Initially, the Insolvency and Bankruptcy Code, 2016 (“Code”) did not contain any express provision giving powers to the National Company Law Tribunal (“NCLT”) or the National Company Law Appellate Tribunal (“NCLAT”) to allow parties to withdraw insolvency petitions which had been admitted. In one case, the NCLAT refused to exercise its inherent powers under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 (“NCLAT Rules”) to allow a compromise by the parties, after admission of a petition. The Supreme Court of India, whilst accepting that the NCLAT did not have the powers to allow withdrawal of the petition after admission, nevertheless, exercised its own special powers under Article 142 of the Constitution of India[1] and allowed parties to settle the matter.

In order to enable withdrawal of insolvency petitions by way of settlement, an amendment was brought into effect from June 6, 2018 by inserting Section 12A in the Code.[2] Section 12A provides for withdrawal of admitted petitions and 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 per cent voting share of the committee of creditors, in such manner as may be specified.” While the amendment sought to resolve one issue, it gave rise to additional questions, such as the time period up to which such settlement can be permitted and who can make an application for settlement.

From the language of Section 12A it is clear that there is no stipulation for a timeline within which an application for settlement must be preferred. This was later clarified by way of a press release[3] and by insertion of Regulation 30A in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016[4] which permits withdrawal “before issue of invitation for expression of interest [EOI] under regulation 36A.” However, the above provisions were considered by the Supreme Court in Brilliant Alloys Private Limited v. Mr. S. Rajagopal & Ors.[5] which held that Regulation 30A “can only be considered directory depending on the facts of each case”. The above ruling was affirmed by the Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors[6], holding that “Regulation 30A is not mandatory but directory” and “an application for withdrawal may be allowed in exceptional cases even after issue of invitation for expression of interest.” Even before the above clarification by the Supreme Court, the NCLT had also allowed withdrawal after acceptance of the resolution plan by the Committee of Creditors (“CoC”), subject to imposition of cost.[7] Similarly, NCLAT had held that even an order of liquidation passed in respect of a company will not come in the way of a decision by NCLT to allow an application under Section 12A, provided that approval of 90% of the CoC is obtained.[8] In Swiss Ribbons, the Supreme Court also clarified that the NCLT is empowered to allow applications for settlement even before the constitution of CoC, by exercise of its inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016. Such discretionary inherent powers can be exercised also by the NCLAT under the NCLAT Rules, depending of the facts of the case and after providing an opportunity of hearing to all concerned parties.[9]

As regards the persons who are entitled to file a withdrawal petition, the NCLAT has held that “the application for withdrawal can be filed only by the applicant, who initially filed application under Section 7 or 9.”[10] In another ruling, expanding the scope of Section 12A, the NCLAT held that “any person not barred under Section 29A”, i.e. any person who is not barred from being a resolution applicant, can file such petitions.[11] However, in a subsequent ruling, the NCLAT after relying upon the Supreme Court judgment in Swiss Ribbons has held to the contrary that Section 29A is not applicable while considering an application under Section 12A and that promoters/ shareholders would be entitled to settle the matter.[12]

Based on the above cases, a view may be taken that defaulting promoters, who are otherwise ineligible under Section 29A to be a resolution applicant, can regain control of the company in the case of a settlement. The NCLAT has also held that once the Section 12A application has been approved by 90% of the CoC, it is not open for the NCLT to reject the same. The effect of this is that the term “The Adjudicating Authority may” has been interpreted as “shall” by the NCLAT.[13] Section 12A has been positively and liberally interpreted to allow settlements in most cases where the requisite consent of the CoC has been obtained.

Recently, the Supreme Court rejected an interlocutory application for withdrawal of a resolution plan filed before it by a successful resolution applicant on the ground that the exit route under Section 12A is not available to a successful resolution applicant. The court held that the procedure envisaged applies only to the applicants invoking Sections 7, 9 and 10.[14] The court however recorded that it was not going into the question to as to whether a successful resolution applicant altogether forfeits its right to withdraw from the process.

Authors:

Nafisa Khandparkar, Senior Associate
Harshit Jaiswal, Associate

Footnotes:

[1] Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP, 2017 SCC OnLine SC 1715; See also Uttara Foods and Feeds Private Limited v. Mona Pharmachem, 2017 SCC OnLine SC 1404
[2] This was by way of the Insolvency and Bankruptcy (Second Amendment) Act, 2018
[3] Press release of the Ministry of Corporate Affairs at: https://ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jun/President%20Approves%20Promulgation%20of%20the%20Insolvency%20and%20Bankruptcy%20Code%20(Amendment)%20Ordinance,%202018__2018-06-06%2021:10:49.pdf
[4] w.e.f. July 3, 2018
[5] 2018 SCC OnLine SC 3154
[6] (2019) 4 SCC 17
[7] In the matter of  SBM Paper Mills Ltd, order of NCLT, Mumbai delivered on December 2, 2018 in M.A. 1396/2018 ,827/2018, 1142/2018, & 828/2018 in C.P. (IB)-1362(MB)/2017
[8] V. Navaneetha Krishnan v. Central Bank of India, 2018 SCC OnLine NCLAT 904. Please note that this order does not consider Regulation 30A and its interplay with Section 12A.
[9] Gopal Krishna Bathla v. Crown Realtech Pvt. Ltd. & Anr., Company Appeal (AT) (Insolvency) No. 28 of 2020, Order dated May 22, 2020; Girish Agarwal v. Lavis Signature Panel (P) Ltd., 2019 SCC OnLine NCLAT 490
[10] Frances John Kattukaran v. Federal Bank, Company Appeal (AT) (Insolvency) No. 242 of 2018, Order dated November 13, 2018
[11] V. Navaneetha Krishnan v. Central Bank of India, 2018 SCC OnLine NCLAT 904
[12] Shweta Vishwanah Shirke & Ors. v. The Committee of Creditors & Anr., NCLAT order dated August 28, 2019 in Company Appeal (AT) (Insolvency) No. 601 of 2019
[13] Shweta Vishwanah Shirke & Ors. v. The Committee of Creditors & Anr., NCLAT order dated August 28, 2019 in Company Appeal (AT) (Insolvency) No. 601 of 2019
[14] Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh & Ors., 2020 SCC OnLine 67