Withdrawal of Application Prior to Constitution of Committee of Creditors

By Vidya Kamath

Author is a 3 rd year B.B.A.,LLB student of Shri Dharmasthala Manjunatheshwara Law College and Centre for Postgraduate Studies & Research in Law, Mangaluru

The insertion of Section 12 A [1]of IBC has opened floodgates for petitions under IBC for the defaulters and corporate debtors, as Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) permits the withdrawal of the applications at any stage if the insolvency procedure has been initiated under Section 7, 9 and 10 of the Insolvency and Bankruptcy Code. Erstwhile, even to those parties who have opted for a settlement before the constitution of the Committee of Creditors (hereinafter referred to as “CoC”). The provisions above of the Insolvency Bankruptcy Code (hereinafter referred to as “IBC”) came into force with a retrospective effect after the recommendation of Insolvency Law by appointing an Ad Hoc Committee in 2018. The primary focus of this enactment was to provide speedy recovery to all those parties who have agreed to settlements before the final disposal.

Despite the offerings, the withdrawal process is cumbersome. It stands on a disputable opinion as there is no specific provisional measure safeguarding the rule of the application by the Financial Creditor /Operational Creditor post-admission stage. In the absence of any statutory provision, NCLT permits the withdrawals post / prior to the admission/denial stage at the discretion of incumbent officers after approving such parties’ agreement before the bench.  The act, therefore, has failed to propose the idea behind the withdrawal after the settlements, leaving the code in an ambiguous status.

The settlement between the parties facilitates them to file for a withdrawal of the application before the NCLT for an immediate appropriate remedy. While permitting the admission of the application under the preceding sections, the adjudicating authority appoints an Interim Resolution Professional /Resolution professional to take over the company’s control in default. Since the stipulation in Regulation 30 [2]alone does not permit the withdrawal after inviting expression of interest, it has to be read with Section 12 A, which provides an additional impact for the withdrawal application.

Furthermore, the CoC shall be appointed within 30 days of the appointment of an IRP. In Brilliant Alloys Private Limited Vs. Mr S. Rajagopal & Ors[3], the Supreme Court stated that the parties are permitted to withdraw the application at any point during the Insolvency process. It is a sine qua non of the statutory requirement that Regulation 30 A has to be read along with the main provisions of Section 12A, which alone contains no such imposition. Accordingly, this stipulation can only be directory depending on the facts of each case.

On 30th December 2019, a Single Bench of NCLT in Vikas Shuttering Store Private Limited Vs. Supreme Infrastructure India Limited[4] pronounced that, when the parties have agreed to the terms of settlement before the constitution of Committee of Creditors CoC, the court may, at its discretion, allow the withdrawal of the application under Regulation 30(1) (a) of IBBI (Insolvency and Bankruptcy Board India), 2016.

Factual Background

The Petition was filed by Shri Bhavani Shankar Sharma, Suspended Director of the Corporate Debtor before the NCLT that MA (hereinafter referred to as “Miscellaneous Appeal”) be withdrawn, to take on record the consent terms executed between the Corporate Debtor and the Operational Creditor. The consequential direction was sought to withdraw the Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) against the Corporate Debtor. The second MA was filed by the IRP seeking withdrawal of the CIRP concerning the Corporate Debtor under the settlement arrived between the Operational Creditor and the Corporate Debtor. Aggrieved by the Order, the applicant in the first MA approached NCLAT seeking the withdrawal of the insolvency application.

Remedy through Regulation 30(1) (a) of IBBI

The issue arising for consideration in the present MA’s :

1) Whether the MA’s should be allowed whereby CIRP against the Corporate Debtor would be withdrawn, and the Board of Directors would be restored to its original position because of the settlement agreement dated NIL arrived at between the Operational Creditor and Corporate Debtor.

The Court held that since consent terms were updated, there is a presumption that the settlement between the parties was made before the constitution of CoC, wherefore, the process prescribed under Regulation 30A (1) (a) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 should be complied with and not the procedure prescribed under regulation 30A (1) (b) thereof to constitute the withdrawal settlement.

