Withdrawal of Corporate Insolvency Resolution Process Pursuant to Settlement under Section 12A of the Insolvency and Bankruptcy Code, 2016

Introduction

The Insolvency and Bankruptcy Code, 2016 represents a transformative legislative initiative in India’s corporate restructuring landscape. Among its various provisions, Section 12A stands out as a critical mechanism that allows parties to withdraw admitted insolvency applications through settlement, balancing the objectives of debt recovery with corporate revival. This provision was introduced through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, with retrospective effect from June 6, 2018, specifically to address the gap where parties had no formal mechanism for out-of-court settlements after the initiation of Corporate Insolvency Resolution Process.

The legislative intent behind introducing Section 12A stemmed from recommendations made by the Insolvency Law Committee Report submitted in March 2018[1]. The Committee recognized that settlements between corporate debtors and creditors could serve the best interests of all stakeholders by avoiding lengthy insolvency proceedings and preserving the corporate debtor as a going concern. This article examines the regulatory framework governing withdrawal of CIRP applications under Section 12A, analyzes significant judicial pronouncements that have shaped its interpretation, and explores the practical challenges and strategic considerations surrounding this provision.

Legal Framework Governing Withdrawal of CIRP Applications

Section 12A of the Insolvency and Bankruptcy Code, 2016

Section 12A provides the statutory foundation for withdrawal of insolvency applications. The provision states that the Adjudicating Authority may allow the withdrawal of an application admitted under Section 7, Section 9, or Section 10, on an application made by the applicant with the approval of ninety percent voting share of the Committee of Creditors, in such manner as may be specified. The requirement of a ninety percent majority reflects the legislature’s intention to prevent individual actions and encourage collective decision-making, recognizing that all creditors face potential financial losses during CIRP proceedings.

The stringent threshold of ninety percent approval serves multiple purposes. First, it ensures that withdrawal decisions are not made hastily or at the behest of a few creditors who might have reached favorable individual settlements. Second, it protects the interests of minority creditors who might otherwise be prejudiced by premature withdrawal. Third, it maintains the integrity of the insolvency process by requiring overwhelming consensus before abandoning formal resolution proceedings. Notably, this threshold is more stringent than the sixty-six percent voting requirement for approving resolution plans under Section 30(4) of the Code, indicating that the legislature views withdrawal as requiring even greater consensus than plan approval.

Regulation 30A of the CIRP Regulations, 2016

The procedural aspects of withdrawal are governed by Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016[2]. This regulation underwent significant amendment on July 25, 2019, following the Supreme Court’s observations in Swiss Ribbons Private Limited v. Union of India[3]. The amended regulation provides two distinct pathways for filing withdrawal applications depending on whether the Committee of Creditors has been constituted.

Under the current framework, an application for CIRP withdrawal may be made before the constitution of the Committee of Creditors by the applicant through the Interim Resolution Professional, or after constitution of the Committee, by the applicant through the Interim Resolution Professional or Resolution Professional. The application must be submitted in Form FA accompanied by a bank guarantee towards estimated expenses incurred by the resolution professional. Where the application is made before constitution of the Committee, the Interim Resolution Professional must submit it to the Adjudicating Authority within three days of receipt. Where the application is made after constitution of the Committee, it must be considered by the Committee within seven days, and if approved by ninety percent voting share, the Resolution Professional must submit it to the Adjudicating Authority within three days of such approval.

The provision also addresses situations where CIRP withdrawal applications are filed after the issuance of invitation for expression of interest under Regulation 36A. In such cases, the applicant must state reasons justifying withdrawal after the issuance of such invitation, recognizing that significant resources may have been expended by potential resolution applicants at that stage. This requirement balances the need for flexibility in allowing settlements with the need to discourage frivolous or opportunistic withdrawal applications that could waste stakeholder time and resources.

