SECTION 12A OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016 IS NOT VIOLATIVE OF ARTICLE 14 OF CONSTITUTION OF INDIA

[Mr. M. GOVINDARAJAN]

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 made by-

• A financial creditor under Rule 4;
• An operational creditor under Rule 6; or
• A Corporate Applicant under Rule 7

for initiation of corporate insolvency resolution process (‘CIRP’ for short), on a request made by the application before the admission of the application for initiation of corporate insolvency resolution process.

Insolvency Law Committee Report

The Government appointed Insolvency Law Committee to analyze the provisions of the then IBC Code and the developments that are to be made in this process.  The Committee submitted its report during March 28.  The Committee also discussed about the withdrawal of application under the Code.  The Committee observed that-

• Under Rule 8 the Adjudicating Authority may permit withdrwal of the application on a request made by the applicant before its admission.
• There is no provision in the Code or Rules in relation to permissibility of withdrawal of post admission of a CIRP application.
• There have been instances where on account of settlement between the applicant creditor and the corporate debtor, judicial permission of withdrawal of CIRP was allowed in the following cases-

• Lokhadwala Kataria Constructions P Limited v. Ninus Finance & Investment Manager LLP – Civil Appeal No. 9279 of 2017; 2017 (7) TMI 1274 - SUPREME COURT
• Mothers Pride Diary India (P) Limited v. Portrait Advertisement & Marketing (P) Limited – Civil Appeal No. 9286/2017; 2017 (7) TMI 1275 - SUPREME COURT
• Uttara Foods and Feeds (P) Limited v. Mon Pharacem – Civil Appeal No. 18520/2017 [2017 (11) TMI 1763 - SUPREME COURT OF INDIA]

• The design of the code is based on ensuring that all key stakeholders will participate to collectively assess viability.
• The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process.
• The liabilities of all creditors who are not the part of the negotiation process must also be met in any negotiated solution.

Thus it is agreed that once the CIRP is initiated, it is no longer a proceeding only between the applicant creditor and the corporate debtor but is envisaged to be a proceeding involving all creditors of the debtor.  The intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors.

On a review of the multiple Adjudicating Authority and Appellate Authority judgments, the consistent pattern that emerged was that a settlement may be reached amongst all creditors and debtors, for the purpose of a withdrawal to be granted and not onlyt he applicant creditor and the debtor.  On the basis read with the intent of the Code, the Committee unanimously agreed that the relevant rules made by amended to provide for withdrawal post admission if the Committee of Creditor approves of such action by a voting share of 90%.

Section 12A

Section 12A was inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018 with retrospective effect from 06.06.2018. 

Section 12A provides that the Adjudicating Authority may allow the withdrawal of the 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.

Regulation 30A

For the purpose of Section 12A, Regulation 30A was inserted vide Notification No.IBBI/2018-19/GN/REG031, dated 03.07.2018 in Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Process) Regulations, 2016.

Regulation 30A provides that –

• An application for withdrawal under section 12A shall be submitted to the interim resolution professional or the resolution professional, as the case may be, in Form FA of the Schedule before issue of invitation for expression of interest under regulation 36A.
• The application shall be accompanied by a bank guarantee towards estimated cost incurred for the purposes of regulation 31(c) and (d) till the date of application.
• The Committee shall consider the application within 7 days of its constitution or 7 days of receipt of the application, whichever is later.
• Where the application is approved by the committee with 90% of the voting share, the resolution professional, shall submit the application to the Adjudicating Authority on behalf of the applicant, within 3 days of such approval.

The Supreme Court in ‘Brilliant Alloys (P) Limited v. S. Rajagopal and others’ [ 2019 (3) TMI 1016 - SUPREME COURT ] – SLP (Civil) No. 31557/2018, has stated that regulation 30A(1) is not mandatory but is directory for the simple reason that on the facts of a given case an application for withdrawal may be allowed in exception cases even after issue of invitation of expression of interest under Regulation 36A.

Section 12A- violative of Article 14?

In ‘Swiss Ribbons Private Limited and another v. Union of India and others’ – 2019 (1) TMI 1508 (SC), the petitioners assailed the constitutional validity of certain provisions of the Code including section 12A.    The petitioners contended that Section 12A of the Code is contrary to the directions of this Court in its order in ‘Uttara Foods and Feeds Pvt. Ltd. v. Mona Pharmachem’, Civil Appeal No. 18520/2017 [decided on 13.11.2017],  [2017 (11) TMI 1763 - SUPREME COURT OF INDIA] and that instead of following the said order, Section 12A now derails the settlement process by requiring the approval of at least ninety per cent of the voting share of the committee of creditors. Unbridled and uncanalized power is given to the committee of creditors to reject legitimate settlements entered into between creditors and the corporate debtors. Shri Rohatgi then argued that the resolution professional, having been given powers of adjudication under the Code and Regulations, grant of adjudicatory power to a non-judicial authority is violative of basic aspects of dispensation of justice and access to justice.

The Supreme Court observed that it is clear tht once the Code gets triggered by admission of a creditor’s petition under section 7 to 9 the proceeding that is before the Adjudicating Authority, being a collective proceeding, is a proceeding in rem.  Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim.  A question arises as to what is to happen before a Committee of Creditors is constituted.  The Supreme Court made it clear that at any stage where the committee of creditors is not yet constituted a party can approach the Adjudicating Authority directly, which the Adjudicating Authority may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016 allow or disallow an application for withdrawal or settlement.  This will be declared after hearing all the concerned parties and considering all relevant factors on the facts of each case.

The Supreme Court held that the main thrust against the provision of Section 12A is the fact that 90% of the Committee of Creditors has to allow withdrawal.  This high threshold has been explained in the Insolvency Law Committee Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into.  This explains why 90%, which is substantially all the financial creditors have to grant their approval to an individual withdrawal or settlement.  The Supreme Court further held that the figure of 90% in the absence of anything further to show that it is arbitrary, must pertain to the domain of the legislative policy, which has been explained by the Insolvency Law Committee Report.  It is also 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 Adjudicating Authority and the Appellate Tribunal can always set aside such decision under section 60 of the Cde.

The Supreme Court, for all these reasons, was of the view that section 12A of the Code is not violative of Article 14 of the Constitution.