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Withdrawal of Insolvency Application: Unpacking the Role of Settlement Agreements in India’s Insolvency and Bankruptcy Code

Article by Rishabh Singh 

The Insolvency and Bankruptcy Code of 2016 (“I&B Code, 2016 / Code”) serves as a pivotal instrument in the Indian legal framework, with its primary objective being the preservation of businesses as “going concerns.” A fundamental aspect of this preservation is the Corporate Insolvency Resolution Process (“CIRP”), which, when initiated, is designed to conclude with a resolution that revitalizes the distressed business. Once the CIRP commences, the ultimate aim is to bring the resolution for the Corporate Debtor (“CD”).  One method that has emerged to facilitate such resolutions other than resolution plan is the One-Time Settlement (“OTS”) agreement, a negotiation between the indebted corporation and its creditors. The code does not provide any specific section or Regulation which speaks about the OTS but it is observed that the Committee of Creditors (“CoC”) generally allows for these kinds of settlement outside the court.

The OTS process begins with the CD proposing a settlement to the CoC members along with other Creditors. This proposal’s acceptance by 90% of the CoC members initiates the subsequent steps, which include the withdrawal of applications previously filed by the applicant(s) / Creditor before the Ld. Adjudicating Authority, a step governed by Rule 8 of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules of 2016. (i.e Hon’ble NCLT).

Underlying the CIRP starts, it is expected to maximize the value of the assets of the CD and consequently the interests of all its stakeholders. It has been noted that the promotors enter into OTS agreement with the CoC members and upon reaching consensus with a voting of 90% of the CoC members in favour of the same. The applicant may file an application before the Hon’ble NCLT for the withdrawal of CIRP application. It has also been observed in some cases that the directors/promotors also enters into OTS with the Operational Creditors to settle their dues.

Notably, during the initial enactment of the Code, the scope for settlements was limited. Rule 8 only permitted application withdrawal before admission to the Ld. National Company Law Tribunal (“NCLT”). Consequently, legal challenges arose, resulting in an accumulation of appeals in the courts, prompting the need for regulatory adjustments. Section 12A was inserted specifically providing for withdrawal after admission. It is well known that the section was inserted after the Hon’ble Supreme Court ruling in Lokhandwala Kataria Construction Private Limited v. Nisus Finance And Investment Managers LLP[1], where the Hon’ble Apex Court had to use its plenary powers under Article 142 of the Constitution of India to permit withdrawal after admission of resolution process. The Hon’ble SC subsequently eased out the process of withdrawal by its ruling in Brilliant Alloys Private Limited v. Mr. S. Rajagopal & Ors[2].

Subsequently, the IBC (Second Amendment) Act of 2018 introduced Section 12A, granting the Ld. Adjudicating Authority the power to approve settlements. However, this approval requires the substantial support of at least 90% of the voting share of the Committee of Creditors (COC).

Empowering CD with the opportunity to settle their claims can effectively save both time and financial resources. Furthermore, it aligns with the ultimate objectives of the Code, which are to maximize creditor returns and facilitate business continuity.

This article provides a platform for understanding and redefining the financial settlement landscape in India under Section 12 A of the Code, promoting transparency and efficacy in resolving distressed businesses and upholding the interests of all stakeholders.

 

WITHDRAWAL OF INSOLVENCY PROCEEDINGS UNDER SECTION 12A OF THE CODE

Section 12A of the Code, allows for the withdrawal of Insolvency proceedings by the applicant. This provision enables the withdrawal, if the CoC members approves such resolution by 90% voting share. The idea is to promote settlements and avoid unnecessary insolvency proceedings, fostering a more flexible and consensual approach in resolving financial distress. It is observed that the commercial wisdom of the CoC to accept or reject the Section 12 A withdrawal is also taken into consideration. But the final discretion rests with the Ld. Adjudicating Authority. The report of the Bankruptcy Law Reforms Committee also discussed that “Once a bankruptcy petition is filed, it cannot be withdrawn without the leave of the Adjudicating Authority”.[3]

The issue with respect to withdrawal of CIRP under 12 A of the code was a burning topic which was discussed at every level. There were instances where withdrawal was allowed after the publication of Expression of Interest (EoI / FORM-G) and in some cases even after the receipt of resolution plan. Some of these cases are highlighted below:

The Hon’ble Supreme Court in the case of Brilliant Alloys Private Limited v. Mr. S. Rajagopal & Ors[4]. held that Section 12A contains no time stipulation and allowed the settlement, even after issue of invitation for expression of interest, thereby annulling the CIRP proceedings.

