the insolvency process.
Under the Code, the Committee of Creditors is entrusted with the primary responsibility of financial restructuring. They are required to assess the viability of a corporate debtor by taking into account all available information as well as to evaluate all alternative investment opportunities that are available. The Committee of Creditors is required to evaluate the resolution plan on the basis of feasibility and viability[2]. The CoC can pass a resolution plan by a 66% majority vote. This ensures that the resolution plan is accepted by a majority of the members of the CoC. The present paper is a small attempt to highlight the powers and role of the Committee of Creditors formed under Section 21 of IBC and is a further attempt to analyse the present scenario on the withdrawal of application by the committee based on the judicial pronouncements under Section 12A of the Code.
The analysis of the statutory framework governing the CIRP and periodic reports of the Insolvency Law Committee indicates that withdrawal of resolution plan by successful resolution applicant is a creditor-driven process. The aim of the process, in preferential order is to: first, enable resolution of the debt by maintaining the corporate debtor as a going concern, in order to preserve the business and employment of the personnel; second, maximise the value of the assets of the corporate debtor and enable a higher pay-back to its creditors than under liquidation; and third, enable a smoother and faster transition to liquidation in the event that a time-bound CIRP fails, in a bid to avert further deterioration of value.[3]
One crucial remedy provided by the IBC is the withdrawal mechanism under Section 12A. This provision allows for the withdrawal of insolvency proceedings with the agreement of at least 90% of the committee of creditors (CoC).
Section 12A of the Insolvency and Bankruptcy Code, 2016 reads as follows:
“12A. Withdrawal of application admitted under section 7, 9 or 10. –
The Adjudicating Authority may allow the withdrawal of an 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 inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018 with retrospective effect from 6 June 2018. Before this section was inserted, the Court, under Article 142 of the Constitution, was passing orders allowing withdrawal of applications after creditors’ applications had been admitted by NCLT or NCLAT in exceptional cases[4].
However, the lack of exclusive provision for the withdrawal of applications once they were admitted into the insolvency process created difficulties for distressed companies that may have wanted to explore alternative options for resolving their financial difficulties outside of the insolvency process. The 2018 amendment provided a new mechanism for distressed companies to settle their outstanding dues with their creditors and work towards a resolution plan that was mutually acceptable.
The introduction of Section 12A provided greater flexibility and control to the CoC by allowing them to decide whether or not to continue with the insolvency process even after admission of application, which helped to ensure that the interests of all stakeholders involved were protected.
Overall, the amendment made in 2018 regarding the withdrawal of application under the IBC has had a positive impact on the insolvency process by providing distressed companies with an alternative means of resolving disputes outside of the insolvency process and offering greater flexibility and control to the CoC.
This section has been further clarified by the Supreme Court in various judgments. In Swiss Ribbons Pvt. Ltd. v. Union of India[5], the court held Section 12A constitutionally valid and said that the CoC has the power to withdraw an insolvency application under it. The Court noted that “the intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors.” The objective of the IBC is to ensure the revival of the debtor company and not liquidation, and the withdrawal of the insolvency application can achieve the same objective.
In the case of Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta[6], the Court held that the withdrawal of an insolvency application should be approved by the Adjudicating Authority and should not result in a loss of value for any stakeholders. The court clarified that the Adjudicating Authority can reject the withdrawal application if it is not convinced that the withdrawal is in the interest of all stakeholders.
Regulation 30A of IBBI Regulations was introduced after insertion of section 12A in IBC. It provided the mechanism of dealing with applications filed for withdrawal. Later on, it was substituted by notification dated 25.07.2019 in IBBI Regulations. According to the said provision, withdrawal under section 12A of IBC could be moved before the Adjudicating Authority by the applicant through IRP before constitution of the CoC and in case the CoC has been constituted, then also by the applicant through IRP or the RP. However, the applicant would be required to justify the withdrawal by giving reasons. It further provides the procedure for dealing with such an application.[7]
Over time, the time of withdrawal under Section 12A has been interpreted by the judiciary in multiple pronouncements. Various scenarios in which the question arises on whether the application under Section 12A can be withdrawn have been discussed below:
1. Before Admission by the Adjudicating Authority
Before the 2018 amendment, the withdrawal of an application was permitted before the admission of the application under Rule 8 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which read as follows:
“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.”
