WITHDRAWAL OF CIRP APPLICATION: ONLY POSSIBLE WAY TO REGAIN CONTROL BY PROMOTERS UNDER IBC

Withdrawal of application for initiation of corporate insolvency resolution process (“CIRP”) after its admission was originally not part of the Insolvency and Bankruptcy Code, 2016 (“Code” or “IBC”) as passed by the Parliament nor its originally notified rules or regulations.  It was inserted in the Code via Section 12A with effect from June 6, 2018, after the recommendations from the Insolvency Law Committee, 2018.

Before this amendment, Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, provided for withdrawal before admission of an application for initiation of CIRP (“CIRP Application”). However, the Adjudicating Authority was not vested with the power to grant withdrawal of such application after its admission. In view of this rule, the Adjudicating Authority i.e. the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Authority (“NCLAT”) prima facie could not avail of the inherent powers recognised by Rule 11 of the National Company Law Tribunal Rules, 2016 or Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 respectively, to allow a compromise to take effect after admission of the insolvency petition[1].

During this intervening period, the parties approached the Hon’ble Supreme Court, pleading to invoke its inherent powers prescribed under Article 142 of the Constitution of India to grant withdrawal of application. In all the cases which were disposed-off by the Hon’ble Supreme Court, the applicant wanted to withdraw the application on the ground that it arrived on settlement terms with the Corporate Debtor and hence there is no requirement for continuation of the proceedings under the Code. In Uttara Foods and Feeds Private Limited1, the Hon’ble Supreme Court opined that “instead of all such orders coming to the Supreme Court as only the Supreme Court may utilise its powers under Article 142 of the Constitution of India, the relevant Rules be amended by the competent authority so as to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached“.

Accordingly, Section 12A was inserted in the Code by way of Insolvency and Bankruptcy (Second Amendment) Act, 2018 along-side Regulation 30A in the IBBI (Insolvency Resolution for Corporate Persons) Regulations, 2016 to provide for power to the Committee of Creditors (“CoC”) to approve withdrawal of CIRP application by a voting-right of ninety-percent as suggested by the Insolvency Law Committee, 2018.

Soon after the amendment, the constitutional validity of the same was challenged before the Hon’ble Supreme Court, among various other grounds, in Swiss Ribbons Pvt. Ltd.[2] wherein it was held that Section 12A passes the constitutional muster.

All these are clear indicators that withdrawal of CIRP application is possible if the promoters of the corporate debtor come with a settlement plan which is more favourable than the plans submitted by the Resolution Applicants. This is the only possible way the promoters, who are otherwise ineligible to participate in submission of resolution plans due to the provisions of Section 29A of the Code, can take back control over the Corporate Debtor. In the recent case of Andhra bank vs Sterling Biotech Ltd.[3], the NCLAT allowed the withdrawal of application of insolvency and allowed for the settlement with the creditors despite of the fact that the adjudicating authority (NCLT, Mumbai) raised serious concerns over the promoters being absconders and questioned the source of funding for the proposed settlement based on which the withdrawal was voted upon by the Committee of Creditors. The NCLAT further held that “The application under Section 12A having been approved by the ‘Committee of Creditors’ more than 90% of the voting share, it was not open to the Adjudicating Authority to reject the same and that too on a ground of ineligibility under Section 29A, which is not applicable.”.

Another interesting point to note here is that Regulation 30A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (before its amendment in July 2019) did not provide for withdrawal after an invitation for Expression of Interest (EoI) is issued to the public where no such deadline is provided in Section 12A itself and in this context the Hon’ble Supreme Court, in Brilliant Alloys Pvt. Ltd, held that Regulation 30A shall be read with the main provision of Section 12A and accordingly, the regulations were amended on July 25, 2019 to provide for withdrawal of CIRP application even after invitation for EoI is issued. This can provide a leeway to the promoters in coming with a settlement even after the issue of invitation for Expression of Interest.

In the context set above, the following issues arise for discussion and debate:

  • Whether a promoter who has a better settlement plan challenge the decision of CoC to reject such plan on the ground that the CoC had approved a resolution plan which is commercially less favourable than that of the settlement plan?
  • Can the Adjudicating Authority or the Appellate Authority direct the CoC to admit a withdrawal application causing it to accept the settlement plan proposed by the Promoter?

Before we make an attempt to give our opinion on the above issues, we wish to reproduce the extract of the order passed by the Hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. (Supra) while withholding the constitutional validity of Section 12A of the Code:

“… 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.

This suggests that a promoter can approach the NCLT when he is unable to get approval of the ninety per cent of the voting share of the committee of creditors, on the ground that his settlement plan was arbitrarily rejected.

Settlement Plan v. Resolution Plan

To address the first issue, we considered a case where Ms. A, promoter of the Corporate Debtor proposed a settlement plan to settle the dues of all its creditors with a hair-cut of 30% entirely upfront whereas the plan approved by the CoC provided for payment of the dues to the creditors with a hair-cut of 35% and the payment is spread across a period of 3 years. In this case, Ms.A’s plan in all regards is a better proposal and the creditors would have benefitted and hence it is a just settlement rejected by the CoC.

Now, we assumed that Ms. A made an application under Section 60(5) before the Adjudicating Authority to set aside the decision of the CoC on the ground that she proposed a just settlement and that as stated in Swiss Ribbons Pvt. Ltd. (Supra) the Adjudicating Authority can set-aside the decision of the CoC where the CoC had arbitrarily rejected such just settlement.

