Conundrums around Post Admission Withdrawal of Insolvency Proceedings in the Aftermath of Vallal RCK Versus M/s. Siva Industries & Holding Limited and Ors.1
The interpretation of Section 12A of Insolvency and Bankruptcy code, 2016 has evolved through various judicial pronouncements in Supreme Court, NCLAT and NCLT. After successfully being tested on the touchstone of Indian Constitution in Swiss Ribbon case, Section 12 A and its interplay with other important sections of IBC is interesting as well as contrasting.
Section 12A: Withdrawal of application admitted under section 7, 9 or 10.
[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.]
The Orders passed in Francis John Kattukaran Vs. The Federal Bank Ltd. & Anr.2, Brilliant Alloys Pvt. Ltd. Vs. Mr. S. Rajagopal & Ors.3, Swiss Ribbons Pvt. Ltd. Vs. Union of India4 held common position that the RP cannot file an application for withdrawal of an application made under section 7, 9 or 10 of the Code. It held that Regulation 30A cannot override the substantive provisions of section 12A. Accordingly, the applicant can only move an application for withdrawal of the application before the Adjudicating Authority, while the RP can’t do so. The interplay between these sections has transitioned in three years where Section 12A has gained more stringency.
The various question of Law pertaining to applicability of Section 12A were discussed in Siva Industries judgment. One of the most important questions of Law discussed in this Judgment is whether the Adjudicating Authority can sit in an appeal over the commercial wisdom of Committee of Creditors (hereinafter referred asCoC)? It was held that when 90% and more of the creditors in their wisdom after deliberations find that it will be in the interest of the stakeholders to permit settlement and withdraw CIRP, the Adjudicating Authority or the Appellate Authority cannot sit in an appeal over the commercial wisdom of CoC. It has been held that the commercial wisdom of CoC has been given paramount status without any judicial intervention for ensuring completion of the process in the stipulated timeline prescribed by IBC. There is an intrinsic assumption that Financial Creditors are fully informed about the viability of the Corporate Debtor & feasibility of the proposed resolution plan. It was also held that 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.
There have been instances that most of the time CoC acts in sweeping manner and does not act in the spirit of the Code wherein Code was aimed to resolve the debt of the going concern and have a balanced approach. It has been often argued that the main object of IBC was to permit the corporate debtor to continue as an on going concern and at the same time paying the dues of the creditors to the maximum. Such judicial pronouncements often leads to the ambiguity in understanding in the cases where no precedents are there for allowing judicial interventions in the cases where commercial wisdom of CoC is not displayed. Thus, such conundrums lead to the unbalancing of the interest of Promoters of the Corporate Debtor and ends up giving arbitrary power to the creditors and will be roadblock in arriving omnibus settlement. The Courts are not clear on what defines arbitrariness and capriciousness. The bolstering stringency of Section 12A compared to Section 30(4) of IBC is not good for the applicability of the Code. The sweeping power given to the CoC discourages the settlement, which was the main reason why Section 12A amendment was added in the first place. If this legal position is not clarified than every promoter of the Corporate Debtor, who wants to save the company as the going concern has to knock the door of Apex Court under Article 142 and it will lead to flooding of litigation in the Apex Court. Thus, the time has arrived when the policy makers and Supreme Court should look beyond the BLRC report, which had designed Section 12A and ensure that Debtors who have the capability and intent to restructure their debt must have equal say like creditors in part of negotiation and settlement process.
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