Withdrawal of CIRP — Oscillating between Value Maximisation and Plan Approval

The Corporate Insolvency Resolution Process (CIRP) as elaborated under the provisions of the Insolvency and Bankruptcy Code, 2016¹ (Code) facilitates the swift reorganisation and restructuring of a corporate debtor for its revival and at the same time to ensure maximisation of the value of assets.²

In recent trends however, corporate debtors undergoing CIRP, and their creditors, are increasingly opting for settlements, as an alternative to completing the insolvency proceedings. The probable rationale for opting for settlements mid-way is to facilitate faster recovery of dues as opposed to undergoing the rigmarole of prolonged proceedings. Such settlements also allow the corporate debtors an opportunity to reorganise their financial structure and avoid liquidation.

While there is an emerging pattern of withdrawing CIRP, the interpretation of law governing such withdrawal remains divergent, often posing considerable challenges regarding the stage and manner of such withdrawal. Against this brief backdrop, the present article gives a brief overview of the law relating to the withdrawal of CIRP.

Provisions governing withdrawal of CIRP

Prior to 2018, only Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, provided for withdrawal of an insolvency application before its admission. However, there was no provision in the Code on the aspect of whether an application after admission can be withdrawn or settled by the corporate debtor.

This issue arose for the first time before National Company Law Appellate Tribunal (NCLAT) in Mother Pride Dairy India (P) Ltd. v. Portrait Advertising & Mktg. (P) Ltd.³ wherein the NCLAT while interpreting the aforementioned Rule 8 held: “… once an application is admitted, it cannot be withdrawn even by the operational creditor, as other creditors are entitled to raise claim pursuant to public announcement under Section 15 read with Section 18 of the Insolvency and Bankruptcy Code, 2016.” However, the Supreme Court set aside this decision and accepted the settlement between the applicant creditor and the corporate debtor by exercising its plenary power under Article 142 of the Constitution of India⁴.⁵

Subsequently, similar issues were brought before the Supreme Court, seeking the exercise of its inherent powers under Article 142 of the Constitution. Identifying the lacunae in the Code, the Supreme Court directed the competent authority to amend the legislation.⁶

As a result, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 was promulgated on 6-6-2018, inserting Section 12-A in the Code:

12-A. Withdrawal of application admitted under Sections 7, 9 or Section 10.—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.

To supplement Section 12-A of the Code, Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 was inserted with effect from 4-7-2018. It provides:

30-A. Withdrawal of application.—(1) An application for withdrawal under Section 12-A may be made to the adjudicating authority:

(a) before the constitution of the committee, by the applicant through the interim resolution professional;

(b) after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be:

Provided that where the application is made under clause (b) after the issue of invitation for expression of interest under Regulation 36-A, the applicant shall state the reasons justifying withdrawal after issue of such invitation.

Stages of withdrawal of CIRP

An application for withdrawal of insolvency application can be made at the following stages:

(i) Before the constitution of the committee

Where an application under Section 12-A of the Code is made for the withdrawal before the constitution of Committee of Creditors (CoC), the interim resolution professional (IRP) must present it directly before the adjudicating authority (AA) for approval. It is a settled position of law that where the CoC has not yet been constituted, National Company Law Tribunal (NCLT), functioning as the adjudicating authority, may be moved directly for withdrawal which, may use its inherent powers under Rule 11 of the NCLT Rules, 2016, may allow or disallow the application for withdrawal or settlement after hearing the parties and considering the relevant factors on the facts of each case.⁷

(ii) After the constitution of the committee

Post the constitution of CoC, an application for withdrawal must be made through the interim resolution professional or resolution professional, as the case may be, which shall be approved by ninety per cent (90%) voting share of the CoC.

In Vallal RCK v. Siva Industries and Holdings Ltd.⁸, the Supreme Court observed by that the requirements for withdrawal under Section 12-A are more stringent than those for approving a resolution plan under Section 30(4). The Court emphasised that when 90% or more of the creditors, in their wisdom after due deliberations, determine that permitting settlement and withdrawing CIRP is in the interest of all stakeholders, the adjudicating authority or appellate authority cannot sit in an appeal over the commercial wisdom of the CoC. Interference is warranted only when the decision of the CoC is capricious, arbitrary, irrational, or dehors the provisions of the statute or the rules.

