The Insolvency and Bankruptcy Code has been introduced with an object of maximization of the value of the assets, promote entrepreneurship ,availability of credit, resolution of insolvency within the time bound manner balance the interest of all stakeholders including alteration of priority of payments to the Govt are some of the objects of the code. But while drafting the code, the provision of withdrawal of an application is not inserted .Hence there is no provision under the code to withdraw an application filed before the Hon!ble Tribunal except as provided for in Rule 8 of the Insolvency and Bankruptcy (Application to the NCLT) Rules of 2016. Under this provision, the Adjudicating authority will have powers to allow withdrawal of an application filed before Tribunal Prior to its admission. Once the application is admitted, there are no powers to allow withdrawal of an application under the code
Under the code there is no provision for withdrawal of an application from the NCLT for initiation of CIRP except Rule 8 (Adjudicating authority) rules 2016 wherein the NCLT could allow withdrawal of application on a request made by the applicant before its admission. So the provision for withdrawal is available only prior to admission and once an application is admitted there is no provision for withdrawal.
What is Rule 8 of NCLT Rules?
As per Rule 8 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
The Financial Creditor will file the application under rule 4, Operational Creditor will file an application under rule 6 and Corporate Debtor will file the application under rule 7 as the case may be .The Adjudicating authority will allow the withdrawal of application under rule 8. Hence in earlier days, there is no provision under the code to allow withdrawal of application from CIRP after admission of application by the Adjudicating authority
The question of allowing the application for withdrawal can be permitted after its admission by the Honourable National Company Law Tribunal Tribunal by using the inherent powers given under rule 11 of the National Company law Tribunal rules 2016 in view of rule 8 was discussed in the matter Lokhandwala Kataria Construction Private ltd Vs Nisus Finance & Investment Managers LLP before the Hon’ble Supreme court. The Apex court in this case allowed a settlement between the corporate debtor and the creditors using its inherent powers provided under Article 142 of the constitution of India. According to this article, which states that the Apex court can exercise this power to pass such order or such decree as is necessary for doing complete justice in any cause or matter pending before it. The Apex court has set aside the decision of NCLAT wherein the Appellate Authority refused to exercise its inherent powers provided under Rule 11 of NCLAT Rules 2016
Rule 11 says that nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal
The same view was taken by the Supreme court in the matter of Mothers Pride Dairy India Private ltd Vs Portrait Advertising and Marketing Private ltd and thereafter in another matter Uttara Foods and Feeds Private ltd Vs Mona Pharmachem where it was held
“We are of the view that instead of all such orders coming to the Supreme Court as only the Supreme Court may utilize its powers under Article 142 of the Constitution of India, the relevant Rules be amended by the competent authority to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached.“
Accordingly, Insolvency Law Committee has recommended amendment of Rule 8 to allow withdrawal after the admission of CIRP. Accordingly an amendment Ordinance was made on 06.06.2018 which allowed the Adjudicating Authority the power to allow withdrawal of on application by the applicant with 90% voting share approval of COC in meeting is the condition to be fulfilled for approval.
Why 90% voting share is required?
The CIRP is no longer a proceeding between the Creditor and the Corporate Debtor and it is a process involving all creditors of the debtor. The intention of the code is to discourage individual actions and encourage collective actions and settlement must be reached amongst all creditors and the debtor for the purpose of a withdrawal to be granted. The decision of withdrawal is also to be taken by a majority of creditors who are having capability and capacity to revive the business of the corporate debtor and not by sole creditor. Hence the Committee has unanimously agreed that the relevant rules may be amended to provide for withdrawal post-admission if the COC approves of such decision by a voting share of ninety per cent
Accordingly Section 12A and also regulation 30A of the IBBI (Corporate Insolvency Resolution Process) regulations were introduced for the purpose of withdrawal of an application from the CIRP after its admission. Hence the application filed under Section 7,9 and 10 by FC,OC and CD respectively can be withdrawn after its admission as per the provisions of the code .
For the convenience, the Provisions regarding withdrawal are furnished hereunder
a. As per Rule 8 of Insolvency and Bankruptcy (application to adjudicating authority) Rules before admission of the application
b. As per the provisions of Section 12 A and also as per the provisions of the Regulation 30 A of IBBI (Insolvency Regulation Process for corporate Persons) Regulations 2016
The Provisions of Rule 8 are applicable for withdrawal of an application before its admission in front of the Adjudicating Authority.
The Withdrawal of an application as per Provisions of Section 12 A and regulation 30 A can be classified as under
1. After admission of the application but before constitution the COC
2. After formation of COC but before issuance of expression of interest
3. After issuance of expression of interest
As per Section 12 A 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
The following steps are to be followed for withdrawal
1. The application for withdrawal must be filed in the prescribed format such as Form FA
2. The application must be filed by the applicant through IRP if the withdrawal is filed after admission but before constitution of the COC
3. The application is filed after constitution of COC is to be filed through IRP or RP as the case may be
4. If the application for withdrawal is filed after issuance of expression of interest, the applicant has to state the reasons justifying withdrawal
5. Along with form FA , a bank guarantee should also be accompanied .
6. The Bank guarantee should cover the estimated expenses such as fees to be paid to RP or Insolvency Professional entity and if any fees to be paid to any other Professionals and other reasonable expenses incurred by the RP .the fees to be paid to AR and out of expenses incurred by the AR for discharge of duties etc
7. The application for withdrawal must be filed before the Adjudicating Authority by the IRP within 3 days of its receipt if it is received before constitution of the COC
8. If the application for withdrawal is received after constitution of COC, it should have approval of COC with 90% voting share within 7 days of its receipt and RP has to file the same before the Adjudicating authority on or before 3 days of its receipt.
