Analysis of Section 12A under IBC

By- Ananth Kini, Advocate, Supreme Court & Delhi High Court

ABSTRACT

The Insolvency and Bankruptcy Code, 2016 seeks to consolidate and amend the law relating to insolvency into a single legislation and among other things also provides for insolvency of corporate debtor. Under section 7,9, and 10 of the IBC an applicant can file an application for initiating insolvency of a corporate debtor before the concerned Adjudicatory Authority which may also be withdrawn by the applicant either at the pre or post admission stage if certain conditions are met.

The article will study the law on withdrawal application under the IBC and the relevant rules and regulation thereunder along with elucidating upon the recent amendments made therein and judicial pronouncements on the same. The article will further also study the law on withdrawal application as it existed pre and post the 2021 IBC amendment, highlight the need for having the amendment and study the interrelation between section 12A and section 29A of the IBC and lastly conclude with researcher’s opinion.

I. INTRODUCTION

The Insolvency and Bankruptcy Code, 2016[1] (hereinafter, ‘IBC’) is a comprehensive law which deals with insolvency of Companies, LLPs, MSMEs and even individuals and also personal and corporate guarantors and partnership firms. For the purpose of effectuating the IBC, both the Ministry of Corporate Affairs (MCA) and the Insolvency and Bankruptcy Board of India (IBBI) have framed several rules and regulations. The cases relating to insolvency and liquidation for companies, LLPs and MSMEs are heard by the NCLT (Adjudicatory Authority) whereas the cases relating to insolvency of individuals and partnerships are heard by Debt Recovery Tribunal (DRT). An appeal from NCLT is heard by the hon’ble NCLAT and from that to the hon’ble Supreme Court, likewise, an appeal from DRT is heard by hon’ble DRAT and from that to the hon’ble Supreme Court.

As per IBC, creditors can be classified as Operational creditors, Financial Creditors or any other creditors which does not come under the definition of these two. Operational Creditors are those creditors who have a legally enforceable operational debt against the corporate debtors whereas financial creditors are those creditors who have a legally enforceable financial debt against the corporate debtors.

Under section 9 of the IBC, the Operational Creditors can file insolvency applications against the corporate debtors before the concerned Adjudicatory Authority in case of default in repayment of dues but before filing such an application it is mandatory for the operational creditor to serve upon the corporate debtor a notice under section 8 of the IBC seeking payment failing which only a section 9 petition can be filled by him. The existence of default can be proved by way of the following documents –

Copy of the relevant invoice;
Affidavit stating no notice of any dispute has been received relating to operational debt has been received by him;
Copy of records maintained by the information utility;
Certificate certifying that no payment has been received by the financial institutions maintaining the account of the corporate debtor;
Any other proof that would confirm that there has been no payment by the corporate debtor.

Section 9 sub section (5) states that if the application is complete in all respect and default is proved before the Adjudicatory Authority after hearing the corporate debtor it shall admit the application within 14 days of filing of application or if the application incomplete it shall allow the operational creditor to rectify the applications within 7 days. The Corporate Insolvency Resolution Process (CIRP) shall commence on the date of the admission of the section 9 petition by the Adjudicatory Authority.

Likewise, a financial creditor can file an insolvency application under section 7 of the IBC against the corporate debtor against whom a financial debt is owed. However, unlike section 9 petition in case of an application by a financial creditor it is mandatory for them to name a Insolvency Resolution Professional (IRP) who would look after the affairs of the corporate debtor in case the application is admitted. Further, in case of section 7 application no prior notice is required to be served upon the corporate debtor and the default can be proved by way of record of default maintained by the information utility or any other document. Another difference between operational and financial creditors is that two or more financial creditors can jointly file an application under section 7 but the same is not true in case of operational creditor. Similarly, Section 7 sub section (4) & (5) states that if the application is complete in all respect and default is proved before the Adjudicatory Authority after hearing the corporate debtor it shall admit the application within 14 days of filing of application or if the application incomplete it shall allow the operational creditor to rectify the applications within 7 days. As per section 7 sub-section (6) the Corporate Insolvency Resolution Process (CIRP) shall commence on the date of the admission of the section 7 petition by the Adjudicatory Authority.

