Analysis of withdrawal of CIRP proceeding pursuant to settlement under Section 12A of IBC

Decoding the Code
Chapter-II: Corporate Insolvency (CIRP)
Topic-1 : CIRP Initiation and withdrawal

Analysis of withdrawal of CIRP proceeding pursuant to settlement under Section 12A of Insolvency and Bankruptcy Code, 2016 (IBC)

This part of the Decoding the Code series decodes:

• Interpretation of Section 12A of IBC, CIRP Regulations 30A and AAA Rule 8. 
• Withdrawal CIRP application before admission of application u/s 7, 9 or 10
• Withdrawal of CIRP after admission but before constitution of Committee of Creditors (CoC)
• Withdrawal of application/CIRP after constitution of Committee of Creditors (CoC)
• Judicial Pronouncements
• Restoration CIRP application upon failed of settlement
• Constitutional validity of the Section 12A
• Status in law prior the Section 12A
• Recommendation of the Insolvency Law Committee

1. Introduction

Section 12A is inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018 with retrospective effect from 06.06.2018 on recommendation by Insolvency Law Committee Report (Mar, 2018) to provide facility to withdraw application made under section 7, 9 or 10 on settlement even if CIRP has been initiated. A matter can be settled between the parties and an application(s) under Sections 7 or 9 or 10 can be withdrawn only at four stages:

i. Before admission of application under Sections 7 or 9 or 10
ii. After admission but before constitution of committee of creditors(CoC)
iii. After constitution of CoC but before issue of invitation for expression of interest
iv. After issue of invitation for expression of interest

Regulation 30A of CIRP Regulation, 2016 provides the procedure and compliance for withdrawal of an application. In absence of any settlement, if no withdrawal is made at the aforesaid four stages then Resolution Process continues and if any Resolution Plan is found to be viable, feasible and having financial matrix and qualifies in terms of sub-section (2) of Section 30 and approved by 66% of voting shares of the Committee of Creditors(CoC), the Adjudicating Authority may pass order approving the plan under Section 31.

Hon’ble Supreme Court in Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. & Anr. (2021) ibclaw.in 46 SC held an application for withdrawal under Section 12-A is not intended to be a culmination of the resolution process. This, as the statutory scheme would indicate, is at the inception of the process. Rule 8 of the Adjudicating Authority Rules, as we have seen earlier, contemplates a withdrawal before admission. Section 12-A subjects a withdrawal of an application, which has been admitted under Sections 7, 9 and 10, to the requirement of an approval of ninety per cent voting shares of the CoC.

Further, the Hon’ble Court held that the withdrawal leads to a status quo ante in respect of the liabilities of the corporate debtor. A withdrawal under Section 12-A is in the nature of settlement, which has to be distinguished both from a resolution plan which is approved under Section 31 and a scheme which is sanctioned under Section 230 of the Act of 2013. The scheme of compromise or arrangement under Section 230 of the Act of 2013 cannot certainly be equated with a withdrawal simpliciter of an application, as is contemplated under Section 12-A of the IBC.

2. Withdrawal application before admission of application u/s 7, 9 or 10

Under rule 8 of the Application to Adjudicating Authority Rules, 2016, the NCLT may permit withdrawal of the application on a request by the applicant before its admission. The rule 8 is reproduced here:

“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.”

Whether, in view of the above rule 8, the NCLAT could utilize the inherent power recognized by Rule 11 of the NCLAT Rules, 2016 to allow a compromise before it by the parties after admission of the matter:

Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 as under:

“11 Inherent Powers
Noting 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 question was answered by Hon’ble Supreme Court in the matter of Lokhandwala Kataria Construction Private Limited Vs. Nisus Finance And Investment Managers LLP [2017] ibclaw.in 04 SC where an appeal was filed by the appellant/Corporate Debtor  against the order passed by the NCLT, Mumbai Bench whereby the application under section 7 of the Code has been admitted. The parties submitted before the NCLAT that they have settled the dispute and part amount has already been paid. The NCLAT, however, held that such settlement cannot be ground to interfere with the impugned order in absence of any other infirmity. The NCLAT further held that Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 has not been adopted for the purpose of the Code and only Rules 20 and 26 have been adopted in absence of any specific inherent power and where there is no merit, the question of exercising inherent power does not arise.

