Provision For withdrawal of application under IBC Laws

[SHUBHANKAR AGNIHOTRI]

Introduction 

Parliament enacted the Insolvency and Bankruptcy Code in 2016 to give the power to financial creditors and operational creditors, to recover their debt from the corporate debtor. The main purpose behind this act is to revive the corporate debtor.  Financial creditors, operational creditors, and corporate persons by themselves can file an application for initiating the Corporate Insolvency Resolution Process (CIRP) under sections 7, 9, and 10 respectively. The first step for initiating the CIRP process is that an applicant must file an application before the Adjudicating Authority (AA) regarding the initiation of the CIRP Process. And if there is not any error in the application or there is not any disciplinary proceeding against IRP the AA may admit that application and can give the order for initiation of the CIRP Process. In the beginning, there was a provision under Rule 8 of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 that AA can allow the withdrawal of the application of initiation of CIRP on the request of the applicant before the admission of the application. There was not any express provision in the IBC or any other related rules for withdrawal of application after admission. Under Rule 11 of the NCLAT Rules, 2016 it is the inherent power but Appellate tribunals were hesitant about using this power in the mattes of withdrawal of application after the admission because there was not any express provision about this. In 2018 the Insolvency and Bankruptcy Code, 2016 was amended and section 12A was introduced. Section 12A gives the power to the Adjudicating authority to allow the withdrawal application even after the admission. Regulation 30A was also inserted in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which also talks about the same. In this article, we will briefly discuss the whole concept of the withdrawal of the CIRP application.

Old Provisions 

The Insolvency and Bankruptcy Code, 2016 was enacted in the year of 2016, at that time in the code there was not any provision related to the withdrawal of the CIRP application. In the same year The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 also came into force, and Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 talks about the provisions related to the withdrawal of CIRP application. Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 states that the AA can permit the withdrawal of the CIRP application before its admission. There was the provision of withdrawal of application before admission but there was not any express provision that allow the withdrawal of the CIRP application after admission. Rule 11 of the NCLAT Rules, 2016 talks about the inherent powers of the appellate tribunal. Rule 11 states that “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 issue of whether in the preview of Rule 8 can appellate Tribunal exercise there inherent power under Rule 11 and permit the withdrawal of CIRP application after the admission was arise before the Supreme court in the case of LOKHANDWALA KATARIA CONSTRUCTION PRIVATE LIMITED VERSUS NISUS FINANCE AND INVESTMENT MANAGERS LLP - 2017 (7) TMI 1274 - SUPREME COURT.  In this case, the court said that appellate tribunals cannot exercise their inherent power under Rule 11 of the NCLAT Rules, 2016 in view of Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 and can’t permit the withdrawal of CIRP application after the admission. The court said that there are not any express provisions relating to the withdrawal of CIRP application after admission so the appellate tribunal cannot use its inherent power in the view of Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 and permit the withdrawal of CIRP application after admission. In the case of UTTARA FOODS AND FEEDS PRIVATE LIMITED VERSUS MONA PHARMACHEM - 2017 (11) TMI 1763 - SC ORDER the Supreme Court recommended that the competent authority (either Parliament of IBBI) should amend the Code or regulations and insert the express provisions which will allow the withdrawal of CIRP application after the admission. In a result of this recommendation, the Insolvency Law Committee was formed in 2017. The main issue in the committee was 'Withdrawal of CIRP Proceedings Pursuant to Settlement’.  The committee observed that there are provisions regarding the withdrawal of application before admission but there are not any provisions of withdrawal post-admission.[1] The committee analyzed many NCLT and NCLAT judgments and recommend that there should be provisions that allow the withdrawal of applications post-admission. The committee recommended that the main aim of the code is to ensure that all the stakeholders can participate in the restructuring process so that withdrawal of application post-admission should be approved by COC with a vote share of Ninety percent.

New Provisions 

In 2018 S.12-A in IBC, 2016 and regulation 30B in the IBBI (Corporate Insolvency Resolution Process) were inserted. According to section 12A the Adjudicating Authority may allow the withdrawal of CIRP application admitted under Sections  7, 9, or 10. The key point is that the withdrawal application has to be approved by the 90% votes of COC. The withdrawal of an application after admission of CIRP application is classified in different parts-

Withdrawal of application before the CoC is constituted

Where an application for withdrawal of CIRP application under section 12-A of IBC, 2016 if filled prior to the formation of CoC, in this case the Interim Resolution profession has the responsibility to present the application before the Adjudicating Authority for the approval. In such cases approval of CoC is not required. The primary goal of the code is not recovery but revival, so even after the insolvency application has been accepted by the adjudicating authority, if later both parties, creditors and debtors, have reached an agreement at any stage where the committee of creditors has not yet been constituted, a party can directly approach the NCLT through an interim resolution professional, seeking withdrawal of application. Tribunal may, in exercise of its inherent power, grant the request. The NCLAT Rules, 2016, Rule 11 permits a withdrawal or settlement application. In the SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. - 2019 (1) TMI 1508 - SUPREME COURT the NCLT may exercise its inherent powers under Rule 11 of the NCLAT Rules, 2016 to approve or disapprove an application for withdrawal or settlement while the CoC has not yet been constituted.