Can CIRP be withdrawn after the approval of resolution plan by CoC?

A question however arises as to whether the withdrawal application can be made once a resolution plan has been approved by the CoC. There are various judicial precedents on this aspect and the position is somewhat in a flux.

In Jindal Stainless Ltd. v. Shailendra Ajmera⁹, the NCLAT while emphasising the paramount importance of the CoC’s commercial wisdom and the strict timeline prescribed by the Code, it was observed that:

26. It is well-settled that the timeline in the IBC has its salutary value and it was the wisdom of the CoC which decided to vote on the resolution plan after completion of challenge process and not to proceed to take any further negotiation or further modification of the plan, that decision ought not to have been interfered with.

In Ebix Singapore (P) Ltd. v. Educomp Solutions Ltd. (CoC)¹⁰, the Supreme Court held that the binding effect of the resolution plan has the consequence of preventing the CoC or the resolution applicant to renege from its terms after the plan has been approved by the CoC through a voting mechanism. This view has been affirmed by the Supreme Court in GLAS Trust Co. LLC v. Byju Raveendran¹¹.

Similarly, in Hem Singh Bharana v. Pawan Doot Estate (P) Ltd.¹², the NCLAT observed that once CoC has approved a resolution plan, it is not permissible to consider a withdrawal application under Section 12-A. Approval by the CoC of a resolution plan must be in accordance with its commercial wisdom and when CoC approves a plan, then the resolution applicant is prohibited to modify or withdraw from the plan, same embargo also applies on CoC from changing its stand.

Furthermore, in Union Bank of India v. Kapil Wadhawan¹³, it was observed by the NCLAT that “there was no scope for negotiations between the parties once the CoC has approved the resolution plan”. However, it is pertinent to mention that the aforesaid NCLAT judgment¹⁴ has been challenged before the Supreme Court and has stayed the operation of the judgment.

Divergent judicial interpretation

While courts have generally held that once a resolution plan is approved by CoC, an application under Section 12-A cannot be entertained, there have been conflicting judicial precedents on this issue, as is evinced from the following.

In Satyanarayan Malu v. SBM Paper Mills Ltd.¹⁵, NCLT Mumbai permitted withdrawal of CIRP at the stage when the plan was pending for the approval before the NCLT, after acceptance by CoC. The Bench took into account the offer of one-time settlement made by the corporate debtor to the financial creditor, which was more economical than the resolution plan.

Similarly, in Prudent Arc Ltd. v. Ravi Shankar Devarakonda¹⁶, it was submitted that CoC is well within its powers under the IBC to conduct Swiss Challenge mechanism even at a stage when the resolution plans are placed for voting. NCLAT highlighted that the decision to conduct a Swiss Challenge was approved by the CoC with a majority of 99.18% with the view to maximise the value of the corporate debtor and hence was not in violation of Regulation 39(1-A) of the CIRP Regulations or any other provisions of the Code.

Furthermore, in Shaji Purushothaman v. Union Bank of India¹⁷, where NCLAT observed that if an application is filed under Section 12-A, the CoC may decide whether the proposal given by the appellant for settlement is better than the resolution plan as approved by the Committee of Creditors. This interpretation suggests that a withdrawal application may still be considered even after a resolution plan has been approved, introducing an element of uncertainty regarding the finality of CoC approved resolution plans.

Pertinently, in Axis Bank Ltd. v. Lanco Amarkantak Power Ltd.¹⁸, the NCLT, Hyderabad allowed the CoC to consider a revised financial offer even though the resolution plan of the successful resolution applicant was pending approval by the adjudicating authority. This raises a significant question whether the approach adopted by NCLT aligns with the law laid down in Ebix Singapore case¹⁹. Notably, this order has been challenged before the NCLAT and its outcome may provide further clarity on this aspect.

