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

Decoding the Code
Chapter-3 : CIRP
Topic-1 : CIRP Application and withdrawal

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

(updated 29.01.2020)

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 A matter can be settled between the parties and an application(s) under Sections 7 or 9 or 10 can be withdrawn only at four stages: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. 

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 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).

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)

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.

 

3.4 Judicial Pronouncements on Section 12A

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.

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.)

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. 

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.

Applicant can only move application for withdrawal of the application before the Adjudicating Authority and not by the Resolution Professional

NCLT, Mumbai bench in the matter of Federal Bank Ltd. Vs. Trio Fab (I) Pvt. Ltd.-MA 1421/2018 IN CP(IB)-1309/MB/2017 dated 29.11.2018, held that “It is also stated in the minutes that 100% quorum was present in the said CoC meeting. It is pertinent to mention that Federal Bank is the sole financial creditor who has 100% voting share in CoC. In this, Federal Bank moved the application for withdrawing the Petition and prior to this, RP has moved the application for withdrawing the Petition under Section 12A of the Code.
In this case, Hon’ble NCLAT has passed an order on 13.11.2018 in Company Appeal (AT)(Insolvency) No.242 of 2018, wherein it is held that Regulation 30A cannot override the substantive provisions of Section 12A according to which the applicant can only move application for withdrawal of the application before the Adjudicating Authority and not by the Resolution Professional.”

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.

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’.

 

4. 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.

 

5. 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.”

 

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.

 

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