Both 7 and 9 petition are adversarial in nature and is contested between the parties unlike section 10 of the IBC where the Corporate applicant itself files an application for initiating CIRP against it before the concerned Adjudicatory Authority if it has committed a default along with some other documents such as books of accounts, special resolution approving the corporate applicant to file such application by ¾ majority and name of the proposed resolution professional to be appointed if the application is admitted.

The word ‘Corporate applicant’ has been defined under section 5(5) of the IBC which means corporate debtor, member authorized to represent and file insolvency application for CIRP, or any person who has control over the operation or financial affairs of the corporate debtor. The application under section 10 shall be admitted/rejected within 14 days of filing of application or if the application incomplete it shall allow the corporate applicant to rectify the applications within 7 days. As per section 10 sub-section (5) the Corporate Insolvency Resolution Process (CIRP) shall commence on the date of the admission of the section 10 petition by the Adjudicatory Authority.

II. WITHDRAWAL OF CASES AT PRE-ADMISSION STAGE

Before the insolvency application is admitted against the corporate debtor by the Adjudicatory Authority, the corporate debtor and the operational or financial creditor as the case may be can settle the matters at any time. The parties can either opt for out of court settlement or can alternatively can request by the Adjudicatory Authority to refer the matter to mediation.

If settlement is arrived between the parties, they can execute a settlement agreement and thereafter the creditor can file an application under rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 seeking withdrawal of the application. However, it may be noted that settlement between the parties must be voluntary and the Adjudicatory Authority cannot compel the parties to enter into settlement as held the hon’ble Supreme Court in E S Krishnamurthy vs Bharath Hi Tech Builders Ltd. (2021) ibclaw.in 173 SC[2] wherein it opined that both the Adjudicatory Authority and the NCLAT are statutory tribunal and are not court of equity and are bound by the provisions of the IBC, it further held that they can encourage settlement and has to adjudicate insolvency application strictly as per the IBC. Similarly, the hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. vs Union of India [2019] ibclaw.in 03 SC[3] judicially recognized invoking inherent power under rule 11 of the NCLT Rules, 2016 to allow settlement application that are filed before the constitution of COC but also cautioned that such applications have to be decided by the Adjudicatory Authority on a case-to-case bases and after hearing all the parties and considering all the relevant factors.

III. POSITION UNDER IBC REGARDING POST ADMISSION SETTLEMENT – PRE-SECTION 12A

In so far as post admission matters are concerned in absence of any statutory legislations, the Adjudicating Authority were invoking its inherent power under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 to admit post admission settlement applications, however this practise of invoking inherent power to settle post admission matter has been deprecated by the both the hon’ble NCLAT and the Hon’ble Supreme Court in Lokhandwala Kataria Construction Private Limited V. Nisus Finance and Investment Managers [2017] ibclaw.in 04 SC[4].

Apart from this, the hon’ble Supreme Court and the Adjudicatory Authority and the hon’ble NCLAT in many cases have also suggested to the parliament to amend the law so as to allow post admission settlement of cases. For example, in Uttara Foods and Feeds Private Limited V. Mona Pharmachem [2017] ibclaw.in 10 SC[5] (hereinafter, ‘Uttara Foods’s case’) the hon’ble Supreme Court not only deprecated the practise of the Adjudicatory Authority to admit post admission settlement application by invoking its inherent power under Rule 11 of the National Law Appellate Tribunal Rules and on appeal by the hon’ble Supreme Court invoking is power under Article 142 of the Constitution but also advised the legislature to suitable amend the law. Thus, in absence of any statutory provision both the NCLAT and the Hon’ble Supreme Court were allowing post admission settlement applications under its inherent power as in the case of Mothers Pride Dairy India Private Limited V. Portrait Advertising and Marketing [2017] ibclaw.in 05 SC[6]. Regulation 30A of Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulation, 2016 (hereinafter, ‘IBBI IRPCP Regulations, 2016’) prior to amended to its amendment in 2019 stated as under –