At this juncture, we wish to take you through another landmark judgement passed by the Hon’ble Supreme Court in K. Sashidhar[4] wherein it was opined that “… the legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC… ” It further observed that “No corresponding provision has been envisaged by the legislature to empower the resolution professional, the adjudicating authority (NCLT) or for that matter the appellate authority (NCLAT), to reverse the “commercial decision” of the CoC…” From this, we understand that the role of NCLT is not to look into the commercial wisdom of the CoC and it is only to ensure that the due process of law is not compromised. A resolution plan approved by the CoC may be rejected by the Adjudicating Authority u/s 31(1) only when the plan is not in conformity with the requirement prescribed u/s 30(2) and not on any other ground.

Applying the above analogy to the current application filed by Ms. A, the Adjudicating Authority cannot admit such application since it is beyond its scope to look into the commercial wisdom of CoC in rejecting a settlement plan proposed by the promoter Ms. A u/s 12A of the Code.

Aggrieved by the dismissal order, Ms. A preferred an appeal before the Appellate Authority, i.e. NCLAT. As clarified in K. Sashidhar (Supra), even the NCLAT is not empowered to reverse the commercial decision of the CoC. Further, section 32 read with section 61(3) of the Code has set out the grounds on which the decision of the CoC approving a resolution plan can be interfered with. These grounds are not concerned with the commercial wisdom of the CoC.

With this analogy, we can safely conclude that the NCLAT also cannot go into the commercial wisdom of the CoC in rejecting a settlement plan u/s 12A.

For the sake of furthering our argument, let us imagine that the NCLT or the NCLAT gave an opportunity to Ms. A to present her case. During the hearing it will be briefed that Section 12A provided for a right to the applicant to withdraw the CIRP Application if approval from CoC having voting share of ninety percent has been received. In this case such approval has not been provided and instead of such settlement plan, the CoC preferred to approve another resolution plan by an eligible resolution applicant under the Code. Both these decisions are the outcome of the commercial wisdom of the CoC, which can, undoubtedly, be not questioned by the NCLT/NCLAT. However, the counsel for Ms. A may produce a copy of the extract of the order passed by the Hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. (Supra) wherein it was laid down that “… 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”.

Now, the NCLT/NCLAT will be in a fix as on one hand we have the order passed by the Supreme Court in Swiss Ribbons Pvt. Ltd. (Supra) and on the other hand we have the order passed by the Supreme Court in K. Sashidhar (Supra) where the former states that the NCLT/NCLAT can set aside the decision of the CoC in rejecting a just settlement and the latter clarifies that the NCLT/NCLAT cannot dive into the commercial wisdom of the CoC. In this case, setting-aside the decision of the CoC means directing the CoC to approve the settlement plan proposed by Ms. A which is not within the purview of the NCLT/NCLAT.

Here comes the follow-up issue as to whether the NCLT/NCLAT can direct the CoC to admit a withdrawal application u/s 12A of the Code. It prima facie appears to be beyond the scope of both the NCLT/NCLAT. However, if we re-visit the order of the Supreme Court in Swiss Ribbons Pvt. Ltd. (Supra) the NCLT/NCLAT may set-aside the decision of the CoC arbitrarily rejecting a just settlement / withdrawal claim. For a moment, let us assume that NCLT/NCLAT had set-aside CoC’s decision. In such case, two situations might occur. First, the CoC may be directed to vote on the withdrawal application again. Second, the CoC may be directed to admit the withdrawal application. In the first situation, the CoC is highly likely to reject the withdrawal application again. In the second situation, which is the point of discussion, the NCLT/NCLAT is indulging into the commercial wisdom of the CoC by directing it to take commercial decisions.

Conclusion

The above game of analogy might sound hypothetical, but the idea is to highlight certain inconsistencies in the Code as well as in different Supreme Court orders. Where the NCLT/NCLAT are not conferred with the power to look into the commercial wisdom, how can they decide if a settlement/withdrawal claim is just or not? In the absence of such power, the constitutional validity of Section 12A becomes questionable, yet again.

The trend of the orders passed by the Supreme Court in the subject matter of the Code indicate that the Supreme Court had recognised the significance of upholding the constitutionality of an economic legislation like the IBC, in the wake of the ever-increasing Non-Performing Assets (NPAs) in the Banking Sector.

In the developed economies like the USA and UK, there is no provision for withdrawal, post admission of the bankruptcy/insolvency application. Hence, withdrawal after the admission of the CIRP application is a provision which is unique to the Indian insolvency framework and can be termed as an experiment by the law makers. We conclude our article with the following observation made by the Supreme Court in Swiss Ribbons Pvt. Ltd. (Supra):

“The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole… To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation.”[5]

Foot Notes

[1] Uttara Foods and Feeds Private Limited v. Mona Pharmacem, Civil Appeal No. 18520/2017 (Para 2)

[2] Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., Writ Petition (Civil) No. 99/2018 (Order dt. 25-01-2019)

[3] Andhra Bank vs Sterling Biotech Ltd.(Through the Liquidators) & Ors., Company Appeal No. 612/2019

[4] K. Sashidhar v. Indian Overseas Bank & Ors., Civil Appeal No. 10673/2018

[5] Para 85 of the SC order in Swiss Ribbons Pvt. Ltd.

CA Pallavi Aggarwal is a Chartered Accountant who is currently undergoing Graduate Insolvency Programme (GIP) at IICA, Ministry of Corporate Affairs, Government of India. By 2021, she will be amongst the youngest Insolvency Professionals in India - who would be duly recognised by Insolvency and Bankruptcy Board of India (IBBI).