Stages for Withdrawal Applications

The regulatory framework contemplates four distinct stages at which withdrawal applications may be filed. The first stage is before admission of the application under Sections 7, 9, or 10, which is governed by Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. At this stage, withdrawal is relatively straightforward as CIRP has not yet commenced.

The second stage is after admission but before constitution of the Committee of Creditors. This stage gained prominence after the Supreme Court’s decision in Abhishek Singh v. Huhtamaki PPL Ltd.[4], where the Court held that Section 12A does not prohibit entertaining withdrawal applications even before the Committee is constituted. The third stage is after constitution of the Committee but before invitation for expression of interest, where the application must secure ninety percent approval from the Committee. The fourth stage is after invitation for expression of interest has been issued, where withdrawal is still permissible but requires justification for the delay and Committee approval.

Judicial Interpretation and Landmark Decisions

Swiss Ribbons Private Limited v. Union of India (2019)

The constitutional validity of Section 12A was challenged and upheld by the Supreme Court in the landmark case of Swiss Ribbons Private Limited v. Union of India decided on January 25, 2019[3]. The petitioners argued that the ninety percent voting share requirement was arbitrary and could allow the Committee of Creditors to arbitrarily reject just settlements. The Court rejected these contentions and held that the provision passes constitutional muster under Article 14 of the Constitution.

In its analysis, the Supreme Court noted that the requirement for ninety percent majority ensures that all financial creditors have a meaningful say in approving individual withdrawals or settlements, rather than leaving such decisions to a simple majority. The Court observed that this higher threshold pertains to the domain of legislative policy, which is explained by the Insolvency Law Committee Report. Furthermore, the Court clarified that the Committee of Creditors does not have the last word on the subject, as the National Company Law Tribunal and thereafter the National Company Law Appellate Tribunal can set aside arbitrary decisions under Section 60 of the Code.

The Swiss Ribbons judgment laid the foundation for subsequent jurisprudence on Section 12A by affirming that the provision strikes an appropriate balance between facilitating settlements and protecting creditor interests. The Court’s endorsement of the provision as constitutionally sound provided much-needed certainty to stakeholders navigating the withdrawal process.

Abhishek Singh v. Huhtamaki PPL Ltd. (2023)

The Supreme Court’s decision in Abhishek Singh v. Huhtamaki PPL Ltd., delivered on March 28, 2023, provided crucial clarification on the applicability of Section 12A before constitution of the Committee of Creditors[4]. In this case, Huhtamaki PPL Limited had filed a petition under Section 9 of the Code against Manpasand Beverages Limited for an outstanding amount. The National Company Law Tribunal admitted the petition and initiated CIRP. Subsequently, before the Committee of Creditors could be constituted, the parties reached a settlement and the operational creditor received full payment.

However, the National Company Law Tribunal rejected the withdrawal application on the ground that thirty-five creditors had filed their claims and withdrawal would adversely affect their rights. The Tribunal also held that Regulation 30A was not binding upon it. On appeal, the Supreme Court set aside these findings and allowed the withdrawal. The Court held that Section 12A does not expressly bar entertaining applications for withdrawal even before constitution of the Committee. While the provision requires ninety percent Committee approval after constitution, it does not prohibit withdrawal prior to that stage.

The Court further held that the substituted Regulation 30A clearly provides for withdrawal applications being entertained before constitution of the Committee, and this regulation does not conflict with Section 12A but rather furthers the cause introduced by that provision. The Court also clarified that the National Company Law Tribunal possesses inherent powers under Rule 11 of the NCLT Rules, 2016 to allow or disallow withdrawal applications even prior to Committee constitution. Importantly, the Court noted that when the withdrawal application was filed, only the operational creditor, corporate debtor, and interim resolution professional were concerned parties, and other creditors retained their independent rights to pursue their claims through appropriate legal remedies.