That the application for withdrawal shall be as per the following norms as under –

It shall be filed under section 12A through the IRP/Resolution Professional in Form FA and before the issuance of expression of interest under Regulation 36A
The application shall be accompanied by a bank guarantee for meeting the costs estimated under Regulation 31 of the of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereafter, ‘IBBI CIRP Regulations 2016’)
The COC shall be considering the application within 7 days of receipt or its constitution and shall approve the same with a 90% majority.
On it being approved the Resolution Professional shall file the same before the Adjudicatory Authority who may approve the same.

The unamended Regulation 30A made it mandatory that the withdrawal application must be filed before the issuance of expression of interest under Regulation 36A, however, this sub-regulation was held to be directory by the Supreme Court in Brilliant Alloys Private Limited vs Mr. S. Rajagopal [2018] ibclaw.in 35 SC[7] wherein it opined that the stipulation that withdrawal application cannot be allowed after invitation for expression of interest is directory as it is beyond the parent Act i.e., IBC as the parent Act does not contain any such restrictions and accordingly allowed the withdrawal application.

IV. CURRENT POSITION – SECTION 12A OF THE IBC READ WITH REGULATION 30A IBBI IRPCP REGULATIONS, 2016

Section 12A has been inserted into the IBC by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 w.e.f. 6^th June, 2018 of the IBC which empowers the Adjudicatory Authority to allow the applications filled under section 7,9 or 10 on an application made by the applicant with the approval of 90% voting shares of the Committee of Creditors (COC). Section 12A uses the word ‘may’ thereby giving the Adjudicatory Authority a discretion to allow or reject such applications.

Section 12A was inserted into the IBC based upon the recommendations of the Insolvency Law Committee (March, 2018) which had opined in its report in so far as pre-admission application are concerned they can withdraw by filing an application under rule 8 of the CIRP Regulations but so far as post admission applications are concerned they are no such provision either under the IBC or any rule or regulation framed thereunder which empower the Adjudicatory Authority to allow such withdrawals, however despite the same there haven several instances where both the Adjudicatory Authority and the NCLAT have allowed such applications by invoking its inherent powers. The ILC further also relied upon the recommendations of the Bankruptcy Law Committee Report which had earlier opined that ‘..The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution..’. meaning thereby that once insolvency application is admitted it no longer remains a dispute between two parties but rather becomes proceeding which involves all the creditors of the corporate debtor

Post admission of the application, the IRP is appointed by the Adjudicatory Authority under section 16 of the IBC and on his appointment the IRP is entrusted with various statutory duties as provided under the IBC such as public announcement, invitation of claims against the corporate debtor, formation of Committee of creditors (COC) etc. The COC comprises of financial creditors only but if the corporate debtor does not have any financial creditors, then the COC would consist of operational creditors. Suspended board of directors of the corporate debtors do not have any voting rights in the decision of the COC but can attend and participate in the COC meetings. The Meetings are presided over by the Resolution Professional and only financial creditors have voting rights in the COC.

The issue of constitutionality of section 12A arose before the hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. V. Union of India [2019] ibclaw.in 03 SC [8] wherein it was argued that section 12A of the IBC is contravention of Uttara Foods and Feeds Ltd. v. Mona Pharmachem [2017] ibclaw.in 10 SC [9] and it grants unbridled and absolute power to the COC to decide such applications at its whims and fancies and same is violative of article 14 of the Indian constitution. However, the hon’ble Supreme Court did not agree with this submission and held that section 12A to be constitutional while coming to said conclusion it relied upon the Insolvency Law Committee Report (2018) and observed that the threshold of 90% approval by the COC before filing a settlement application is justified since it is likely to promote omnibus settlement with all the financial creditors and moreover what may be a appropriate criteria falls within a policy domain. Apart from this, the hon’ble Supreme Court further held that in any case if the COC arbitrarily rejects a withdrawal application, then in that also the aggrieved person can challenge the same under section 60 of the IBC before the Adjudicatory Authority which may either approve or reverse the decision of the COC.