The Supreme Court upheld that in view of Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, the NCLAT could not utilise the inherent power recognised by Rule 11 of the NCLAT Rules, 2016 to allow a compromise before it by the parties after admission of the matter.

3. Withdrawal of application/CIRP after admission of application u/s 7, 9 or 10

Section 12A of the Code provides that 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 90%  voting share of the committee of creditors.

3.1 Legal text and interpretation of the Section 12A

CHAPTER II: Corporate Insolvency Resolution Process(CIRP)
Section 12A: Withdrawal of application admitted under section 7, 9 or 10:

¹[12A. 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.]

————————
Amendments:

1.  Section 12A inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. (w.e.f. 06.06.2018).

The provisions under Section 12A of the IBC have been made more stringent as compared to Section 30(4) of the IBC. Whereas under Section 30(4) of the IBC, the voting share of CoC for approving the Resolution Plan is 66%, the requirement under Section 12A of the IBC for withdrawal of CIRP is 90%.

Hon’ble Supreme Court in Vallal RCK Vs. M/s Siva Industries and Holdings  Ltd. and Others (2022) ibclaw.in 63 SC reiterated that in Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. [2019] ibclaw.in 03 SC has found that if the CoC arbitrarily rejects a just settlement and/or withdrawal claim, the learned NCLT and thereafter the learned NCLAT can always set aside such decision under the provisions of the IBC.

Further, the Hon’ble Court held 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.

Hon’ble Supreme Court in Ebix Singapore Pvt. Ltd. Vs. CoC of Educomp Solutions Ltd. & Anr. (2021) ibclaw.in 153 SC held that since the aim of the statute is to preserve the interests of the corporate debtor and the CoC, it was recognized that settlements between the corporate debtor and the CoC may be in the best interests of all stakeholders since insolvency is averted.

NCLAT in Rajnish Gupta Vs. Union Bank of India & 1 Other (2022) ibclaw.in 178 NCLAT held that mere withdrawal of the CIRP against the Principal Borrower will not be a bar for the Respondent/Lender in initiating fresh CIRP against the Guarantor.

3.2 Procedure for Withdrawal of the Application

Regulation 30A (amended on 25.07.2019) of CIRP Regulation, 2016 guide the process of making an application under section 12A. Following steps to be considered for withdrawal of an application:

S. No.	Particular	Before constitution of CoC	After constitution of CoC but before issue of invitation for expression of interest	After issue of invitation for expression of interest
1	Application through	By the applicant through the IRP	By the applicant through the IRP or the RP, as the case may be	By the applicant through the IRP or the RPl, as the case may be and the applicant shall state the reasons justifying withdrawal after issue of such invitation
2.	Application Form	Form FA	Form FA	Form FA
3.	Bank Guarantee accompanied with the Form FA	Towards estimated expenses incurred on or by the IRP for purposes of regulation 33, till the date of filing of the application (See Note-1)	Towards estimated expenses incurred for purposes of clauses (aa), (ab), (c) and (d) of regulation 31, till the date of filing of the application(See Note-2)	Towards estimated expenses incurred for purposes of clauses (aa), (ab), (c) and (d) of regulation 31, till the date of filing of the application (See Note-2)
4.	Time limit for CoC	N.A.	CoC shall consider the application within 7 days of its receipt	CoC shall consider the application within 7 days of its receipt
5.	Requirement of CoC Approval	N.A.	CoC approval with 90% voting share is required to consider the withdrawal	CoC approval with 90% voting share is required to consider the withdrawal
6.	Time limit to submit the application to the Adjudicating Authority	IRP shall submit the application to the AA on behalf of the applicant, within 3 days of its receipt.	Where the application  approved by the CoC with 90% voting share, the RP shall submit such application along with the approval of the CoC, to the AA on behalf of the applicant, within 3 days of such approval.	Where the application  approved by the CoC with 90% voting share, the RP shall submit such application along with the approval of the CoC, to the AA on behalf of the applicant, within 3 days of such approval.
7.	Approval of Application by AA	AA may, by order, approve the application. Where the application is approved, the applicant shall deposit an amount, towards the actual expenses incurred as referred in Point No. 3 till the date of approval by the AA, as determined by the IRP or RP, as the case may be, within 3 days of such approval, in the bank account of the corporate debtor, failing which the bank guarantee received as per Point No. 3 shall be invoked, without prejudice to any other action permissible against the applicant under the Code.

