WITHDRAWAL OF APPLICATION FILED UNDER SECTION 7 OF THE CODE AFTER SUBMISSION OF RESOLUTION PLAN

[Mr. M. GOVINDARAJAN]

Corporate Insolvency Resolution Process

The Insolvency and Bankruptcy Code, 2016 (‘Code’ for short)  provides the procedure for initiation of corporate insolvency resolution process by the financial creditors under section 7 and by the operational creditors under section 9 of the Code.  Once the Adjudicating Authority is satisfied that the application complies with the provisions of the Code and there is no disciplinary action against the interim resolution professional it will admit the application and the corporate insolvency resolution process is commencing on the date of admission of the application.

Withdrawal of application

Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides that the Adjudicating Authority may permit withdrawal of the application on a request made by the applicant before its admission.  As such after admission of the application withdrawal is not possible.

There is no provision in the Code or the corporate insolvency resolution process Rules in relation to permissibility of withdrawal post admission of a corporate insolvency resolution application.  The Government constituted an Insolvency Law Committee (to review the functioning and implementation of the Code.  The said Committee recommended that in order to cater to exceptional circumstances warranting withdrawal of an application for corporate insolvency resolution process post admission, it has been recommended to allow such exit provided the Committee of Creditors approves such action by 90% of voting share.

Section 12A of the IBC was brought in the statute book on the basis of the said Committee’s Report.   Section 12A was inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 which came into effect from 01.06.2018.  Section 12A provides that 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 90% voting share of the committee of creditors, in such manner as may be specified.  The percentage of approval of resolution plan is reduced to 66% from 75% but the withdrawal requires 90% vote of the Committee of Creditors.  Section 12A is more stringent provision has been made insofar as withdrawal of corporate insolvency resolution process is concerned.

Pursuant to the insertion of Section 12A in the Code, Regulation 30A of the 2016 Regulations came to be inserted vide notification dated 3rd July 2018. The same came to be substituted vide notification dated 25th July 2019.  The Regulation 30A(1), as amended provides that an application for withdrawal under section 12A may be made to the Adjudicating Authority-

1. before the constitution of the committee, by the applicant through the interim resolution professional;
2. after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be.

Where the application is made under (b)  after the issue of invitation for expression of interest under regulation 36A, the applicant shall state the reasons justifying withdrawal after issue of such invitation.

The application under sub-regulation (1) shall be made in Form FA of the Schedule accompanied by a bank guarantee-

• towards estimated expenses incurred on or by the interim resolution professional for purposes of regulation 33, till the date of filing of the application under clause (a) of sub-regulation (1); or
• towards estimated expenses incurred for purposes of clauses (aa), (ab), (c) and (d) of regulation 31, till the date of filing of the application under clause (b) of sub-regulation (1).

The Interim Resolution Professional shall file application for withdrawal within 30 days from the date of receipt of Form FA under 30A (1)(a)

Where an application for withdrawal is under Regulation 30A(1)(b) the committee shall consider the application, within seven days of its receipt.  The said application is to be approved by the committee with 90% voting share, the resolution professional shall submit such application along with the approval of the committee, to the Adjudicating Authority on behalf of the applicant, within three days of such approval.  The Adjudicating Authority will approve the application for withdrawal.  Once the application for withdrawal is approved the applicant shall deposit an amount, towards the actual expenses incurred till the date of approval by the Adjudicating Authority, as determined by the interim resolution professional or resolution professional, as the case may be, within three days of such approval, in the bank account of the corporate debtor failing which the bank guarantee shall be invoked, without prejudice to any other action permissible against the applicant under the Code.

Case law

In VALLAL RCK VERSUS M/S SIVA INDUSTRIES AND HOLDINGS LIMITED AND OTHERS - 2022 (6) TMI 173 - SUPREME COURT IDBI Bank Limited had filed an application under Section 7 of the IBC for initiation of Corporate Insolvency Resolution Process in respect of the Corporate Debtor. The Adjudicating Authority, vide its order dated 04.07.2019, admitted the said application. In the course of corporate insolvency resolution proceedings the Resolution Professional had presented a Resolution Plan before the Committee of Creditors, submitted by Royal Partners Investment Fund Limited. The said resolution plan has not been approved since only 60.90% of vote has been obtained for its approval.  Therefore the Resolution Professional filed an application before the Adjudicating Authority on 08.05.2020 seeking initiation of liquidation proceedings. 

