Introduction
The Insolvency and Bankruptcy Code, 2016 (Code), in its original form, did not include provisions with respect to withdrawal of an application for the initiation of corporate insolvency resolution process (CIRP). However, pursuant to various judicial pronouncements[i], Section 12A was inserted[ii] in the Code permitting withdrawal of CIRP with the approval of 90% voting share of the committee of creditors (CoC). Regulation 30A was also introduced[iii] in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) laying down the manner and procedure of withdrawal of CIRP. While Regulation 30A initially permitted withdrawal of CIRP only prior to publication of invitation for Expression of Interest (EoI), it was subsequently amended[iv] to permit withdrawal even after the publication of invitation for EoI. However, in such an event, the reasons justifying withdrawal at such a later stage would be required to be informed to the National Company Law Tribunal (NCLT).
Recently, the National Company Law Appellate Tribunal (NCLAT) in Hem Singh Bharana v. Pawan Doot Estate Pvt. Ltd., (Hem Singh v. Pawan Doot Estate) considered whether withdrawal of CIRP under Section 12A can be permitted after the resolution plan had been approved by the CoC and was pending approval of the NCLT.
Brief facts of the case
In 2019, Pawan Doot Estate Pvt. Ltd. (Pawan Doot Estate) was admitted into CIRP. The resolution plan submitted by Mehar Footwear Pvt. Ltd. (Mehar Footwear) was approved by CoC in 2020 and was pending approval of the NCLT. During this pendency, Mr. Hem Singh Bharana - an ex-promoter of Pawan Doot Estate - submitted a settlement proposal before the financial creditors. Further, he filed an application before the NCLT praying to defer the approval of the resolution plan submitted by Mehar Footwear. The said application was dismissed by the NCLT, and the present appeal was preferred before the NCLAT by the ex-promoter challenging the NCLT’s dismissal order.
It was contended before the NCLAT that the approval of the resolution plan cannot be an impediment for accepting the settlement proposal. It was also contended that as Regulation 30A permits withdrawal of CIRP at any stage, the NCLT has sufficient powers to direct the CoC to consider a settlement proposal even at the stage where a resolution plan is pending the approval of the NCLT.
NCLAT’s ruling
Looking at the history of amendments to Regulation 30A, the NCLAT opined that there has to be special reason for withdrawing CIRP after publication of invitation for EoI. Emphasizing on the words “after publication of invitation for EoI”, the NCLAT ruled that had it been the intent of the Code that CIRP could be withdrawn even after approval of resolution plan by the CoC, then Regulation 30A would not have been confined to “after publication of invitation for EoI”, rather, it could have been conveniently mentioned “after approval of Resolution Plan”.
Further, NCLAT noted that the Supreme Court had in Ebix Singapore Pvt. Ltd. v. Committee of Creditors of Educomp Solutions Limited and Anr. held that that once CoC approves a resolution plan, it becomes binding on the resolution applicant and there remains no scope of withdrawal, even while the plan is pending approval before NCLT. Relying on this judgment, the NCLAT held that once the CoC approves the resolution plan in their commercial wisdom, it is bound by its decision, and cannot not be allowed to change its stand in order to give finality to different steps under the Code and for timely conclusion of the CIRP. Accordingly, the appeal filed by the ex-promoter was dismissed.
Our thoughts
The inclusion of Section 12A to the Code allowed promoters of corporate debtors another chance to make good on the default and retain control over the company even after admission of insolvency. The NCLT in Satyanarayan Malu v. SBM Paper Mills Ltd., had allowed withdrawal of the CIRP at the stage where the resolution plan was accepted by the committee of creditors and was pending approval of the NCLT. Interestingly, the Supreme Court in Brilliant Alloys Pvt. Ltd. v. S. Rajagopal and Others had held that Regulation 30A (pre-amendment) is only directory and that withdrawal applications may be allowed in exceptional cases at any stage of the CIRP. While these judgments were handed down in view of the central theme of value maximisation under the Code, they were used by errant promoters to hang on to their companies and thwart the CIRP.
The authors are of the view that the NCLAT’s judgement in Hem Singh v. Pawan Doot Estate clarifies the correct position of law in relation to withdrawal of CIRP after the approval of the resolution plan by the CoC. The NCLAT’s judgment places the resolution plan approved by the CoC at a platform from where there is no going back either by the resolution applicant or the CoC. This effectively means that neither the resolution applicant nor the CoC can renege on the resolution plan even when the circumstances change drastically. It should be mentioned that as on December 2022, the average time taken for completion of a CIRP is 831 days, more than three times the statutory 270-day time period[v]. This delay in the CIRP and the irreversible status of the resolution plan would discourage those resolution applicants who wished to submit the resolution plan on certain commercials, which would not be very feasible two or three years down the line. A scarcity of genuine resolution applicants will naturally lead to unwarranted liquidation of many corporate debtors.
The authors are of the view that though the clarity on the nature and binding effect of the resolution plan is welcome news, it is unlikely to reduce attempts of third parties to seek withdrawal of CIRP after approval of resolution plans by CoC, unless the timeliness provided under the Code are strictly adhered to. It is now for consideration of the legislature to balance the interest of the corporate debtor and the concerns of prospective resolution applicant.
Authors: Souvik Ganguly, Altamash Qureshi, and Paridhi Rastogi
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[i] Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP; Uttara Foods and Feeds Private Limited v. Mona Pharmachem
[ii] Inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 dated 17 August 2018
[iii] Inserted by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2018 dated 03 July 2018
[iv] Inserted by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2019 dated 25 July 2019
[v] Quarterly Newsletter of the Insolvency and Bankruptcy Board of India, October to December 2022 https://ibbi.gov.in/uploads/publication/af5cba14422f5bdfeea4bed0f87f0e3f.pdf