(AA: Adjudicating Authority, IRP/RP: Interim Resolution Professional/Resolution Professional, CoC: Committee of Creditors) 

Note:

1. Expenses such as the fee to be paid to the interim resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses incurred till the date of filing of the withdrawal application on or by the interim resolution professional to the extent ratified under Regulation 33 of CIRP to be considered for Bank Guarantee in case of application filed before constitution of CoC.

2. In case of application filed after constitution of CoC but before issue of invitation for expression of interest or after issue of invitation for expression of interest, following expenses as specified under Regulation 31 of CIRP incurred till the date of filing of the withdrawal application on or by the interim resolution professional to be considered for Bank Guarantee: 

1. 1. Fee payable to authorised representative of creditors in a class for  attending meeting of the committee as specified under sub-regulation (8) of regulation 16A which is reproduced here:

      Number of creditors in the class	Fee per meeting of the committee (Rs.)
      10-100	15,000
      101-1000	20,000
      More than 1000	25,000

   2. Out of pocket expenses of authorised representative for discharge of his functions under section 25A.
   3. Expenses incurred on or by the interim resolution professional to the extent ratified under Regulation 33.(as discussed in Note-1).
   4. Expenses incurred on or by the resolution professional fixed under Regulation 34.

3. As per regulation 36A of CIRP Regulation, 2016, the resolution professional shall publish brief particulars of the invitation for expression of interest at the earliest, not later than seventy-fifth day from the insolvency commencement date, from interested and eligible prospective resolution applicants to submit resolution plans.

4. Voting share means the share of the voting rights of a single financial creditor in the committee of creditors which is based on the proportion of the financial debt owed to such financial creditor in relation to the financial debt owed by the corporate debtor. [Sec. 5(25)]

Hon’ble Supreme Court in Ebix Singapore Pvt. Ltd. Vs. CoC of Educomp Solutions Ltd. & Anr. (2021) ibclaw.in 153 SC held that withdrawal of the CIRP is allowed only if it upholds the interests of the CoC, is time-bound, and takes into consideration how the expenses relating to the insolvency process up to withdrawal shall be borne. 

3.3 Legal content of the regulation 30A of CIRP Regulations, 2016

30A. Withdrawal of application.

(1) An application for withdrawal under section 12A may be made to the Adjudicating Authority –

(a) before the constitution of the committee, by the applicant through the interim resolution professional;
(b) after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be:
Provided that where the application is made under clause (b) after the issue of invitation for expression of interest under regulation 36A, the applicant shall state the reasons justifying withdrawal after issue of such invitation.

(2) The application under sub-regulation (1) shall be made in Form FA of the Schedule accompanied by a bank guarantee-

(a) towards estimated expenses incurred on or by the interim resolution professional for purposes of regulation 33, till the date of filing of the application under clause (a) of subregulation (1); or
(b) towards estimated expenses incurred for purposes of clauses (aa), (ab), (c) and (d) of regulation 31, till the date of filing of the application under clause (b) of sub-regulation (1).

(3) Where an application for withdrawal is under clause (a) of sub-regulation (1), the interim resolution professional shall submit the application to the Adjudicating Authority on behalf of the applicant, within three days of its receipt.

(4) Where an application for withdrawal is under clause (b) of sub-regulation (1), the committee shall consider the application, within seven days of its receipt.

(5) Where the application referred to in sub-regulation (4) is approved by the committee with ninety percent voting share, the resolution professional shall submit such application along with the approval of the committee, to the Adjudicating Authority on behalf of the applicant, within three days of such approval.

(6) The Adjudicating Authority may, by order, approve the application submitted under sub-regulation (3) or (5).

(7) Where the application is approved under sub-regulation (6), the applicant shall deposit an amount, towards the actual expenses incurred for the purposes referred to in clause (a) or clause (b) of sub-regulation (2) till the date of approval by the Adjudicating Authority, as determined by the interim resolution professional or resolution professional, as the case may be, within three days of such approval, in the bank account of the corporate debtor, failing which the bank guarantee received under sub-regulation (2) shall be invoked, without prejudice to any other action permissible against the applicant under the Code.

Hon’ble Supreme Court in in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors. [2018] ibclaw.in 35 SC, has stated that Regulation 30A(1) is not mandatory but is directory.

