Withdrawal of CIRP may save corporate debtor

By Shreya Sircar and Sanjukta Roy, Bharucha & Partners

The object of the Insolvency and Bankruptcy Code, 2016 (IBC) is to maximise the asset value of the corporate debtor while protecting and balancing the interests of all stakeholders. The IBC discourages individual actions for enforcement and endeavours to resolve the debts of the company to the benefit of all creditors. To further these objectives, Section 12A was introduced by the IBC (Second Amendment) Act, 2018 permitting withdrawal of an application to invoke a corporate insolvency resolution procedure (CIRP) previously admitted under Sections 7, 9 or 10 of the IBC.

Withdrawal of CIRP may save corporate debtor Shreya Sircar
Shreya Sircar
Bharucha & Partners

A withdrawal application may be filed either with the approval of 90% of the voting rights of the committee of creditors (CoC), or, where the CoC has not been constituted, by applying to the National Company Law Tribunal (NCLT) which may, in its discretion, allow or reject the application. The high threshold of obtaining approval of 90% of the voting rights of the CoC militates against withdrawals that would allow the recovery of individual debts to the exclusion of other creditors. All financial creditors may then participate and collectively assess the viability of the negotiated resolution proposal. Where withdrawal applications are filed prior to the constitution of the CoC, the NCLT does not have the benefit of the CoC’s commercial wisdom. In making its decision, the NCLT should ensure that the interests of all stakeholders are taken into account. To ensure that this is done, the NCLT tends to reject withdrawal applications where it is not clear that the interests of all stakeholders have been taken into consideration. (See Dinesh Gupta v Rolta India Ltd).

Section 12A may enable creditors to recover higher amounts than they usually would in a CIRP, where they are often forced to take massive haircuts or quietly accept the proportion available in the waterfall in the event of liquidation. The section appears to indicate a transition from a creditor-centric approach, seeking to maximise or recover individual debts, to a debtor-in-control process. It appears to grant an opportunity to the promoters to regain control of the affairs of the corporate debtor.

Section 12A is not without its share of critics. The possible misuse of the section by those intentionally shut out of the resolution process under other provisions such as section 29A, which prohibits promoters and related parties from acting as resolution applicants, merits consideration. A settlement arranged between the promoters with specific creditors is similar to a resolution plan proposed by a related party, which is barred under section 29A, thereby allowing backdoor entry to the persons who led the company into default.

A withdrawal application is likely to be opposed by other financial creditors or any other creditor whose debts have not been settled under the resolution agreement. While it is correct that the independent right to pursue claims and seek initiation of a CIRP by the other creditors with whom the corporate debtor has not settled is left intact, this may result in a multiplicity of proceedings, a possibility which ought to be avoided.

A settlement arranged between the corporate debtor and specific creditors may even be a preferential transaction, forbidden by section 53 of the IBC, and contrary to the interests of the rest of the creditors and stakeholders. As an example, an application filed by an operational creditor seeking an initiation of CIRP may be admitted by the NCLT. Thereafter, the corporate debtor settles the debts of that operational creditor, who subsequently files a withdrawal application under section 12A before the setting up of the CoC. If this were allowed by the NCLT, it would put the operational creditor in a superior position to the financial creditors, something outside the framework envisaged by the IBC.

Notwithstanding the problems, the withdrawal of a CIRP under section 12A remains a viable option for both the creditors, who may agree to a proposal from the corporate debtor if the settlement amount is greater than the value they expect to receive upon the conclusion of a CIRP or in liquidation proceedings, and also the corporate debtor, which is granted the chance to regain control over its business and keep the company going.

Shreya Sircar is a partner and Sanjukta Roy is an associate at Bharucha & Partners.

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New Delhi – 110 019. India

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