Regulation 30A of the IBBI IRPCP Regulations, 2016, as amended by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2019 and the same came into effect from 3^rd July, 2018 of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulation, 2016 (hereinafter, ‘IBC CIRP Regulations’) provides for additional information and documents that have to filed along with section 12A which includes the following as under –

A. If in case the COC has been constituted by the IPR, then the COC must approve the withdrawal application by 90% voting rights but in case the COC has not been constituted then the IRP himself can file such application for withdrawal of the CIRP as it happened in the case of Vinayak K Deshpande V. Nexo Industries P. Ltd. (2022) ibclaw.in 12 NCLAT[10] wherein the hon’ble NCLAT while allowing the post admission settlement directed the IRP to file form FA under section 12A of the IBC read with Regulation 30A of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulation, 2016 before the Adjudicatory Authority and also allowed the suspended board of directors to regain control over the management of the corporate debtor.

B. It shall be in accordance with Form FA as given in the schedule of the regulation along with a bank guarantee for two things i.e., towards the expensed incurred by the Interim Resolution Professional under regulation 33 till date of filing of the withdrawal application and for expenses incurred under regulation 31 (aa), (ab (c) and (d).

C. The application for withdrawal has to be considered by the COC within 7 days of the receipt of the same or in the case the COC is not constituted the IRP has to submit the application to the Adjudicatory Authority within 3 days of receipt of the same.

D. On receipt of the application then COC shall approve the same by 90% voting rights and thereafter the IRP shall foreword both the withdrawal application and the resolution passed by the COC to the Adjudicatory Authority.

E. If the application is admitted by the Adjudicatory Authority, then the applicant shall pay the amount as determined by the IRP within 3 days failing which the bank guarantee given by the applicant shall be invoked to recover the CIRP cost without prejudice to any other action that may be taken against the Applicant.

The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2018 has clarified that afore-said regulation 12A shall be applicable only to CIRP that would commence on or after 3^rd July, 2018 and does not apply to CIRP that had begun prior to that.

Form FA of the IBC Regulations, 2019 was substituted by the IBBI vide Notification No. IBBI/2019-20/GN/REG048, dated 25^th July, 2019 with effect from 25^th July, 2019 and states the following particulars as under –

Name of the applicant
Section under which the application was filled i.e. 7,9 or 10
Date of order admitting the application
Particulars that the bank guarantee as required under Regulation 30A has been annexed with the application.

The data maintained by IBBI states for the period July – September, 2018 26 CIRP were closed on account of section 12A application, similarly, for the period October – December, 2018 36 CIRP were closed on account of withdrawal under section 12A application[11]. Likewise, for the period July- September, 2020 10 CIRP were closed on of for the period July – September, 2018 26 CIRP were closed on account of section 12A application[12]. An increase in application filed under section 12A is noticed since its introduction under the IBC for example as per data maintained by IIBI shows that as of June, 2019 there have been 2126 cases where application has been admitted out of which 101 cases have been withdrawn under section 12A, the data further shows that number of application filed under section 12A has also been on a consistent rise as the number of application filed in December, 2018 quarter was 63 which increased to 91 in march 2019 quarter and which again increased to 101 in the June, 2019 quarter.

V. RECENT CASES

A. In Satyanarayan Malu V. SBM Paper Mills Ltd. [2018] ibclaw.in 01 NCLT an interesting question of law arose before the hon’ble NCLT, Mumbai wherein it was posed with the question whether the suspended director of the corporate debtor undergoing CIRP can submit an application under section 12A offering a Onetime settlement after the resolution plan has been approved by the COC and is pending for approval before the Adjudicatory Authority, the NCLT answered the same in affirmative while opining that such belated applications should be discouraged and imposed a fine of Rs. 5 lakhs on the applicant for wasting the time of the Court and for setting in motion the IBC. The hon’ble NCLT allowed the application as the OTS being offered by the director was an higher value than the successful resolution applicant and also at that relevant time amended 2019 IBC CIRP Regulation 2016 was not applicable to the corporate debtor thus the stipulation that withdrawal application has to be filled before issuance of expression of interest was not applicable in the facts of the case and the NCLT allowed the belated application.