Withdrawal of application after the CoC is constituted

The interim resolution professional will submit to the CoC for approval any application for withdrawal under section 12-A of IBC, 2016 in accordance with the method established by the Code. If the proposal receives the required 90% of the vote in the CoC, it is then referred to the Adjudicating Authority, which has the jurisdiction to accept or reject such applications. Given that all creditors of a company undergoing CIRP are susceptible to the possibility of financial loss, the necessity of a 90% majority vote for withdrawal is intended to discourage individual actions and encourage collective actions. Capable creditors with an interest in restarting the business of the corporate debtor must decide whether to permit withdrawal. In the case of SHAJI PURUSHOTHAMAN VERSUS UNION BANK OF INDIA & ORS. - 2019 (9) TMI 1344 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI wherein the NCLAT, New Delhi Bench held that the "Committee of Creditors" may assess whether the appellant's proposal for settlement under Section 12-A is better to the "resolution plan" as approved by it and may pass the necessary decision if the appellant files an application under section 12-A of IBC, 2016. We are not offering any view on the matter, though, as the "Committee of Creditors" must make this decision. In the case of VALLAL RCK VERSUS M/S SIVA INDUSTRIES AND HOLDINGS LIMITED AND OTHERS - 2022 (6) TMI 173 - SUPREME COURT the Supreme Court emphasized that in comparison to the standards for approving a settlement plan under Section 30(4), those for withdrawal under Section 12A are more onerous. The adjudicating authority or appellate authority cannot sit in an appeal over the commercial wisdom of the CoC if 90% or more of the creditors believe that approving settlement and terminating CIRP is in the best interests of all parties. Only when the CoC's judgment is arbitrarily made, unreasonable, or deviates from the law or the norms is interference justified.

Withdrawal of application after Form G (Expression of Interest) has been issued

One of the most commonly asked questions about withdrawal is whether it is possible to withdraw after Form G, or the expression of interest (EOI), has been issued. In the case of in the case of SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. - 2019 (1) TMI 1508 - SUPREME COURT According to the Supreme Court, Regulation 30A(1) of the CIRP Regulations, 2016 is just a directory and not mandatory. Under Regulation 36A of the CIRP Regulations, 2016, an application for withdrawal may, in extraordinary circumstances, be granted even after the issuing of an invitation for expression of interest.

Withdrawal of application after approval of resolution plan

In the case of HEM SINGH BHARANA VERSUS M/S PAWAN DOOT ESTATE PRIVATE LIMITED THROUGH SH. DARSHAN SINGH (RESOLUTION PROFESSIONAL) , SUMEDHA MANAGEMENT SOLUTIONS PVT. LTD., SH. DARSHAN SINGH RESOLUTION PROFESSIONAL, SUMEDHA MANAGEMENT SOLUTIONS PVT. LTD., EDELWEISS ASSET RECONSTRUCTION COMPANY LIMITED, CANARA BANK, BANK OF INDIA - 2022 (1) TMI 1323 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI  [1] Once a resolution plan has been approved by the Committee of Creditors (CoC), considering a withdrawal application under section 12-A of IBC, 2016 becomes infeasible. The NCLAT stated that the Resolution Applicant is not permitted to alter or withdraw from the resolution plan once the CoC has approved it. Similarly, once it has made a decision, the CoC is not permitted to reverse it. The NCLAT noted that under Regulation 30A of the CIRP Regulations, provided there are appropriate grounds for the withdrawal, an application for withdrawal under section 12-A of IBC, 2016 may only be submitted after the issuing of a "Expression of Interest."

Withdrawal of application at the stage of liquidation

Another question of the debate was whether a withdrawal application can be considered at the stage of liquidation? It is quite likely to withdraw an application made under Sections 7, 9 or 10 once the liquidation process has started. It is crucial to note right away that the core principle of the Code is to maximize the corporate debtor's assets in order to protect it from the wrath of liquidation.

In the case of V. NAVANEETHA KRISHNAN VERSUS CENTRAL BANK OF INDIA, COIMBATORE & ANOTHER - 2018 (8) TMI 2063 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL the NCLAT observed that if the CoC decides to grant an application with 90% of the vote, it may be withdrawn under Section 12-A of IBC, 2016 even when it is at the liquidation stage. A person who is not prohibited by Section 29A and complies with the COC's requirements during the liquidation period may submit an offer to the Adjudicating Authority for consideration, according to the NCLAT. The liquidation decision issued by the Adjudicating Authority will not preclude the COC from issuing an appropriate order if it accepts the offer with 90% of the voting shares and chooses to withdraw the application under Section 7 of the IBC.

Conclusion

In light of the foregoing, it must be determined that a CIRP application under Sections  7, 9, or 10 of the Code may be withdrawn in accordance with section 12-A of IBC, 2016. The AA authorities may permit or deny the withdrawal of such requests. It is important to note that applications may be withdrawn not only after an EOI has been issued, but also, in some circumstances, after receiving resolution plans. Both the legislature and the courts have recently made a strong argument for case settlements since they encourage a win-win situation for all parties and also help to clear the court system. It is crucial to remember that a company's decision to the insolvency process is a privilege, subject to rules, rather than a right. The CoC needs to be persuaded that the withdrawal is in everyone's best interests, including those of the operational creditors, financial creditors, and employees. The corporation must continue the insolvency procedure if the CoC rejects the withdrawal. Additionally, corporations have the option to opt out of the insolvency procedure and look for resolution in alternative ways under section 12-A of IBC, 2016. It is a desirable feature that guards against the needless expense of company resolution or liquidation and guarantees that all stakeholders are given an equal opportunity to settle their differences.

[1] (2023) ibclaw.in 23 NCLAT,

[1] Report of the Insolvency Law Committee