NCLAT in Sintex Plastics Technology Ltd. Vs. Mahatva Plastic Products and Building Materials Pvt. Ltd. (2023) ibclaw.in 01 NCLAT held that CIRP Regulation 30A has been made to give effect to the provisions of IBC and the Regulation 30A has to be read harmoniously with the provisions of IBC.

There is no law which allows a third-party/shareholders to settle the claims of Financial Creditor on behalf of the Corporate Debtor.¹

4. Judicial Pronouncements on Section 12A and Regulation 30A

4.1 Withdrawal of CIRP after issue of invitation for Expression of Interest [Regulation 30A(1)]

Regulation 30A(1) imposes an additional condition for withdrawal of CIRP that such application shall be filed before issue of invitation for expression of interest under regulation 36A. Hon’ble Supreme Court in the matter of Brilliant Alloys Private Limited Vs. Mr. S. Rajagopal & Ors. [2018] ibclaw.in 35 SC  allowed withdrawal of CIRP even after the issue of invitation for expression of interest and set aside the order of NCLT and held that regulation 30A has to be read along with the main provision section 12A, which contains no such stipulation. Hence, this stipulation under regulation 30A can only be considered as directory in nature depending on the facts of each case.(The case has been considered under Regulation 30A by amendment in July’19.)

NCLAT in matter of Shaji Purushothaman Vs. Union Bank of India & Ors. [2019] ibclaw.in 142 NCLAT held that if an application u/s 12A is filed by the Appellant, the CoC may decide as to whether the proposal given by the Appellant for settlement in terms of Sec. 12A is better than the ‘Resolution Plan’ as approved by it, and may pass appropriate order.

4.2 What is to happen where a committee of creditor(CoC) is not yet constituted

A question arises as to what is to happen before a committee of creditors(CoC) is constituted (as per the timelines that are specified, a CoC can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). Supreme Court in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors.  cleared the issue that at any stage where the CoC is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the concerned parties and considering all relevant factors on the facts of each case. (The case has been considered under Regulation 30A by amendment in July’19.)

Further, Hon’ble Supreme Court in Ashok G. Rajani Vs. Beacon Trusteeship Ltd. & Ors. (2022) ibclaw.in 115 SC held that the question of approval of the Committee of Creditors by the requisite percentage of votes, can only arise after the Committee of Creditors is constituted. Before the Committee of Creditors is constituted, there is, in our view, no bar to withdrawal by the applicant of an application admitted under Section 7 of the IBC. The settlement cannot be stifled before the constitution of the Committee of Creditors in anticipation of claims against the Corporate Debtor from third persons. The withdrawal of an application for CIRP by the applicant would not prevent any other financial creditor from taking recourse to a proceeding under IBC. The urgency to abide by the timelines for completion of the resolution process is not a reason to stifle the settlement.

Hon’ble Supreme Court in Abhishek Singh Vs. Huhtamaki PPL Ltd. & Anr. (2023) ibclaw.in 37 SC held that once the parties had settled the dispute even before the CoC had been constituted, the application ought to have been allowed then and there rather than await the other creditors to jump into the fray and allow the IRP to proceed further. Section 12A did not specifically mention withdrawal of such applications where CoC had not been constituted but at the same time it does not debar entertaining applications for withdrawal even before constitution of CoC. Therefore, the application under section 12A for withdrawal cannot be said to be kept pending for constitution of CoC, even where such application was filed before constitution of CoC. The substituted Regulation 30A of IBC as it stands today clearly provided for withdrawal applications being entertained before constitution of CoC. It does not in any way conflicts or is in violation of section 12A of IBC. There is no inconsistency in the two provisions. It only furthers the cause introduced vide section 12A of IBC. Thus, NCLT fell in error in taking a contrary view. Hon’ble Supreme Court held that it may be noted that at the time when the application for withdrawal of the proceedings was filed the CoC was not constituted as such there could not have been any other concerned parties except the OC, CD and IRP.