B. In Praveen Arjun Patel V. JK Lakshmi Cement Ltd. [2018] ibclaw.in 57 NCLAT[13], the Adjudicatory Authority admitted the section 9 application filled by the operational creditor and an IRP was appointed. Subsequently, the corporate debtor filed an appeal challenging the final order before the hon’ble NCLAT wherein the applicant and the corporate debtor settled the matter and CIRP was closed. Since, by than time the IRP had called for claims, the remaining creditors argued before the hon’ble NCLAT that the settlement was in contravention of section 12A of IBC, however the tribunal did not agree with their submission stating that section 12A is inapplicable as COC is yet to be constituted and the final order was challenged before it and on settlement the final order given by the Adjudicatory Authority was set aside, hence withdrawal application with permission of other creditors was justified and there is no impropriety in the order of the Adjudicatory Authority.

C. In Francis John Kattukaran V. The Federal Bank Ltd. (2018) ibclaw.in 212 NCLAT[14], the hon’ble NCLAT held an application under section 12A can be only be filed by the applicant i.e. the person who had filled the section 7,9 or 10 application and not by the IRP or the Resolution Professional reasoning that section 12A only empowers the applicant to file withdrawal application. It further held that although Regulation 30A(4) states that Resolution Professional or the IRP shall file withdrawal application the same is incorrect as regulations cannot override the section 12A of IBC.

D. In Navaneetha Krishnan V. Central Bank of India (2018) ibclaw.in 298 NCLAT[15], Coimbatore, the hon’ble NCLAT has held that even during liquidation proceedings against the corporate debtor a person who is not prohibited under section 29A of the IBC can file an application for withdrawal of CIRP/liquidation after getting the same approved as per section 12A i.e., with the consent of 90% of the COC.

E. In Maharashtra Seamless Limited Padmanabhan Venkatesh [2020] ibclaw.in 03 SC [16] the hon’ble Supreme Court held that successful resolution applicant whose resolution plan has been approved by the Adjudicatory Authority cannot invoke section 12A to withdraw its resolution plan and same is binding on it.

F. In Dinesh Gupta V. Rolta India Limited (2021) ibclaw.in 690 NCLT[17], the hon’ble NCLT, Mumbai faced a question as to whether a withdrawal application filed under section 12A by the applicant can be allowed if the same has filed before the constitution of COC and after taking consent of all the applicant but matters has not been settled with other reaming creditors of the corporate debtor? The Hon’ble NCLT went through the IBC, Swiss ribbon’s case (supra) and observed that no applicant has the inherent right to withdraw the petition post admission even if the matter has been settled between him and the corporate debtor as after admission the proceedings are in rem and the interest of other stakeholders are also involved in the case, it further observed that in the present case as not only the debt owed to financial creditors has not been settled but also most of the financial creditors of the corporate debtor are banks which have given huge amount of loans to the corporate debtor, further, the Adjudicatory Authority also noted that apart from the present applicant there are around 75 cases already pending against the same company before it, considering these factors the hon’ble NCLT dismissed the application filed under section 12A as the same would result in multiplicity of proceedings before other creditors of the corporate debtor.

G. In Jai Kishan Gupta V. Green Edge and Ors [2019] ibclaw.in 240 NCLAT[18], the hon’ble NCLAT rejected the withdrawal application filed under section 12A and upheld the decision of the hon’ble NCLT considering the fact that there were other financial creditors who had filed their claims with IRP and whose claims has not been settled by the corporate debtor, further, the hon’ble NCLAT also observed that the Applicant i.e. ex director of the corporate debtor was not co-operating with the IRP and as in the meantime that is after the application was filed but before it was decided by the Adjudicatory Authority the COC had been constituted, therefore the hon’ble NCLAT was of the view that the COC should first approve the withdrawal application.

