By Nitya Jain, a fifth-year student at NLU, Jodhpur
There has been a rising trend of the corporate debtor and the creditor settling their claims out of court after initiating a formal insolvency proceeding in the National Company Law Tribunal (“NCLT”). This has been made possible due to Section 12A of the Insolvency and Bankruptcy Code, 2016 (“IBC”) which provides for withdrawal of insolvency applications. An aggrieved party first files an insolvency application against the corporate debtor in the NCLT but thereafter realises that a private settlement is more feasible and withdraws the application. In fact, data from Insolvency and Bankruptcy Board of India (“IBBI”) shows that out of the 142 cases closed in the second-half of 2018, 63 had been withdrawn under Section 12A. This is 45 percent of the total insolvency cases closed. Thus, it is relevant to understand the laws governing withdrawal of insolvency applications.
The withdrawal of the application can be done at various stages of the insolvency proceedings. It can be withdrawn before it’s admission by the tribunal, after its admission, before the setting up of Committee of Creditors (“CoC”) or after the CoC has been set up. It can be withdrawn even after the invitation for expression of interest has been issued and the resolution plan has been made. The laws applicable at each stage differs and the approvals required change. These can be divided into four stages.
Stage 1: Before the admission of the application
Before the coming of Section 12A, applicants relied on Rule 8 of the Insolvency & Bankruptcy (Adjudicating Authority) Rules, 2016 to withdraw their insolvency applications. This rule provides for “withdrawal of application on a request made by the applicant before its admission.” The term ‘before its admission’ is of relevance here. In Mother Pride Dairy India v. Portrait Advertising & Marketing , the NCLT acknowledged that a private settlement had been reached between the applicant and the corporate debtor. But it held that the application cannot be withdrawn once it has been admitted by the tribunal. The rationale for the same was that other creditors are entitled to raise their claim after the admission of the application and the proceeding has become in rem. Similarly, in Lokhandwala Kataria Construction v. Nisus Finance and Investment Managers LLP, it was held that irrespective of the settlement between the applicant and the corporate debtor, the matter cannot be closed till the claim of all the creditors is satisfied by the corporate debtor.
Stage 2: After the admission of the application but before the constitution of CoC
Section 12A of the IBC was introduced via an amendment to provide a mechanism for withdrawal of application after it has been admitted. In order to protect the interest of all creditors, a safeguard was added in the provision whereby such withdrawal is possible only with the approval of ninety percent voting share of the CoC. Here a doubt arises as to what will happen in a case where the application has been admitted but the CoC has not yet been set up. Can such an application be withdrawn? If yes, how?
This riddle was solved by the Hon’ble Supreme Court in Swiss Ribbons v. Union of India in January 2019, where it stated that “We make it clear that at any stage where the committee of creditors 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…….”
Consequently, in July 2019, an amendment was made in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“Regulations”) to accommodate a pre-CoC situation. Accordingly, Regulation 30A (1) (a) of the Regulations provides that before the CoC has been constituted withdrawal may be made by the applicant through the interim resolution professional.
Stage 3: After the constitution of CoC
Section 12A will simply apply and the application can be withdrawn provided that such withdrawal is approved by ninety per cent of the CoC. This has to be read with Regulation 30A (1) (b) of the Regulations which states that withdrawal after the constitution of the CoC has to be made by the applicant through the interim resolution professional or the resolution professional, as the case may be.
Stage 4: After the issue of invitation for expression of interest
Once the CoC has been set up, the next stage in the insolvency proceeding is invitation for expression of interest. It is an invite to the general public whereby those interested in submitting resolution plans for the corporate debtor can do so. Initially, Regulation 30A of the Regulations did not allow withdrawal of application after issuance of invitation for expression of interest. However, the judiciary still allowed the withdrawal in various cases overlooking the regulation and acting in pragmatic economic terms.
The Supreme Court in the case of Brilliant Alloys v. Mr. S. Rajagopal held that the insolvency application for can be withdrawn even after issuance of invitation for expression of interest. The rationale for doing so was that the out of court settlement was more beneficial for all the stakeholders involved. It was considered prudent to ignore the Regulations in this matter to ensure maximum economic benefit to the parties.
Eventually, the Regulations were amended and the withdrawal of insolvency application was allowed after the issuance of invitation for expression of interest provided there are reasons justifying such withdrawal.
The judiciary went one step further in the matter of SBM Paper Mills and allowed withdrawal even after the resolution plan was accepted by the CoC. The NCLT acknowledged the value that the one-time settlement was offering the parties which was much better than the resolution plan. However, the tribunal also cautioned against such withdrawals and stated that withdrawal at such a later stage of insolvency proceedings must be discouraged. Such withdrawals waste the time of the court as well as of the insolvency resolution machinery. Accordingly, the NCLT awarded high costs as a deterrent.
Settlement has been sought time and again by creditors in lieu of insolvency proceedings under IBC. Although IBC provides a time limit for resolution of insolvency, it is rarely followed and cases get stretched for more than 500 days which is almost double of the time limit provided in the IBC. In light of this, many lenders opt for withdrawing their application and choose to settle outside court with the debtor. For instance, in January 2020, the Union Bank of India withdrew a couple of insolvency petitions and opted for settlements with the defaulting companies for a much better realisation. The reason for the same was that the bank had not seen any successful resolution for cases referred by it to the NCLT. In a statement the MD and CEO of the United Bank stated that looking at the kind of value that lenders are getting through NCLT and the time taken for resolution, the preferred route is settlement with the corporate debtor.
It can be concluded that the judiciary is allowing withdrawal of applications filed under IBC where such withdrawal is economically advantageous to the parties. This practice is in line with the central theme of the IBC i.e. maximization of economic benefit for the lenders. However, it also raises an important question about the effectiveness of IBC in providing maximum fiscal relief.