 

WITHDRAWAL AT THE STAGE OF PENDENCY OF LIQUIDATION OR RESOLUTION PLAN

In case where no valid resolution plan has been received or the resolution plan is not approved by the majority CoC in the meetings before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the CIRP, the Ld. Adjudicating Authority upon the application filed by the Interim Resolution Professional or the Resolution Professional upon authorisation by the CoC members shall pass an order for liquidation of the CD, in terms of Section 33 of the Code. As against the mandatory provisions of Section 33, Section 12A is not an automatic remedy. If the CD files an OTS scheme, the CoC may consider the same. However, the ultimate authority to approve withdrawal of CIRP vests with the Ld. Adjudicating Authority, and the power should be exercised, considering commercial as well as social interest

Amended provisions of the code lays down the provision for withdrawal of application post admission of insolvency application, and through various judgments clarity regarding withdrawal after the liquidation is now clear. It is to be noted that Hon’ble Supreme Court and Ld. NCLAT through orders in various cases has approved the withdrawal of application even during the stage of liquidation, if the COC permits such withdrawal. Few of the cases pertaining to withdrawal under Section 12 A is mentioned below:

  • Navaneetha Krishnan v. Central Bank of India[i]

The Hon’ble NCLAT, New Delhi Bench held that:

“ 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”.

 

  • Shweta Vishwanath Shirke v. Committee of Creditors (Company Appeal (AT) (Insolvency) No. 527, 601, 612 Of 2019)[5]

The key issue discussed in this case was with respect to the applicability of Section 29 A of the code during 12 A settlement. It was held that Section 29A is not applicable for entertaining/considering an application under Section 12A as the nature of both the applications are different and the applicants are not entitled to file application under Section 29A as ‘resolution applicant’.  In the present case, the ‘Corporate Insolvency Resolution Process’ was initiated pursuant to an application filed under Section 7 by Andhra Bank. The application under Section 12A was approved by the CoC having more than 90% of the voting share, therefore, it was not open to the Adjudicating Authority to reject the same on the ground of ineligibility under Section 29A, which is not applicable.

 

  • Vallal RCK v. Siva Industries and Holdings Limited & Ors ( Vallal RCK v. Siva Industries and Holdings Limited & Ors, Civil Appeal Nos. 1811-1812 of 2022[6]

It was held that the Ld. Adjudicatory Authority or an appellate authority cannot sit in appeal over the commercial wisdom of the Committee of Creditors (COC). The judgment affirmed the principle that when 90% and more of the committee of creditors, in their wisdom after due deliberations, approved a settlement and consequential withdrawal of the insolvency proceedings, the Ld. NCLT or the Ld. NCLAT ought not sit in appeal over the said decision.

 

Conclusion

Therefore, the cloud on the withdrawal of CIRP proceedings under Section 12 A at various stages of the proceedings especially during liquidation is clear. However, in case of liquidation the Ld. NCLT or Ld. NCLAT looks into the fact whether the Promoters are barred under Section 29A of the Code or not. It is imperative to note that Section 12A is not a resolution plan, Section 12A aims and focus on the inception of the initiation of the process itself. However, the judicial forums have cautioned that if in guise of withdrawal of CIRP, the creditors are actually agreeing to a resolution plan, then the Ld. Adjudicating Authority may exercise discretion which ultimately benefits the CD. The idea of withdrawal under Section 12A is akin to a declaration by overwhelming majority of CoC that the circumstance which led to initiation of insolvency do not exist anymore. The provisions of the Code should not be misused by any stakeholder to strip asset value or otherwise work to the detriment of the business or other stakeholders. The intent of code is to provide a reasonable opportunity for rehabilitation of a business before a decision is taken to liquidate and the Ld. Adjudicating Authority may allow withdrawal if the pre-conditions are met, however, Section 12A should not provide the debtor with an opportunity to abuse the process of law.

[1] Civil Appeal No. 9279 Of 2017
[2] Special Leave to Appeal (C) No(s). 31557/2018
[3] https://ibbi.gov.in/BLRCReportVol1_04112015.pdf
[4] Special Leave to Appeal (C) No(s). 31557/2018
[5] Company Appeal (AT) (Insolvency) No. 527, 601, 612 Of 2019.
[6] Civil Appeal Nos. 1811-1812 of 2022.
[i]https://ibbi.gov.in//webadmin/pdf/order/2018/Aug/9th%20Aug%202018%20in%20the%20matter%20of%20V.%20Navaneetha%20Krishnan%20Vs.%20Central%20Bank%20of%20India,%20Coimbatore%20&%20Anr._2018-08-20%2011:05:55.pdf
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