H. In the Siva Industries’ case an application under section 12A was filed by the erstwhile promoters of the Siva industries offering a sum of Rs, 328 crores against the total claim of the financial creditors of Rs. 4863 crores, this compelled the hon’ble NCLT, Chennai to observe that the settlement proposal put forth by the applicant looks more like a business restructuring plan and a resolution plan rather than settlement simpliciter as not only the settlement is less but also the settlement plan. Considering into account the same, the hon’ble NCLT further observed that the wisdom of the COC to accept or reject a settlement plan is not conclusive and the same is amenable to judicial review by the NCLT if the COC has violated any provisions of the IBC. The hon’ble further opined that if in case the corporate debtor fails to comply with the settlement plan and commits a default then in that the present CIRP cannot be revived but again a fresh insolvency application has to be filed and if admitted then the CIRP will begin de novo hence considering the same the hon’ble NCLT rejected the withdrawal application as it was of the view that no money has been paid by the applicant to the creditors and the settlement application put forth is not a settlement simpliciter but rather a business structing plan.

VI. CONFLICT BETWEEN SECTION 12A AND SECTION 29A OF IBC

\Section 29A of the IBC which enlists the people who are ineligible to submit a resolution plan among other things under sub-clause (g) & (j) enlists the promoter and management of the corporate debtor undergoing CIRP. Section 29A was initially not present under the IBC from its very inception but was later inserted through IBC Second Amendment Act 2021 with retrospective effect i.e., 23.11.2017, this was necessary in order to prevent backdoor entry and prevent misuse of IBC. Section 29A is applicable not only during the CIRP but also at liquidation proceedings. Since, promoters are precluded from submitting resolution plan due to virtue of section 29A a question arose if the promoter and management of the corporate debtor undergoing CIRP can settle the case with the applicant after getting it approved with the COC? Further, another incidental question arose if the erstwhile promoters or management can be a resolution applicant?

In Andhra Bank V. Sterling Biotech (2019) ibclaw.in 470 NCLAT[19], the hon’ble NCLAT while relying upon the Swiss Ribbon’s case and the report of the insolvency law committee report has held that erstwhile promoters of the corporate debtor are not prohibited under section 29A of the IBC and they can file an application for withdrawal of CIRP after getting it approved from the COC, however, they are ineligible to file a resolution plan either individually or jointly or indirectly through another person. The hon’ble NCLAT further held that that promoters and the management of the corporate debtor are eligible to settle the matters under section 12A of the IBC and the bar under section 29A is not applicable to them as the offer made by them to settle the case comes under the design of section 12A.

The hon’ble NCLAT in Bank of Baroda V. Sisir Kumar [2020] ibclaw.in 22 NCLAT[20], the court held that section 29A is only inapplicable when the offer for settlement is made by the promoters but if the promoters are under the grab of settlement offering a resolution plan or restructuring plan then the same shall be hit by section 29A.

In another case by the name Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. (2021) ibclaw.in 46 SC[21] an issue arose before the Court as to whether a person who is disqualified under section 29A of the IBC can submit a compromise scheme under section 230 of the Companies Act when the corporate debtor is undergoing liquidation proceedings? This was answered negatively by the hon’ble NCLAT which on appeal was affirmed by the hon’ble Supreme Court observing that promoters or the management cannot be allowed to get back door entry by proposing compromise scheme as this will be against the objective of section 29A of IBC.