9. If the application for withdrawal is approved, the applicant shall deposit an amount towards the actual expenses incurred till the date of approval by the Adjudicating Authority as determined by the IRP/RP as the case may be within 3 days of such approval in the bank account of the CD failing which the Bank Guarantee received shall be invoked without prejudice to any other action permissible against the applicant under the code.
Who has to file an application for withdrawal before the Adjudicating Authority ?
As per Regulation 30 A, the application is to be filed by the applicant and not by the Resolution Professional. This was decided in the matter of Federal bank ltd Vs Trio Fab(I) Pvt ltd wherein the Federal bank which is the sole financial Creditor who has 100% voting share in COC has filed an application for withdrawal. Prior to this Resolution Professional has filed an application for withdrawal. The Hon’ble NCLAT held that the application is to be filed by the applicant.
Whether withdrawal application can be made after receipt of resolution plan?
The answer to this question is yes. This matter was decided in Navaneetha Krishnan Vs Central Bank of India, Coimbatore & Another wherein the application for withdrawal was filed after submission of resolution plan provided if Committee of Creditors accept with 90 per cent voting share.
In the matter of Satynarayan Malu Vs SBM Paper Mills ltd the Hon!ble NCLT Mumbai had allowed an application for withdrawal of CIRP when Resolution plan was approved by COC and it is due for approval at Tribunal ,as the one time settlement offer made by the Corporate debtor is more economical than the Resolution plan.
In the matter of Mr Vimal Chandrunwal Vs Brilliant alloys Pvt ltd, NCLT Chenai had refused to admit the application for withdrawal filed after the issuance of Invitation of expression of interest on the ground that as per Section 12 A it must be filed before issue of invitation of expression of interest.
But the Apex court has reversed the decision of Tribunal and held that section 12 A must read along with Regulation 30 A in the matter of Brilliant Alloys Pvt ltd Vs Mr S.Rajagopa, & Ors and allowed the application for settlement after issue of invitation of expression of interest.
Whether the Section 12 A is violative of Article 14?
The Apex court has dealt the above issue in the matter of Swiss Ribbons & Anr Vs Union of India ors where it was held that the Regulation 30 A(1) is not mandatory but it directory in nature because the application of withdrawal may be allowed in exceptional cases even after issue of invitation for expression of interest. Accordingly necessary amendment was made to Regulation 30 A by including the word “Justifying with reasons” whenever the application for withdrawal is filed after issue of expression of interest.
Whether Section 29 A is applicable for withdrawal of application ?
The NCLT Mumbai in the matter of Andhra Bank Vs Sterling Biotech& Ors had rejected the application for withdrawal on the ground that the promoters are ineligible under section 29 A. even though the proposal has received requisite 90% voting share and held further that OTS is also a type of resolution plan hence it will attracts section 29 A.
But the Appellate Tribunal in the matter Shweta vishwanath shirke & Ors The committee of Creditors it was held that section 29 A is not applicable for entertaining the application under section 12 A
What is pertinent to note the point is once the COC approves the withdrawal applicaton with 90% voting share, then in such case section 29 A is not applicable
There are few comments stating that the allowing withdrawal results in waste of time and effort invested in the CIRP period. But the Adjudicating authority has set aside this argument by stating that the if the withdrawal application is filed for the maximatation of assets of CD and upheld the importance of protection of interest of stakeholders then in such cases withdrawal is better option to liquidation.
Whether withdrawal will be allowed after approval of resolution plan ?
The answer to this question is NO. It was decided in the matter of Kundan Care Products ltd Vs Mr Amit Gupta wherein the successful resolution applicant filed an application for withdrawal of its resolution plan as it did not find its plan commercially viable on account of significant delays in the CIRP Process. The Adjudicating Authority rejected this contention against which the appellant preferred an appeal before the Hon!ble NCLAT. The Appellate Tribunal has also rejected the application on the ground that it would be detrimental for the stakeholders and could derail the CIRP process thereby affecting the corporate debtors assets.
Whether withdrawal is allowed during liquidation?
The answer to the question is yes provided the offer of one time settlement offered under Section 12 A is far more beneficial than the amount offered under the liquidation to the Stakeholders, in such cases the Order of Adjudicating authority for liquidation will not come in the way of approval of withdrawal application filed under Section 12 A. This is because the object of the code is ensure maximization of value of the assets, balance the interest of all the stakeholders, Promote entrepreneur ship, completion of the CIRP within the time bound ect are some of the objects of the Code.
In the matter of Naveneetha Krishnan Vs Central Bank of India the Hon!ble NCLAT held that if the application is filed under Section 12 A even during the liquidation period provided if it is satisfying the condition that it is not barred by Section 29 A and it has approval of Committee of Creditors with 90% voting share and amount offered under Section 12 A is more beneficial to the stakeholders than in the case of liquidation, in such cases the Adjudicating authority will permit the withdrawal application even during the liquidation.
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Author: Mr Lakkaraju Srinivas | Advocate & Insolvency Professional |Kondapur, Hyderabad