This rule was also asserted by the National Company Law Appellate Tribunal in the case of Lokhandwala Kataria Construction Pvt. Ltd. v. Nisus Finance & Investment Manager LLP.[8]
The court said, “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 can not be closed till the claim of all the creditors are satisfied by the corporate debtor.”
In Dinesh Gupta v. Rolta India Ltd.[9], the NCLT Mumbai was faced with the question of whether a withdrawal application filed under section 12A by the applicant could be allowed if it was filed before the constitution of the CoC, and after taking the consent of all the applicants, but had not been settled with the remaining creditors of the corporate debtor. The NCLT referred to the Code and Swiss Ribbons case[10] and observed that after admission, no applicant has an inherent right to withdraw the petition, as the proceedings are in rem and the interests of other stakeholders are involved.
2. Before formation of the Committee of Creditors
The primary objective of the Insolvency and Bankruptcy Code is not recovery but revival, which allows parties to approach the NCLT directly through the interim resolution professional seeking withdrawal of an application if both parties, i.e. creditors and debtors, have reached a settlement at any stage where the committee of creditors is not yet constituted.
The Hon’ble Supreme Court in Swiss Ribbons case[11] has recognized that NCLT, under Rule 11 of NCLT Rules, 2016, has inherent powers to allow the withdrawal of an insolvency application when the committee of creditors is yet to be constituted. The court has also observed that an applicant can approach the NCLT directly, and the tribunal may exercise its inherent powers under Rule 11 of NCLT Rules, 2016, to allow or disallow an application for withdrawal or settlement.
Various cases have allowed the withdrawal of applications without the consent of the committee of creditors when the committee has not yet been formed. To reflect the current law, Regulation 30A of the Insolvency and Bankruptcy Board of India (IBBI) Regulations was amended to create a distinction in the way an application may be made based on whether it is before or after the constitution of the committee of creditors.
The Bench comprising Justice B. R. Gavai and Justice Vikram Nath, while adjudicating an appeal filed in Abhishek Singh v. Huhtamaki PPL Ltd.[12], has held that Section 12A of the Insolvency and Bankruptcy Code, 2016 does not debar entertaining applications for withdrawal of Corporate Insolvency Resolution Process (CIRP) even before the constitution of the Committee of Creditors. Further, Regulation 30A of CIRP Regulations furthers the cause of Section 12A of IBC and they both are not conflicting provisions.[13]
In K. Shashidhar v. Indian Overseas Bank[14], the court held that a withdrawal application can be made under Section 12A after the formation of the CoC, but before the issuance of a resolution plan. The court further held that the Adjudicating Authority has the power to decide on the withdrawal application after considering the views of all stakeholders and the reasoning of the CoC.
3. After formation of the Committee of Creditors
Insertion of Section 12A under IBC via 2018 amendment was introduced to permit withdrawal of applications made under sections 7, 9, or 10 with the approval of 90% of the CoC. The Insolvency and Bankruptcy Board of India (IBBI) has been empowered to formulate regulations for submitting such applications.
Through Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal[15], the Supreme Court held that the withdrawal of an insolvency application can be done at any time before the issuance of a resolution plan but the final decision to allow or disallow withdrawals lies with the Adjudicating Authority. The court noted that the objective of the IBC is to revive the debtor company and not to liquidate it, and the withdrawal of the insolvency application can achieve the same objective.
4. After approval of Resolution Plan by the CoC
If the CoC has approved a resolution plan that is pending approval from the Adjudicating Authority and the parties arrive at a settlement, an application for withdrawal can be filed under Section 12-A after obtaining 90% votes of the CoC.