The appellant is the promoter of corporate debtor.  The appellant filed an application before the Adjudicating Authority for settlement under section 60(5) of the Code.  In the said application he offered one time settlement.  The appellant, in his application, prayed the Adjudicating Authority to direct the Committee of Creditors to consider the terms of settlement plan as proposed by him.   The said settlement plan was discussed in various meetings of the Committee of Creditors.  The settlement plan received only 70.63% votes.   Subsequently, one of the Financial Creditors viz. International Assets Reconstruction Company Limited having voting share of 23.60%, decided to approve the said Settlement Plan and the settlement plan got 94.23% votes and approved by the Committee of Creditors.

Therefore the Resolution Professional filed an application before the Adjudicating Authority seeking withdrawal of the application corporate insolvency resolution process initiated against the corporate debtor in view of the approval of the settlement plan by the Committee of Creditors.  The Adjudicating Authority rejected the application for withdrawal and held that the Settlement Plan was not a settlement simpliciter under Section 12A of the Code but a ‘Business Restructuring Plan’.  The Adjudicating Authority in their another order initiated the liquidation process against the corporate debtor.

Aggrieved against both the orders of the Adjudicating Authority, the appellant filed an appeal before the National Company Law Appellate Tribunal.  The National Company Law Appellate Tribunal dismissed the appeal filed by the appellant.  The appellant filed appeal before the Supreme Court in the present appeal.  The Supreme Court granted stayed the impugned judgment.

The appellant submitted the following before the Supreme Court-

• It is more than well settled that the Adjudicating Authority or the Appellate Authority cannot sit in an appeal over the commercial wisdom of Committee of Creditors.
•  The Committee of Creditors  having accepted the Settlement Plan with the voting majority of 94.23%, the Adjudicating Authority and the learned National Company Law Appellate Tribunal have grossly erred in rejecting the Settlement Plan and withdrawal of corporate insolvency resolution process.
•  One of the main objects of the Code  is permitting the Corporate Debtor to continue as an ongoing concern and at the same time, paying the dues of the creditors to the maximum. 
• The impugned judgment passed by the learned National Company Law Appellate Tribunal  and the orders passed by the learned NCLT are totally contrary to the spirit behind the Code.

The issue taken by the Supreme Court for its consideration is as to whether the impugned judgment passed by the National Company Law Appellate Tribunal and the orders passed by the learned NCLT are totally contrary to the spirit behind the Code

The Supreme Court analyzed the provisions of the Code in relation to withdrawal.  The Supreme Court observed that the commercial wisdom of the Committee of Creditors has been given paramount status without any judicial intervention for ensuring completion of the stated processes within the timelines prescribed by the Code.  The Supreme Court further observed that when 90% and more of the creditors, in their wisdom after due deliberations, find that it will be in the interest of all the stakeholders to permit settlement and withdraw corporate insolvency resolution process,  the adjudicating authority or the appellate authority cannot sit in an appeal over the commercial wisdom of Committee of Creditors.  The interference would be warranted only when the adjudicating authority or the appellate authority finds the decision of the Committee of Creditors to be wholly capricious, arbitrary, irrational and de hors the provisions of the statute or the Rules.

In the present case, the Supreme Court observed that the decision of the Committee of Creditors  was taken after the members of the Committee of Creditors , had due deliberation to consider the pros and cons of the Settlement Plan and took a decision exercising their commercial wisdom.  In view of the Supreme Court neither the Adjudicating Authority  nor the National Company Law Appellate Tribunal were justified in not giving due weightage to the commercial wisdom of Committee of Creditors.  The need for judicial intervention or innovation from NCLT and NCLAT should be kept at its bare minimum and should not disturb the foundational principles of the Code. 

The Supreme Court allowed the appeal filed by the appellant.  The impugned judgment dated 28.01.2022 delivered by National Company Law Appellate Tribunal and the orders passed by the Adjudicating Authority are quashed and set aside.  The Supreme Court allowed the withdrawal of the application.