4.3 Commercial decision of CoC to reject or accept settlement

Hon’ble Supreme Court in Vallal RCK Vs. M/s Siva Industries and Holdings  Ltd. and Others (2022) ibclaw.in 63 SC 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 de hors the provisions of the statute or the Rules. In the present case, the decision of the CoC was taken after the members of the CoC, had due deliberation to consider the pros and cons of the Settlement Plan and took a decision exercising their commercial wisdom. The Court held that we are therefore of the considered view that neither the learned NCLT nor the learned NCLAT were justified in not giving due weightage to the commercial wisdom of CoC.

NCLAT in Shaji Purushothaman Vs. S. Rajendran RP of M/s. Empee Distilleries Limited [2020] ibclaw.in 62 NCLAT held that no exceptional circumstances justifying review of decision of CoC in regard to rejection of the Settlement Plan & the approved Resolution Plan being a better one do exist in the instant case.

4.4 The exit route prescribed in Sec. 12A is not applicable to a Resolution Applicant

Hon’ble Supreme Court in the matter of Maharasthra Seamless Limited Vs. Padmanabhan Venkatesh & Ors. [2020] ibclaw.in 03 SC held that Maharasthra Seamless Limited(MSL), being Resolution Applicant, cannot withdraw from the proceeding in the manner they have approached this Court. The exit route prescribed in Section 12A is not applicable to a Resolution Applicant. The procedure envisaged in the said provision only applies to applicants invoking Sections 7, 9 and 10 of the code. In this case, having appealed against the NCLAT order with the object of implementing the resolution plan, MSL cannot be permitted to take a contrary stand in an application filed in connection with the very same appeal.

Hon’ble Supreme Court in Ebix Singapore Pvt. Ltd. Vs. CoC of Educomp Solutions Ltd. & Anr. (2021) ibclaw.in 153 SC reiterated that the exit under Section 12A of the CoC is not available to the Resolution Applicant.

4.5 If Corporate Debtor is a MSME, it is not necessary for the CoC to follow all the procedures under the CIRP

NCLAT in the matter of Saravana Global Holdings Ltd. & Anr. Vs. Bafna Pharmaceuticals Ltd. & Ors. [2019] ibclaw.in 110 NCLAT held that the company being MSME, it is not necessary for the CoC to follow all the procedures under the CIRP. For example, if case is settled before the constitution of the CoC or in terms of Section 12A on the basis of offer given by Promoter, in such case, all other procedure for calling of application of Resolution Applicant etc. are not followed. If the Promoter satisfy all the creditors and is in a position to keep the Corporate Debtor as a going concern, it is always open to CoC to accept the terms of settlement and approve it by 90% of the voting shares. The same principle can be followed in the case of MSME. Further held that it is open to the CoC to defer the process of issuance of Information Memorandum, if the Promoter of MSME offers a viable and feasible plan maximising the assets of the Corporate Debtor and balancing all the stakeholders. For such purpose, it is not required to follow all the procedure as the case for accepting the proposal under Section 12A of the Code.

4.6 AA should have allowed the intervening period i.e. the period when erstwhile RP stopped functioning till the subsequent RP took charge to place the application u/s 12A before the CoC

IN RE Daiyan Ahmed Azmi Vs. Rekha Kantilal Shah, Liquidator & Ors. [2019] ibclaw.in 50 NCLAT, learned counsel appearing on behalf of the Appellant submitted that the period from 14th November, 2018 to 11th January, 2019 should have been excluded for the purpose of counting 270 days. If the said period would have been excluded, the Committee of Creditors(CoC) could have considered the application under section 12A of the Code filed by the Appellant. Taking into consideration the stand taken by the parties including the Resolution Professional(RP), NCLAT are of the view that the Adjudicating Authority(AA) should have allowed the intervening period i.e. the period when erstwhile RP stopped functioning i.e. from 8th December, 2019 to 11th January, 2019 till the subsequent RP (present Liquidator) took charge to place the application under Section 12A before the CoC.

4.7 Promoters/Shareholders are entitled to settle the matter in terms of Sec. 12A and Sec. 29A is not applicable for entertaining/considering an application u/s 12A as the Applicants are not entitled to file application u/s 29A as ‘resolution applicant’

NCLAT in the matter of Andhra Bank Vs.Sterling Biotech Ltd. (Through the Liquidator) & Ors held that from Section 12A and the decision of the Hon’ble Supreme Court in ‘Landmark judgment of Apex Court in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. under IBC [2019] ibclaw.in 03 SC’ , it is clear that the Promoters/Shareholders are entitled to settle the matter in terms of Section 12A and in such case, it is always open to an applicant to withdraw the application under Section 9 of the Code on the basis of which the CIRP was initiated and Section 29A is not applicable for entertaining/considering an application under Section 12A as the Applicants are not entitled to file application under Section 29A as ‘resolution applicant’.