The position, therefore, which emerges is that while the judgments in Ebix Singapore case²⁰ and Hem Singh Bharana case²¹ hold that once a resolution plan is approved by CoC, an application under Section 12-A cannot be entertained, the judgment in Lanco case²², Satyanarayan Malu case²³ and others provide a conflicting view. Further, as noted above, the Supreme Court has stayed the operation of the judgment in Kapil Wadhawan case²⁴. Even though the challenge in Hem Singh Bharana case²⁵ was rejected by the Supreme Court, the observation that in that case, appellant could not have invoked Section 12-A in the absence of requisite concurrence/consent of 90% creditors complicates the analysis. Did the Supreme Court mean that in a situation where such 90% concurrence/consent is available, Section 12-A can be maintained? is something not entirely clear. These aspects will only become clear once the law in Kapil Wadhawan case²⁶ is settled.

Be that as it may, for the present, the following position emerges from a conjoint reading of the judgments in Ebix Singapore case²⁷ and Hem Singh Bharana case²⁸:

(i) Post approval of the resolution plan by CoC, an application under Section 12-A of the Code cannot be entertained. Even otherwise, the resolution plan even prior to the approval of the AA is binding inter se the CoC and the successful resolution applicant.

(ii) Approval by the CoC of a resolution plan has to be in accordance with its commercial wisdom and when CoC approves a plan, then the resolution applicant is prohibited to modify or withdraw from the plan, same embargo also applies on CoC from changing its stand.

(iii) After approval by the CoC of a resolution plan, CoC itself is bound by its decision and cannot be allowed to go back from its decision and pass any other resolution.

Withdrawal at the stage of liquidation

While the legal position pertaining to the withdrawal of CIRP after the approval of resolution plan by the CoC remains uncertain, courts have settled the law pertaining to the withdrawal at the liquidation stage.

In V. Navaneetha Krishnan v. Central Bank of India²⁹, the NCLAT allowed a withdrawal application under Section 12-A even at the liquidation stage. The Tribunal observed that if any person, not barred under Section 29-A of the Code, satisfies the demand of CoC, giving offer, which is approved by the CoC with statutorily required 90% voting share, the offer can be accepted. In such a scenario, the order of liquidation passed by the AA will not come in the way of AA to pass appropriate order.

Similarly, in Vallal RCK case³⁰, wherein no resolution plan was received, the AA directed for the liquidation of the corporate debtor. Subsequently, a settlement plan was submitted by the promoter of the corporate debtor, which was duly approved by the CoC by 90% voting share. In view of the same, the RP filed an application before the NCLT seeking withdrawal of the CIRP. The AA rejected the application against which an appeal was filed, that too, was dismissed and the matter was taken before the Supreme Court.

The Supreme Court set aside the order passed by the AA and allowed the application filed by the RP for withdrawal. It was observed that the Court has consistently held that the “commercial wisdom of the CoC has been given paramount status without any judicial intervention for ensuring completion of the stated processes within the timelines prescribed by the IBC”.

The same view was affirmed by the NCLAT in Hem Singh Bharana case³¹ wherein it was observed that in event no resolution plan is approved and an application for liquidation is pending, Section 12-A can be resorted to.

Future outlook and unresolved questions

While CIRP is aimed at value maximisation of the corporate debtor to enable debtors to continue as a going concern, withdrawal of CIRP on grounds of settlement under Section 12-A, must not come at the cost of undermining the sanctity of the Code and the timelines set out therein.

The Code was enacted to ensure a time-bound resolution of corporate debtors. However, unwarranted delays caused by repeated reconsideration of settlement proposals risk diluting the very purpose and object that the Code aims to achieve.

Judicial precedents have sought to balance these interests by recognising and giving paramount importance to the commercial wisdom of the CoC and simultaneously ensuring that CIRP proceeds in a structured and a time-bound manner. However, divergent judicial interpretation on the issue leaves room for the law to further evolve and crystallise.