This judgment filled a critical gap in Section 12A by confirming that withdrawal applications need not await Committee constitution when parties have reached genuine settlements. The decision promotes early resolution and reduces the burden on the insolvency framework by allowing swift exits where settlements are achieved before formal Committee processes commence.

Vallal RCK v. M/s Siva Industries and Holdings Limited (2022)

The Supreme Court’s decision in Vallal RCK v. M/s Siva Industries and Holdings Limited, delivered on June 3, 2022, addressed the critical issue of judicial interference with the commercial wisdom of the Committee of Creditors[5]. In this case, IDBI Bank Limited had filed an application under Section 7 seeking initiation of CIRP against Siva Industries. The Resolution Professional presented a resolution plan which failed to receive the requisite sixty-six percent votes. Subsequently, the erstwhile promoter of the corporate debtor submitted a settlement proposal which was approved by the Committee with a voting majority of ninety-four point two three percent.

Despite this overwhelming approval, the National Company Law Tribunal rejected the application, characterizing the settlement proposal as a business restructuring plan rather than a settlement simpliciter under Section 12A. The National Company Law Appellate Tribunal upheld this decision. However, the Supreme Court set aside both orders and allowed the withdrawal, holding that when ninety percent or more of creditors, in their wisdom after due deliberations, find that permitting settlement and withdrawing CIRP is in the interest of all stakeholders, the adjudicating authority or appellate authority cannot sit in appeal over the commercial wisdom of the Committee of Creditors.

The Court emphasized that interference would be warranted only when the adjudicating authority or appellate authority finds the Committee’s decision to be wholly capricious, arbitrary, irrational, and de hors the provisions of the statute or rules. The Court noted that Section 12A contains more stringent requirements than Section 30(4), with the former requiring ninety percent approval compared to sixty-six percent for resolution plans, indicating the legislature’s intention to impose higher standards for withdrawal than for plan approval.

This judgment reinforced the principle of creditor supremacy within the insolvency framework and clarified that judicial authorities should exercise restraint in interfering with settlement decisions that have secured overwhelming creditor support. The decision also affirmed that genuine settlement proposals should not be rejected on formalistic grounds when they serve the interests of maximizing stakeholder value and preserving the corporate debtor as a going concern.

Regulatory Compliance and Procedural Requirements

Form and Documentation Requirements

The withdrawal application must be submitted in Form FA as prescribed in the Schedule to the CIRP Regulations. This form requires the applicant to provide comprehensive information including particulars of the original application, details of admission order, and the specific grounds for seeking withdrawal. The application must be accompanied by a bank guarantee towards estimated expenses incurred by the resolution professional, ensuring that professional costs are adequately covered even if withdrawal is granted.

The quantum of the bank guarantee varies depending on the stage at which the application is filed. For applications filed before Committee constitution, the guarantee must cover estimated expenses incurred by the interim resolution professional for purposes of Regulation 33. For applications filed after Committee constitution, the guarantee must cover estimated expenses for purposes of Regulation 31, including information memorandum preparation, appointment of valuers, and other administrative costs.

Timeline and Process Flow

The regulatory framework prescribes strict timelines to ensure expeditious disposal of withdrawal applications. Where the application is filed before Committee constitution, the interim resolution professional must submit it to the Adjudicating Authority within three days of receipt. Where the application is filed after Committee constitution, the Committee must consider it within seven days of receipt. If approved by the Committee with ninety percent voting share, the resolution professional must submit the application along with Committee approval to the Adjudicating Authority within three days.

These tight timelines reflect the legislature’s recognition that prolonged uncertainty regarding withdrawal applications can prejudice both creditors and the corporate debtor. Swift processing of withdrawal applications allows settled matters to exit the insolvency framework quickly, freeing up judicial and administrative resources for cases requiring formal resolution proceedings.