5. Restoration CIRP application upon failed of settlement

• Failing to adhere to terms and conditions of one time settlement, the Financial Creditor is entitled to file fresh Company Petition u/s 7 of IBC is justifiable? -M/s. ICICI Bank Limited Vs. M/s. OPTO Circuits (India) Ltd. (2022) ibclaw.in 317 NCLAT.
• Amrit Feeds Ltd. Vs. S.S. Enterprises (2019) ibclaw.in 335 NCLAT
• No fresh application to initiate CIRP is maintainable, if similar application was filed by the same Operational Creditor for the same cause of action which is permitted to withdraw without liberty to file fresh application – M/s. Suri Rajendra Rolling Mills Vs. M/s. Bengani Udyog Pvt. Ltd. (2021) ibclaw.in 63 NCLAT.
• The term of the Settlement Agreement that provides for reinstatement or fresh filing of the application for initiating CIRP for the Corporate Debtor is not triggered- Maldar Barrels Pvt. Ltd. Vs. Pearson Drums & Barrels Pvt. Ltd. (2021) ibclaw.in 134 NCLAT.
• Default of instalment of Settlement Agreement does not come within the definition of Operational Debt as it does not fall within the definition of additional debt as per Section 5(21) of the IBC- Trafigura India Pvt. Ltd. Vs. TDT Copper Ltd. (2022) ibclaw.in 714 NCLAT.
• Default in settlement agreement is only a by-product which has permitted revival of Section 7 application but in no manner affect the claim in the original application which is financial debt under Section 7 application – Vinay Gupta Vs. Ashika Credit Capital Ltd. & Anr. (2023) ibclaw.in 74 NCLAT.
• The mere fact that instead of reviving company petition, a fresh company petition has been filed under section 7 shall not be reason to reject the company petition – Priyal Kantilal Patel Vs. IREP Credit Capital Pvt. Ltd. & Anr. (2023) ibclaw.in 86 NCLAT.
• Whether settlement agreement for payment of outstanding amount comes under the ambit of Operational Debt? – Suresh Yadav Proprietor Govind Shuttering Store Vs. S.P Contracts Pvt. Ltd. (2023) ibclaw.in 132 NCLT.
• Default of payment of settlement agreement do not come under the definition of Operational Debt under IBC – M/s Ahluwalia Contracts (India) Ltd. Vs. M/s Logix Infratech Pvt. Ltd. (2022) ibclaw.in 464 NCLT.
• Whether a proceeding that has been withdrawn without leave to revive the proceeding, can be restored & Whether a settlement agreement can constitute a financial debt or an operational debt – Pawan Putra Securities Pvt. Ltd. Vs. Wearit Global Ltd. (2022) ibclaw.in 217 NCLT.

6. Constitutional validity of the Section 12A

The issue was argued before Apex Court during the hearing in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. [2019] ibclaw.in 03 SC that Section 12A of the Code is contrary to the directions of this Court in its order in Uttara Foods and Feeds Pvt. Ltd. v. Mona Pharmachem [2017] ibclaw.in 10 SC and that instead of following the said order, Section 12A now derails the settlement process by requiring the approval of at least ninety per cent of the voting share of the committee of creditors. Unbridled and uncanalized power is given to the committee of creditors to reject legitimate settlements entered into between creditors and the corporate debtors.

The Apex Court’s verdict: Section 12A was inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018 with retrospective effect from 06.06.2018. Before this Section was inserted, this Court(Supreme Court), under Article 142, was passing orders allowing withdrawal of applications after creditors‘ applications had been admitted by the NCLT or the NCLAT.

This Court, by its order dated 14.12.2018 in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors. [2018] ibclaw.in 35 SC, has stated that Regulation 30A(1) is not mandatory but is directory for the simple reason that on the facts of a given case, an application for withdrawal may be allowed in exceptional cases even after issue of invitation for expression of interest under Regulation 36A. It is clear that once the Code gets triggered by admission of a creditor‘s petition under Sections 7 to 9, the proceeding that is before the Adjudicating Authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim.