There are certain similarities and differences between approval of resolution plan and allowing a withdrawal application under section 12A.There are similar in the sense that the CIRP/liquidation comes to an end and the corporate debtor is free from the rigour of IBC. But there also several difference in terms of procedure of approval of resolution plan and submitting a withdrawal application. An erstwhile promoter of the corporate debtor cannot file an application for resolution plan as the same is prohibited by section 29A but an erstwhile promoters can file a withdrawal application under section 12A. Another difference between the two is regarding the stage at which it is filed, an a resolution plan is usually at the fag end of the CIRP which is after being approved by the COC is submitted to the NCLT for final approval and if the resolution plan is disapproved by the NCLT then it has two options either to send it back to the COC for modification or fresh resolution plan or alternately the NCLT can order for initiation of liquidation proceedings against the corporate debtor whereas an withdrawal application under section 12A can be filed at any stage i.e. either before admission, post admission and even at the fag end of CIRP or at liquidation stage and only differences is that the perquisites for filing the withdrawal application will be different at each stage.

Further, one peculiar feature is that clean slate principle is not applicable if case the withdrawal application is allowed by the Adjudicatory Authority as the erstwhile management of the corporate debtor regains controls over the company without there being any change in the ownership or assets or liabilities of the company and hence there is no restructuring of the corporate debtor, however in case of the resolution plan once it is approved the new management cannot be held liable for any dues or liabilities prior to the date of approval i.e. the clean slate principle is applicable.

VII. RESEARCHER’S OPINION

The objective of section 12A of the IBC is to legislatively recognize post admission settlement cases which was introduced based upon the recommendations of the Insolvency Law Committee Report. In recent times, both the government and the judiciary have strongly advocated for settlement of cases as it promotes a win-win situation for both the parties and also helps unclogs the judicial system as no appeal can be filed against an order which has been passed through consent and on settlement the case comes to an end. Further, if the matters are also settled, it will help achieve the objective of IBC i.e., speedy disposal of cases and would be in best interest of all the stakeholders as creditors would get their dues at the earliest and the suspended management would also regain control over the company.

However, there are certain apprehension of misuse of this provision as it might turn the insolvency courts into recovery forum for settling private disputes, further, the researcher also feels that necessity of bank guarantee under Regulation 30A of the IBC CIRP Regulations, 2016 are ultra-virus the parent section i.e. 12A as the section nowhere prescribes such a stipulation, thus this should be at best only directory taking cue from the observations of the hon’ble Apex Court in Brilliant Alloys Private Limited’s case. Apart from this, the researcher also feels that there is one ambiguity under section 12A as it only mandates approval of the COC by 90% voting rights for filing the withdrawal application, so the question might arise as to what about the interest of operational creditors? As the COC consists of only financial creditors thus this provision may be unfair for the operational creditors, for example assuming that the corporate debtors have many operational creditors and only few financial creditors in that case only by consent of the financial creditors the company would get free the clutches of IBC but what dues of the operational creditors? Neither their dues were settled nor any the corporate debtor got liquidated? This would encourage another around of litigation by the operational creditors again for getting their dues, thus the researcher feels that there is a legislative vacuum on this point and suitable modifications may be required in this regard one way of doing so would be making amendment under section 12A of the IBC to seeking approval of both financial and operational creditors by 90% voting rights as withdrawal ends in termination of CIRP and as such affects the vested interest of all the stakeholders not just the financial creditors.

Apart from this, the researcher feels that there is another ambiguity as in those cases where the corporate debtor is able to get the approval of the financial creditors i.e., COC with 90% majority but is unable to get the consent of the applicant assuming it to be operational creditor, so in that case the application can be filed as withdrawal application is always filed with consent of all the involved parties. Moreover, assuming that operational creditor is somehow convinced by the corporate debtor but would be unfair to other operational creditors? Only one operational creditor i.e., applicant permission is sought and not others even though insolvency proceedings are in rem proceedings and affect the substantive rights of all the operational creditors. Further, the researcher also feels that the hon’ble NCLT or NCLAT should set certain guidelines on the power of the NCLT exercising judicial review over a application filed under section 12A when the same has been either been accepted or rejected by the COC as it has been observed in some cases that the applicant is somehow successful getting his withdrawal application approved by the COC at huge haircuts and then if the application is allowed the applicant retains control over the company again and also the debt gets settled according to the settlement plan.

