News By/Courtesy: Vidisha Gupta | 04 Apr 2020 19:39pm IST

HIGHLIGHTS

  • Section 12 of Insolvency and Bankruptcy Code, 2016
  • 2nd Amendment to IBC in 2018
  • SBM Paper Mills case

The Insolvency and Bankruptcy Code, 2016 (“Code”) aims to manage the asset deficit in case of insolvency and therefore deals with the state of insolvency in a manner which is beneficial to the Insolvent Company as well as its stakeholders. The primary objective of the Code is Resolution, which further favours maximization of the assets of the Corporate Debtor (the Insolvent Company).  The stages at which an Insolvency Application under Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the Code) can be withdrawn are: Before admission of the application under Sections 7 or 9 or 10, After admission but before constitution of the committee of creditors, After constitution of the committee of creditors but before the issue of invitation for expression of interest and After issue of invitation for expression of interest. This very question of whether an Insolvency Application filed under the Insolvency and Bankruptcy Code, 2016 can be withdrawn after its admission by the Adjudicating Authority remained a point of debate till the introduction of Section 12A through the Second Amendment to the Code in the year 2018. In a plethora of cases the point with regard to withdrawal of the Insolvency Application at different stages has been discussed and analysed. The Code provides the procedure for the application for the Resolution Process and after the 2nd Amendment of the Code in the year 2018, it also provides for withdrawal of the Insolvency Application even after its admission by the Adjudicating Authority by the way of Section 12A of the Code. 

Before the insertion of Section 12 A, the withdrawal of applications was governed by Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. However, this rule addressed only the withdrawal of applications before its admission and did not address whether such application can be withdrawn after the publishing of the Expression of Interest and admitting of Resolution Plans, and whether settlements could be offered by the Corporate Debtor. While this issue arose in various cases such as the Mother Pride Diary India Pvt Ltd v Portrait Advertising & Marketing Pvt Ltd, Lokhandwala Kataria Construction Limited v Nisus Finance and Investment Managers, LLP and the case of Uttara Foods and Feeds Pvt Ltd v Mona Pharmachem.Following the Uttara foods case, an Insolvency Law Committee was set up on 16th November, 2017 to review and address various issues, following which a report was presented in March, 2018. One of the key recommendations of the Report of the Insolvency Law Committee was to allow withdrawal provided such action is approved by 90% voting share. Following the recommendations, precedence and existing rules, the legislature inserted Section 12A through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 which was promulgated on 6th June, 2018 and had retrospective application from this date following its assent by the President on 17th August, 2018.

One of the initial cases that led to the development of this additional provision is through the case of Uttara Foods and Feeds Private Limited v. Mona Pharmacem where it was observed that although Rule 11 of the NCLT Rules, 2016 confers inherent powers to the NCLT, an adjudication on the withdrawal will not fall within the purview of the same and hence, the court stated specifically that an amendment may be made to the relevant rules to include such powers instead of constantly approaching the Supreme Court for relief under Article 142.

In Brilliant Alloys Pvt. Ltd. Vs. Mr. S. Rajagopal & Ors, the Supreme Court reiterated that Regulation 30 A is to be read in consonance with Section 12A. Further making reference to the case of Swiss Ribbons Pvt Ltd v Union of India,  it was reiterated that Regulation 30 A(1) is in fact directory and not mandatory since the NCLT could allow the application for withdrawal in certain circumstances according to the facts of each case, even if such application is made after the issuance of invitation for Expression of Interest under Regulation 36A.

In the case of Satyanarayan Malu vs SBM Paper Mills Limited case, the main issue of whether a withdrawal of CIRP application can be allowed even after the Expression of Interest had been published. The court concluded that this can be allowed if in accordance with Section 12 A, the person making the application for withdrawal was the person who made the application to initiate the CIRP and if the criteria of assent of 90% voting rights of the CoC has been fulfilled. 

To conclude, Section 12A of the Code will be advantageous in cases where the Corporate Debtor makes a sincere effort to settle the claims of the Creditors which must also be a better deal than what the creditors would get if they go for insolvency. The fact that the Insolvency Application can be withdrawn even after the issuance of Expression of Interest, leaves a grey area for the requirement to define and determine the ‘exceptional circumstances’ in which the same can be done.

Section Editor: Pushpit Singh | 04 Apr 2020 21:55pm IST


Tags : Insolvency and Bankruptcy Code, Section 12

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