Role of the Adjudicating Authority

Upon receipt of a withdrawal application, the Adjudicating Authority must examine whether the procedural requirements have been satisfied and whether the settlement appears to be in the interests of all stakeholders. While the Adjudicating Authority must accord significant deference to the commercial wisdom of the Committee of Creditors, it retains discretionary power to reject applications that appear to violate statutory provisions or undermine the objectives of the Code.

The Adjudicating Authority must also ensure that the withdrawal does not prejudice the rights of other creditors who have not consented to the settlement. As clarified in Abhishek Singh, other creditors retain their independent rights to pursue claims through appropriate legal remedies even after withdrawal of the insolvency application. The Adjudicating Authority may impose conditions on withdrawal to protect these interests while allowing the settlement to proceed.

Practical Challenges and Strategic Considerations

Achieving Ninety Percent Consensus

One of the primary challenges in utilizing Section 12A is achieving the ninety percent voting threshold required for Committee approval for withdrawal of CIRP. This high threshold can prove difficult when the Committee comprises creditors with divergent interests or when some creditors perceive greater value in pursuing formal resolution or liquidation rather than accepting settlement terms. Financial creditors holding relatively small claims may block withdrawal of CIRP by withholding consent, potentially derailing settlements that would benefit the majority of stakeholders.

Strategic negotiation becomes critical in securing the requisite approval. Settlement proponents must ensure that proposed terms adequately address the concerns of all major creditor groups and provide clear timelines for payment. In some cases, offering differential treatment to creditors based on the nature and quantum of their claims may help secure broader support, though such differentiation must be carefully structured to avoid accusations of discrimination or preferential treatment.

Timing Considerations

The stage at which a CIRP withdrawal application is filed significantly impacts the complexity of the process and the likelihood of approval. Applications filed before Committee constitution, as clarified in Abhishek Singh, benefit from streamlined procedures and avoid the need for Committee approval. However, early settlements require quick negotiations between the applicant creditor and corporate debtor, which may not always be feasible.

Applications filed after Committee constitution but before invitation for expression of interest offer a middle ground, allowing time for comprehensive settlement discussions while avoiding complications arising from potential resolution applicants who have invested resources in preparing plans. Applications filed after invitation for expression of interest face the additional burden of justifying why withdrawal was not sought earlier, and may encounter resistance from the Adjudicating Authority concerned about wasting stakeholder resources.

Impact on Other Creditors

A persistent concern in withdrawal proceedings is the potential impact on creditors who are not parties to the settlement. As the National Company Law Tribunal observed in the case leading to Abhishek Singh, numerous creditors may file claims after initiation of CIRP, and these creditors may oppose withdrawal that leaves their claims unresolved. However, the Supreme Court clarified that such concerns should not prevent withdrawal, as other creditors retain independent rights to pursue their claims through appropriate legal remedies.

Settlement proponents can address these concerns by offering to include all admitted creditors in settlement terms or by providing mechanisms for other creditors to pursue their claims against the revived corporate debtor outside the insolvency framework. Transparent communication with all stakeholder groups regarding settlement terms and their implications can help minimize opposition and facilitate smooth withdrawal.

Comparative Analysis with Resolution Plans

Understanding the distinction between withdrawal under Section 12A and approval of resolution plans under Section 30 is crucial for strategic decision-making. Resolution plans require approval by sixty-six percent voting share of the Committee and must comply with various statutory requirements including mandatory payments to operational creditors and adherence to waterfall provisions under Section 53 during distribution. Resolution plans also undergo scrutiny for compliance with Section 29A eligibility criteria and must demonstrate viability of the corporate debtor’s business.

In contrast, withdrawal of CIRP applications requires a higher Committee of Creditors approval threshold of ninety percent but offers greater flexibility in settlement terms. Such withdrawals are not required to comply with the waterfall mechanism under Section 53 or the mandatory payment obligations applicable to resolution plans. However, as cautioned by the National Company Law Appellate Tribunal in the proceedings leading to Vallal RCK, settlement proposals that closely resemble resolution plans may attract judicial scrutiny, particularly where they appear to circumvent statutory safeguards.

