The Insolvency and Bankruptcy Code, 2016 (“IBC”) was introduced with the main purpose to provide an efficient mechanism for the resolution, reorganization, and revival of the bankrupt entity promptly. Since its enactment, many amendments were done to address the issues to make it more efficient. One such amendment was done in 2018, which inserted Section 12A through the Amendment Act, to settle the matter and withdraw the case under Corporate Insolvency Resolution Professional (“CIRP”).
WHAT IS SECTION 12A OF IBC?
Before the amendment, the Code had no provision for withdrawing applications for settling matters between creditors and promoters, once applications are admitted under Section 7, Section 9, and Section 10 of the IBC. The IBC (Second Amendment) Act, 2018, introduced Section 12A to address this issue. It states “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 percent. voting share of the committee of creditors, in such manner, as may be specified”. Furthermore, this Section needs to be read with Regulation 30A of CIRP Regulations, 2016 which states “(1) An application for withdrawal under section 12A may be made to the Adjudicating Authority – (a) before the constitution of the committee, by the applicant through the interim resolution professional; (b) after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be: ….”.
By the language of the Sections, it provides for an applicant to file an application for withdrawal after obtaining the consent of a committee of creditors and the Insolvency and Bankruptcy Board of India (“IBBI”), the regulator, may specify how the application is to be made.[i] Recently, in Vinayak Deshpande vs. Nexo Industries Pvt. Ltd.[ii], the Chennai Bench of National Company Law Appellate Tribunal (“NCLAT”) allowed the matter to be settled between corporate debtor and creditor and directed National Company Law Tribunal (“NCLT”) to allow the application for withdrawal under the respective provisions mentioned above. Thus, these sections have been beneficial while settling the matter. But with this, there are certain aspects of Section 12A that arise subsequently.
Two situations can de deduced:
1. Whether an application can be made after the expression of interest in the Resolution Plan?
2. Whether a petition was withdrawn under Section 12A be revived or not?
WHETHER AN APPLICATION CAN BE MADE AFTER THE EXPRESSION OF INTEREST IN THE RESOLUTION PLAN?
Both of these situations have been decided by various judicial pronouncements. Analyzing the first situation, there are instances where the Adjudicating Authority refused and allowed the application. Mr. Vimal Chandrunwal vs. Brilliant Alloys Private Limited[iii], stated that under Regulation 30A, the application shall be submitted to the Resolution Professional before issuing of invitation for Expression of Interest (“EOI”) under Regulation 36A. Thus, the Court refused to admit the application as it was filed after the invitation. But this order was set aside in Supreme Court (“SC”), in Brilliant Alloys Pvt. Ltd. vs. Mr. S. Rajagopal & Ors.[iv], SLP, while allowing the settlement stated “Regulation 30A must be read along with the main provision of Section 12A which contains no such stipulation. Accordingly, this stipulation can only be construed as directory depending on the facts of each case”.
In Swiss Ribbons and Anr. vs. Union of India and Ors., the SC categorically stated that the Regulation 30A(1) is a directory and not mandatory for the reason that on the facts of a particular case, the application may be allowed to be withdrawn in exceptional cases even after the invitation issue for expression of Interest under Regulation 36A. Among these decisions, another interesting situation was decided in the case of Satyanarayan Malu vs. SBM Paper Mills Ltd.[v], where the application was allowed while the resolution plan was pending, and a one-time settlement was allowed. This decision was “more economic than resolution plan”. Keeping these rulings in mind, a need for substitution of Regulation 30A was needed and was done in 2019. The substitution provided the process for withdrawal in three stages namely, before the constitution of the Committee of Creditors, after the constitution of the Committee of Creditors but before the issue of invitation followed by a reason justifying the withdrawal after the invitation. Therefore, it is clear that the Authorities are allowing the application for withdrawal in situations involving issuing of an invitation.[vi]
With this, another pertinent conflict arises between the application to be filed by the CIRP applicant or Resolution Professional. In Francis John Kattukaran vs. The Federal Bank Ltd. & Anr.[vii], the National Company Law Tribunal (“NCLT”) ruled that Regulation 30A cannot override the substantive provision of Section 12A.