The main thrust against the provision of Section 12A is the fact that ninety per cent of the committee of creditors has to allow withdrawal. This high threshold has been explained in the ILC Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantially all the financial creditors, have to grant their approval to an individual withdrawal or settlement. In any case, the figure of ninety per cent, in the absence of anything further to show that it is arbitrary, must pertain to the domain of legislative policy, which has been explained by the Report (supra). Also, it is clear, that under Section 60 of the Code, the committee of creditors do not have the last word on the subject. If the committee of creditors arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT, and thereafter, the NCLAT can always set aside such decision under Section 60 of the Code. For all these reasons, we are of the view that Section 12A also passes constitutional muster.

Power to grant withdrawal under Articles 226 and 227 and Article 142 of the Constitution of India:

High Court exercising power under article 226 and 227 or Supreme Court exercising power under article 142 of the Constitution of India can approve withdrawal of CIRP at any stage.

7. Status in law prior the Section 12A

Before the Section 12A, there was no provision in the Code or the regulations in relation to permissibility of withdrawal post admission of a CIRP application. As discussed above, only rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provide facility to withdraw the application on a request by the applicant before it is admitted by the NCLT.

The NCLAT in Mother Pride Dairy India Pvt. Ltd. v. Portrait Advertising & Marketing Pvt. Ltd. (2017) ibclaw.in 218 NCLAT, took the view that once an application is admitted, it cannot be withdrawn since other creditors are entitled to raise claims. However, “if the appellant satisfies the claim of other creditors, whoever has made claim, in that case Insolvency Resolution Professional will bring the matter to the notice of learned Adjudicating Authority for closure of the resolution process. The learned Adjudicating Authority in such case will consider the case in accordance with law, even before completion of Resolution process and may close the matter.”

In Parker Hannifin India Private Limited v. Prowess International Private Limited [2017] ibclaw.in 18 NCLT, the Kolkata bench of the NCLT held that once a petition is admitted, neither of the parties have the right to withdraw the petition. However, the Chennai Bench of the NCLT took an opposite view in M/s. Phoenix Global DMCC v. M/s. A&A Trading International Pvt. Ltd.–CP/500/(IB)CB/2017 dated 16.06.2017, while exercising its inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016, the NCLT recalled its order for commencement of CIRP and declaration of moratorium once the corporate debtor duly paid the outstanding amount and settled its dispute with the operational creditor. However, the order was recalled given the facts of this particular case where the insolvency resolution professional had not been appointed, no public announcement had been made, no other dues existed other than the dues in this case which had been paid.

In Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP [2017] ibclaw.in 34 NCLAT, the NCLAT held that “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…Even the Financial Creditor cannot be allowed to withdraw the application once admitted, and matter cannot be closed till claim of all the creditors are satisfied by the corporate debtor.”

8. Recommendation of the Insolvency Law Committee to insert the section 12A

29.1 Under rule 8 of the CIRP Rules, the NCLT may permit withdrawal of the application on a request by the applicant before its admission. However, there is no provision in the Code or the CIRP Rules in relation to permissibility of withdrawal post admission of a CIRP application. It was observed by the Committee that there have been instances where on account of settlement between the applicant creditor and the corporate debtor, judicial permission for withdrawal of CIRP was granted. This practice was deliberated in light of the objective of the Code as encapsulated in the BLRC Report, that the design of the Code is based on ensuring that “all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution.” Thus, it was agreed that once the CIRP is initiated, it is no longer a proceeding only between the applicant creditor and the corporate debtor but is envisaged to be a proceeding involving all creditors of the debtor. The intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors.
29.2 On a review of the multiple NCLT and NCLAT judgments in this regard, the consistent pattern that emerged was that a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted, and not only the applicant creditor and the debtor. On this basis read with the intent of the Code, the Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post admission if the CoC approves of such action by a voting share of ninety per cent. It was specifically discussed that rule 11 of the National Company Law Tribunal Rules, 2016 may not be adopted for this aspect of CIRP at this stage (as observed by the Hon’ble Supreme Court in the case of Uttara Foods and Feeds Private Limited v. Mona Pharmacem) and even otherwise, as the issue can be specifically addressed by amending rule 8 of the CIRP Rules.

Last updated on 09.09.2023.

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