The Adjudicating Authority if it finds appropriate, may then approve the application as seen in Satyanarayan Malu v. SBM Paper Mills Ltd.[16] The NCLT Mumbai allowed the withdrawal of CIRP at the stage when the resolution plan was pending approval by the NCLT, after acceptance by the CoC. The Bench considered the offer of a one-time settlement (OTS) made by the corporate debtor to the financial creditor, which was more economical than the resolution plan.
5. After approval of Resolution Plan by the Adjudicating Authority
While the amended provisions of the Insolvency and Bankruptcy Code (IBC) allow for the withdrawal of an application after admission of an insolvency application, there is no clarity on the possibility of withdrawal after a liquidation order has been passed. There are situations where a party may seek to withdraw an insolvency application after a liquidation order has been issued by the Adjudicating Authority.
However, the withdrawal of an application during the liquidation stage has been permitted by both the Hon’ble Supreme Court and the National Company Law Appellate Tribunal (NCLAT), subject to approval by 90% votes of the Committee of Creditors (COC).
The withdrawal of an application can be made under Section 12A even in the liquidation period. The same was stated by the court in the case of V. Navaneetha Krishnan v. Central Bank of India[17] as follows:
“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. Both the appeals are dismissed with aforesaid observations. No cost.”
The NCLAT also observed that if a person, who is not barred under Section 29A, satisfies the COC’s demand during the liquidation period, they may propose a settlement that the COC can consider. If the COC accepts the offer and decides to withdraw the application under Section 7 of the IBC with 90% or more voting share, the liquidation order passed by the Adjudicating Authority will not impede the Adjudicating Authority from passing an appropriate order.
The Supreme Court of India reaffirmed, through its judgement in Vallal RCK v. Siva Industries & Holdings Ltd.,[18], and said that, “When 90% and more of the creditors, in their wisdom after due deliberations, find that it will be in the interest of all the stakeholders to permit settlement and withdraw CIRP, in our view, the adjudicating authority or the appellate authority cannot sit in an appeal over the commercial wisdom of CoC. The interference would be warranted only when the adjudicating authority or the appellate authority finds the decision of the CoC to be wholly capricious, arbitrary, irrational and dehors the provisions of the statute or the Rules.”
In conclusion, the Insolvency and Bankruptcy Code (IBC) has established an effective and structured approach to handling financial distress for various entities. The Committee of Creditors (CoC) plays a significant role in the insolvency process, and the introduction of Section 12A of the IBC has given them more flexibility and control in determining whether or not to continue with the insolvency process, even after admitting an application. The Supreme Court has further clarified the interpretation of Section 12A, which allows the withdrawal of an insolvency application to revive the debtor company.
The 2018 amendment that allows for the withdrawal of an application under the IBC has had a positive impact on the insolvency process, providing distressed companies with an alternative means of resolving disputes outside of the insolvency process while protecting the interests of all stakeholders. Overall, the IBC and its subsequent amendment have strengthened the insolvency process in India, providing a fair and efficient system for resolving financial distress. It is a significant development that ensures all stakeholders are treated fairly and enhances the growth of the Indian economy.
[1] Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407; Gail India Ltd. v. Ajay Joshi, 2021 SCC OnLine NCLAT 359
[2] Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17
[3] Ebix Singapore (P) Ltd. v. Educomp Solutions Ltd. (CoC), (2022) 2 SCC 401
[4] Supra.
[5] (2019) 4 SCC 17
[6] (2020) 8 SCC 531
[7] Abhishek Singh v. Huhtamaki PPL Ltd., 2023 SCC OnLine SC 349
[8] (2017) SCC OnLine NCLAT 406
[9] (2021) ibclaw.in 690 NCLT
[10] Supra.
[11] Ibid.
[12] Supra.
[13]https://www.livelaw.in/top-stories/ibc-application-under-section-12a-for-withdrawal-of-cirp-is-maintainable-prior-to-constitution-of-coc-supreme-court-225026.
[14] (2019) 12 SCC 150
[15] (2022) 2 SCC 544
[16] (2018) SCC OnLine NCLT 32358
[17] (2018) SCC OnLine NCLAT 904
[18] (2022) 9 SCC 803
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