WHETHER A PETITION WITHDRAWN UNDER SECTION 12A BE REVIVED OR NOT?
While analyzing the issue of revival of application, there are different observations regarding the same. In Vaishno Industries Pvt. Ltd. vs. Horizon Global Ltd.[viii], the NCLT granted the Operational Creditor liberty to file a fresh application while rejecting the application seeking revival in JFE Shoji Steel India Private Limited vs. Danke Technoelectro Pvt. Ltd.[ix], the Operational Creditor was allowed to revive it in cases of default by the Corporate Debtor. Recently in ICICI Bank Case[x], an application under Section 12A was filed seeking termination of CIRP, pursuant to the Settlement Agreement between the parties where the Corporate Debtor approached the bank for One Time Settlement which was eventually accepted by the latter. The settlement was for a consideration of Rs. 22.7 crores. To this settlement, the bank thought of taking a contingent approach by filing a Memo for the revival of CIRP, in case the Corporate Debtor fails to comply with the terms as laid down in the Settlement Agreement. However, this was rejected and allowed for a fresh application to be filed. Aggrieved by the order, the bank approached the National Company Law Appellate Tribunal (“NCLAT”). The NCLAT observed that NCLT did an error and was against the principle of natural justice by not replying to an important judgment settled on this matter. The NCLAT relied on the case of Vivek Bansal vs. Bruda Druck India Pvt. Ltd.[xi], where the Operational Creditor was given the liberty to revive the application, in the matter of the Corporate Debtor not adhering to the terms of the Agreement. Emphasizing this, the Appellate Tribunal allowed the bank to apply to revive the CIRP.[xii]
The inclusion of Section 12A has proved to be beneficial to certain cases involving the matter of settlement, and EOI and added flexibility to the Insolvency mechanism prevailing in India. The Judiciary has also interpreted the Sections addressing the issues of conflict at hand. While the current IBC is paving its way to address the issues of exceptional cases, it is yet to be ascertained, what determines these cases these cases. Though, the flexibility to revive the application has been decided but the maintainability still remains an issue. In Delhi Control Devices (P) Limited vs. Fedders Electric and Engineering Ltd.[xiii], the Delhi bench on NCLAT observed, “mere obligation to pay under a Settlement Agreement would not amount to disbursal of amount for consideration against the time value of money, and thus, breach of such obligation would not entitle a party to invoke CIRP against the other party”. The IBC needs to draw the red lines in its provisions, to clarify the maintainability of these Agreements.
[i]Guest, Rectifying the Law: CoC Approval for Withdrawal of CIRP Proceedings, IndiaCorpLaw (2022), https://indiacorplaw.in/2022/01/rectifying-the-law-coc-approval-for-withdrawal-of-cirp-proceedings.html (last visited May 23, 2022).
[ii] Company Appeal (At)(Ch)(Ins) No. 02/2022.
[iii] 582 / 2017.
[iv] SLP(C) 31557 / 2018.
[v] 2018 SCC OnLine NCLT 32358.
[vi] IBC 2016 | Section 12A | Opportunities and Obstacles to Resolution, TaxGuru (2019), https://taxguru.in/corporate-law/ibc-2016-section-12a-opportunities-obstacles-resolution.html (last visited May 23, 2022).
[vii] 2018 SCC OnLine NCLAT 1072.
[ix] 2021 SCC OnLine NCLT 190.
[x] M/s. ICICI Bank Limited vs. M/s. Opto Circuits (India) Limited, 2022 SCC OnLine NCLAT 186.
[xi] 2020 SCC OnLine NCLAT 582.
[xii] Effect of Breach of Settlement Agreement Under Insolvency & Bankruptcy Code, Singhania & Partners, https://singhania.in/blog/effect-of-breach-of-settlement-agreement-under-insolvency-bankruptcy-code (last visited May 23, 2022).
[xiii] 2019 SCC OnLine NCLT 8030.