Navigating the Withdrawal of Insolvency Applications: Judicial Trends and Legislative Intent

The Insolvency and Bankruptcy Code, 2016 (“IBC”), has emerged as a cornerstone for resolving corporate insolvency in India. Among its provisions, the applicability and scope of Section 12A, which permits withdrawal of insolvency applications, has been the focal point of debate, especially concerning its applicability once liquidation proceedings commence.

Introduced in 2018 [1] , Section 12A allows withdrawal of insolvency applications during the corporate insolvency resolution process (“CIRP”), provided 90% of the committee of creditors (“COC”) agrees.

This provision enables parties to settle outside the insolvency framework, potentially avoiding liquidation and ensuring quicker resolutions.

Initially, National Company Law Tribunal and National Company Law Appellate Tribunal (collectively, “Adjudicating Authority”) were more inclined to permit such withdrawals even during the stage of liquidation, seeing them as an opportunity for business revival and survival of the Corporate Debtor.

In Navaneetha Krishnan v. Central Bank of India, the National Company Law Appellate Tribunal, (“NCLAT”) allowed the withdrawal of an application filed by the financial creditor after an order of liquidation of the Corporate Debtor was passed. The case emphasized that 90% COC approval could override the order of liquidation.

A similar view was held in S. Rajendra v. Tata Capital Financial Services Private Limited [2] and Swetha Vishwanath Shrike v. The Committee of Creditors [3] wherein it was held that promoters and shareholders could settle the debt under Section 12A even during liquidation.

Judicial Shift: Stricter Scrutiny

As the application of Section 12A evolved, the Adjudicating Authority began adopting a more cautious stance.

In Vallal RCK v. Siva Industries and Holdings Limited [4] , NCLAT held “The intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors”. It acknowledged that, the intent of IBC was to ensure fair distribution among all stakeholders.

In Narayan Maheshwari v. Kavitha Surana [5] , NCLAT observed that, allowing such withdrawals during liquidation would encourage promoters to wait until liquidation and then settle with creditors at a discounted price, thus undermining the objectives of the IBC. The Insolvency and Bankruptcy Board of India has so far not brought out the regulations for withdrawal of application during liquidation proceedings and the Parliament has not modified the existing structure of IBC. [6]

Section 230: An Emerging Alternative

Once a liquidation order had been passed, there was no provision under the IBC for withdrawal except through a scheme under Section 230 of the Companies Act, 2013 (“Section 230”), as affirmed by various judicial pronouncements [7] .

Section 230 allows a liquidator (in the event the company is being wound up) to propose a scheme of compromise or arrangement with approval of committee of creditors to ascertain if the said scheme is viable, subject to consent of the Adjudicating Authority. The Shivram case [8] discussed the applicability of Section 230 during liquidation in detail, suggesting that it could be a mechanism for revival even after liquidation had commenced.

Before selling the assets piecemeal, the liquidator must explore options under Section 230 which permits compromise or arrangement between the company and its creditors or members to revive the business [9] .

However, the Supreme Court [10] held that “it is important to remember that the explicit recognition of the schemes under Section 230 into the liquidation process under the IBC was through judicial intervention of the NCLAT in Y. Shivram Case. Since the efficacy of this arrangement is not challenged before us in this case, we cannot comment on its merits. However, we offer caution from judicially interfering with the framework as IBC was introduced after careful consideration and is a
robust legislation so intervention should be kept to the bare minimum.”

Furthermore, the Insolvency Law Committee [11] has expressed reservations about using Section 230 in insolvency matters, stating that its application might dilute the focus of the IBC on timely resolution and the orderly distribution of assets. The Committee’s concern lies in the fact that Section 230 was not originally designed to operate within the IBC framework, potentially leading to conflicting outcomes.

Despite this, the absence of a challenge to rulings endorsing Section 230 has created a legal grey area.

Conclusion

The evolution of judicial decisions surrounding Section 12A of the IBC highlights the balance between enabling efficient resolution and maintaining the integrity of the insolvency process. The introduction of Section 230 as an alternative provides a potential pathway for restructuring during liquidation, but its application remains uncertain due to concerns about diluting the IBC’s focus. As judicial trends evolve, the need for legislative clarity becomes increasingly important.

References:

[1] The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.
[2] S. Rajendra v. Tata Capital Financial Services Private Limited IA(IBC)/514(CHE)/2022 vide order dated 30.06. 2022.
[3] Swetha Vishwanath Shrike v. The Committee of Creditors 2019 SCC OnLine NCLAT 1049.
[4] Vallal RCK v. Siva Industries and Holdings Limited (2022) 9 SCC 803.
[5] Narayan Maheshwari v. Kavitha Surana 2023 SCC OnLine NCLT 354.
[6] Small Industries Development Bank of India Vs Tirupur Plaza Hotel Pvt. Ltd vide order dated 30.05.2024.
[7] Jayashree Mohan v. Pathukasahasram Raghunathan Raman, 2021 SCC OnLine NCLT 33165, Rani Precast Pvt. Ltd. IA(IBC)/320(CHE)/2021, Hemanth Meka Rao v. Asset Reconstruction Company (India) Ltd., 2019 SCC OnLine NCLAT 658.
[8] Y. Shivram Prasad v. S. Dhanapal &Ors. Company Appeal (AT) (Insolvency) No. 224 of 2018.
[9] S.C. Sekaran v. Amit Gupta &Ors. Company Appeal (AT) (Insolvency) Nos. 495 & 496 of 2018.
[10] Arun Kumar Jagatramka v. Jindal Steel and Power Limited, MANU/SC/0182/2021.
[11] Report of the Insolvency Law Committee dated February 2020 issued by Ministry of Corporate
Affairs, Government of India.