The choice between pursuing withdrawal or resolution depends on multiple factors including the feasibility of achieving ninety percent Committee consensus, the nature of proposed settlement terms, and the eligibility of potential settlement proponents under Section 29A. In situations where erstwhile promoters seek to regain control of the corporate debtor, withdrawal may offer a viable pathway that avoids Section 29A eligibility restrictions applicable to resolution applicants, though courts have noted that this route should not be misused to circumvent statutory disqualifications.

Conclusion

Section 12A of the Insolvency and Bankruptcy Code, 2016 represents a vital safety valve within the insolvency framework, allowing parties to exit formal proceedings through mutually acceptable settlements. The provision recognizes that preservation of the corporate debtor as a going concern through negotiated settlements may, in appropriate circumstances, better serve stakeholder interests than pursuing resolution or liquidation. The Supreme Court’s decisions in Swiss Ribbons, Abhishek Singh, and Vallal RCK have progressively clarified the scope and application of Section 12A, establishing that CIRP withdrawal applications may be entertained at various stages of proceedings and that overwhelming creditor consensus should receive significant judicial deference.

However, successful utilization of Section 12A requires careful navigation of stringent procedural requirements, strategic negotiation to secure ninety percent Committee approval, and transparent communication with all stakeholder groups. The provision continues to evolve through judicial interpretation and regulatory amendments, reflecting ongoing efforts to balance the objectives of facilitating settlements with protecting creditor interests and maintaining the integrity of the insolvency process. As the Indian insolvency framework matures, Section 12A will likely continue playing a crucial role in enabling efficient exits for cases where parties can reach genuine consensus on settlement terms that maximize value for all stakeholders.

References

[1] Insolvency Law Committee Report (March 2018), Ministry of Corporate Affairs, Government of India. Available at: https://ibbi.gov.in/ILRReport2603_03042018.pdf 

[2] IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Regulation 30A (as substituted by IBBI/2019-20/GN/REG048, dated July 25, 2019). Available at: https://ibbi.gov.in/uploads/legalframwork/2020-08-17-234040-pjor6-59a1b2699bbf87423a8afb5f5c2a0a85.pdf 

[3] Swiss Ribbons Private Limited & Anr. v. Union of India & Ors., Writ Petition (Civil) No. 99 of 2018, Supreme Court of India, decided on January 25, 2019. Available at: https://indiankanoon.org/doc/17372683/ 

[4] Abhishek Singh v. Huhtamaki PPL Ltd. & Anr., Civil Appeal arising out of SLP(C) No. 4353 of 2021, Supreme Court of India, decided on March 28, 2023. Available at: https://www.scconline.com/blog/post/2023/04/04/regulation-30a-of-cirp-regulations-and-section-12a-of-ibc-are-not-inconsistent-legal-research-legal-news-updates/ 

[5] Vallal RCK v. M/s Siva Industries and Holdings Limited and Others, Civil Appeal Nos. 1811-1812 of 2022, Supreme Court of India, decided on June 3, 2022. Available at: https://indiankanoon.org/doc/132801550/ 

[6] Insolvency and Bankruptcy Code, 2016 (31 of 2016), Ministry of Law and Justice, Government of India. Available at: https://www.indiacode.nic.in/bitstream/123456789/15479/1/the_insolvency_and_bankruptcy_code%2C_2016.pdf 

[7] The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (26 of 2018). Available at: https://ibbi.gov.in/webadmin/pdf/legalframwork/2018/Aug/The%20Insolvency%20and%20Bankruptcy%20Code%20(Second%20Amendment)%20Act,%202018_2018-08-18%2018:40:34.pdf 

[8] National Company Law Tribunal Rules, 2016, Rule 11. Available at: https://ca2013.com/rule-11-national-company-law-tribunal-rules-2016/ 

Published and Authorized by Sneh Purohit