The Court’s Discretionary play

The Committee enforced the introduction of Section 12 A due to the rapid increase in the withdrawal applications. The only provision available under Insolvency Bankruptcy Code is Rule 8 for the withdrawal of the insolvency application since the parties have already agreed to the said terms of the settlement. Thereby authorizing the adjudicating authority to allow the withdrawals of insolvency application by the applicant, with the approval of 90 per cent of the voting share, post-admission by the members of CoC. Section 12 A of IBC read with Regulation 30A of CIRP permits the withdrawal of application after the admission of application but before the constitution of CoC. The Court may, however, permit the withdrawals under exceptional facts.

The evolution of these provisions was brought into significant notice on 24th July 2017 in Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP[5] , when the Nisus Finance and Investment LLP applied as under section 7 of the Code, appealing the Orders against NCLT and questioning whether NCLT could utilize its inherent powers. The Corporate debtor approached the NCLAT to submit the settlement application of the dispute, thereby the parties requesting to allow their compromise after admission of their matter. The view under Rule 8 of I&B Code 2016, the Hon’ble Supreme Court upheld the verdict passed by the NCLAT that it cannot use its inherent powers for the withdrawal of the application. Still, it significantly used its intrinsic power by stating, “We utilize our powers under Article 142 of the Constitution of India to put a quietus to the matter before us”.

Following the same principle of the inherent power structure, the NCLAT bench in Uttara Foods and Feeds Private Limited v. Mona Pharmachem[6], using its inherent powers recognised by Rule 11 of the NCLT Rules, the tribunal couldn’t permit the compromise after the admission of the insolvency application.

In the wake of the plethora of identical Petitions arising before the court, the Hon’ble Supreme Court held that “the Relevant Rules be amended by the competent authority to include such inherent powers.” Therefore the Courts could keep a balancing view between Section 12 A of the Insolvency Code and the Inherent powers used under Rule 11 of the NCLT Rule 2016[7], setting its targets at what stage the application could be permitted for withdrawals after the parties have consented to settlement on their said contracted terms.

 In the celebrated case of 2019, the Supreme Court in Swiss Ribbons & Anr. v Union of India v Ors [8]observed, wherein the petition was filed assailing the Constitutional validity of Insolvency and Bankruptcy Code of 2016, the Court elaborately stated that “At any stage when the committee of creditors has not been constituted the parties can approach the NCLT directly”, while the court remarked that it might use its inherent power permitted under Rule 11 of NCLT Rules, 2016. The court, after considering all the facts and hearing the concerned parties, may allow or disallow the withdrawal or for the settlement if it seems fit at its discretion.

Conclusion

After the amendment of the IBC, the structure and the ambit of the procedure above has widened its scope from a limited spacing to plenteous alternative remedies available at each phase of the insolvency procedure, reducing the subjects’ grievances in the dispute. But yet there is a necessity to clear the ambiguous status of the code as no specific provisions permit the withdrawals, burdening the courts to look into the merits of each case. “The law does not concern itself with trifles”.

Still, it provides opportunities to the parties to directly approach the NCLT seeking withdrawal of the application by filing the petition under Section 12 A of IBC with Rule 11 of the NCLT Rules. The courts, while using the inherent powers, may be put in a predicament position to wisely use their discretionary powers and maintain a balance so that their discretionary power may not be turned into arbitrary usage. If the NCLT has admitted the application under Section 7, 9 or 10 of the IBC and appointed an Interim Resolution Professional for enquiry, the parties can undoubtedly be proceeding further with the Section 12 A read with Regulation 30A, after the settlement between the Corporate Debtor and the Financial Creditor /Operational creditor before the constitution of CoC. Relief may be provided with either way or under exceptional cases only after the issuance of invitation towards the expression of interest under Regulation 36A.


[1] The Insolvency and Bankruptcy Code, 2016 (Act 12A of 2016)

[2] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2019 (Regulation 30A of 2019)

[3] Brilliant Alloys Private Limited vs Mr. S. Rajagopal [2018] SCC 31557

[4] Vikas Shuttering Store Private Limited Vs Supreme Infrastructure India Limited [2019] C.P. (IB) 4752/(MB)

[5] Lokhandwala Kataria … vs Nissus Finance And Investment [2017] SCC 9279

[6] Uttara Foods And Feeds Private vs Mona Pharmachem [2017] SCC SLP(C) 26824

[7] National Company Law Tribunal Rules, 2016( Act 11 of 2016)

[8] Swiss Ribbons Pvt. Ltd. & Anr vs Union of India & Ors [2018] SCC 99, 28623

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