Further, in order promote settlement the government may consider mediation compulsory for IBC disputes unless some urgent relief is required as it is in the case of matters under the Commercial Court Act, 2015[22] wherein the Courts issues notice in the case and refers the matter for mediation and only if the mediation is unsuccessful then only the courts hear the matter on merits, such procedure may also be adopted under the IBC as this further help unclog the judicial systems. In order to achieve this purpose, the NCLT may consider enacting mediation rules which may enlist procedure, power and duties of a mediator, their qualifications and experience and other necessary details. A separate room within or nearby the court complex may be earmarked for conducting mediation proceedings and the NCLT may also invite applications from interested parties for getting empanelled as a mediator. In addition to this, more appointment of judges at the Adjudicatory Authority and NCLAT may also be considered for unclogging the judicial system.

Another effective suggestion can be two establish a separate court only for insolvency matters as the current system of NCLT hearing both matters under the Companies Act, 2013 and the IBC has increased the workload of the NCLT and if special court is established then matters will be expeditiously decided considering also the fact that proceedings under the IBC are time bound and also having a designated courts for insolvency will ease the issues of logistical and infrastructural problems that are currently being faced by the NCLT, also this will develop the expertise of the judge in insolvency matters.

VIII. CONCLUSION

The government by introducing section 12A has sought to legislative recognize a concept which has already been judicial recognized by the courts in a number of cases i.e., post admission settlement. In so far pre-admission settlement are concerned there were already recognized under rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, however, since post admission settlement were not legislatively recognized the Adjudicatory Authority was settling such matters using its inherent powers and even in certain cases the hon’ble Supreme Court had invoked its power under article 142 of the Constitution.

Based on the recommendations of the hon’ble Supreme Court in Uttara Foods case’s and Insolvency law Committee report section 12A was inserted into the IBC by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 w.e.f. 6^th June, 2018. The perquisites for filing a settlement application depends at which stage it is filed, if it is filed before pre-admission or before the COC is constituted then the Adjudicatory Authority can allow the same under its inherent power but it is filed post admission and after COC has been formed then it can file under section 12A of the IBC read with Regulation 30A of the IBBI IRPCP Regulations, 2016. Usually, a settlement application is allowed by the Adjudicatory Authority results in a win and win situation for all the stakeholders under the IBC be it Courts, financial creditors or the Applicant and unless it the Adjudicatory Authority is of the view that any provision of the IBC would be violated if the application is allowed or it feels that the consent of all the unrelated financial creditors have not been taken. Lastly, it may also be mentioned that the commercial wisdom of the COC on either accepting or rejecting a withdrawal application is not conclusive and their decision is amenable to judicial review before the Adjudicatory Authority which can approve or reject the withdrawal application.

Reference:

[1]Act No. 31 OF 2016

[2] (2021) ibclaw.in 173 SC

[3] [2019] ibclaw.in 03 SC

[4] [2017] ibclaw.in 04 SC

[5] [2017] ibclaw.in 10 SC

[6] [2017] ibclaw.in 05 SC

[7] [2018] ibclaw.in 35 SC

[8] [2019] ibclaw.in 03 SC

[9] [2017] ibclaw.in 10 SC

[10] (2022) ibclaw.in 12 NCLAT

[11]The IBBI’s Newsletter Can Be Accessed At Https://Www.Ibbi.Gov.In/Uploads/Publication/63fe4207c474cfd7b832d7219449b89a.Pdf (Last Visited On 4th May, 2022)

[12]Ibid.

[13] [2018] ibclaw.in 57 NCLAT

[14] (2018) ibclaw.in 212 NCLAT

[15] (2018) ibclaw.in 298 NCLAT

[16] [2020] ibclaw.in 03 SC

[17] (2021) ibclaw.in 690 NCLT

[18] [2019] ibclaw.in 240 NCLAT

[19] (2019) ibclaw.in 470 NCLAT

[20] [2020] ibclaw.in 22 NCLAT

[21] (2021) ibclaw.in 46 SC

[22] Act No. 4 Of 2016.

Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

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