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Withdrawal of CIRP before Constitution of CoC

April 13, 2022

By Nihit Nagpal and Anuj Jhawar

The Insolvency and Bankruptcy Code, 2016 empowers Financial Creditor, Operational Creditors, and Corporate Debtor to initiate the Corporate Insolvency Resolution Process (CIRP) upon a default being committed by a Corporate Debtor[1]. CIRP involves the setting up of a Committee of Creditors (CoC) and approval of a resolution plan to restructure the Corporate Debtor, or the liquidation of the Corporate Debtor. Often, Creditors and Corporate Debtor prefer to reach amicable settlements instead of going through with the entire CIRP process. This can achieve a better outcome for the creditor than the resolution plan would. Settlements also ensure that the creditor gets paid in a timely manner, before the Corporate Debtor’s assets deteriorate to a great extent, and they also protect Corporate Debtor from the risk of liquidation.

Section 12A of the Insolvency and Bankruptcy Code, 2016 allows the applicant for CIRP to approach the Adjudicating Authority for withdrawing the application, subject to obtaining approval from 90% voting share of the CoC[2]. The provision must be read with Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Process for Corporate Persons) Regulations, 2016, which prescribe separate processes for withdrawal of CIRP before and after the CoC has been constituted[3]. Approval of the CoC is not necessary to apply to the Adjudicating Authority under Section 12A of the Code if the CoC has not been constituted[4]. The position of law on this point was further clarified by the Hon’ble National Company Law Appellate Tribunal (NCLAT) in its recent judgement dated January 07, 2022 in M/S Ashish Ispat Pvt. Ltd. v Primuss Pipes and Tubes Ltd[5].

M/S Ashish Ispat Pvt. Ltd. v Primuss Pipes and Tubes Ltd- Brief facts

The Appellant, M/S Ashish Ispat Pvt Ltd., was an Operational Creditor of the Respondent Corporate Debtor, Primuss Pipes and Tubes Ltd. The Appellant filed an application for initiating CIRP against the Respondent under Section 9 of the Insolvency and Bankruptcy Code, 2016. The Appellant and Respondent reached an amicable settlement and the Appellant, through the Interim Resolution Professional (IRP) filed an application under Section 12A to withdraw the Section 9 application. The Section 12A application was filed by the IRP with the NCLT, and the CoC was constituted 2 days later. The CoC consisted of two Financial Creditor, and one of them did not consent to the withdrawal of CIRP. The dissenting creditor had 17% voting shares, therefore, the NCLT rejected the application for withdrawal of CIRP. The Operational Creditor then filed an appeal before the NCLAT.

NCLAT’S Judgment- CoC’s approval not required for filing a withdrawal of CIRP

The NCLAT allowed the appeal, setting aside the order of the NCLT. The NCLAT first discussed the language of Regulation 30A, which provides for separate procedures for filing withdrawal applications, before and after the constitution of the CoC. According to Regulation 30A(3), if an application is filed pre-constitution, it is submitted to the Adjudicating Authority by the IRP. As per Regulation 30A(4), if an application is filed post-constitution, it must first be considered by the CoC. The NCLAT also referred to Swiss Ribbons v Union of India, where the Hon’ble Supreme Court held that before the CoC is constituted, parties can directly approach the NCLT with their withdrawal applications[6]. The Appellate Tribunal also relied on other judgements of the Hon’ble Supreme Court and the NCLAT where pre-constitution withdrawal applications had been allowed without the consent of the CoC[7]. Keeping in mind the facts of the case, precedent, and the statutory scheme of Regulation 30A, the NCLAT decided that the approval of the CoC was not required for filing a withdrawal application in this case.

Conclusion

The question of seeking CoC’s approval for filing a withdrawal application under Section 12A of the Insolvency and Bankruptcy Code, 2016 arises only if the CoC is in existence on the date the application is filed. This is clear from the language of Regulation 30A of the IBBI regulations, 2016, and has been the unequivocal stand of the Hon’ble Supreme Court and the NCLAT in a series of preceding decisions.

[1] The Insolvency and Bankruptcy Code, 2016, No. 31 of 2016, §§7, 9, & 10.

[2] The Insolvency and Bankruptcy Code, 2016, No. 31 of 2016, §12A.

[3] Insolvency and Bankruptcy Board of India, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, IBBI/2016-17/GN/REG004 (Notified on November 30, 2016), Regulation 30A.

[4] Insolvency and Bankruptcy Board of India, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, IBBI/2016-17/GN/REG004 (Notified on November 30, 2016), Regulation 30A.

[5] Comp. App. (AT) (Ins.) No. 892 of 2021.

[6] (2019) 4 SCC 17

[7] Kamal K Singh v Dinesh Gupta, Civil Appeal No. 4933 of 2021; Sunil Tandon v Manoj Kumar Anand, Comp. App. (AT) (INS) Np. 283 of 2019; Anuj Tejpal v Rakesh Yadav, Comp. App. (AT) (INS) No. 283 of 2019.

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