Supreme Court: Applications for Withdrawal of CIRP even before Constitution of COC can be entertained under Section 12A of IBC

Supreme Court: Applications for Withdrawal of CIRP even before Constitution of COC can be entertained under Section 12A of IBC

The Supreme Court by its division bench comprising of Justices B.R. Gavi and Vikram Nath, observed that Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC) does not debar entertaining applications for withdrawal even before constitution of Committee of Creditors (COC). Therefore, the application under section 12A for withdrawal cannot be said to be kept pending for constitution of CoC, even where such application was filed before constitution of CoC.

In the present case, the Corporate Debtor (CD)- Manpasand Beverages Ltd. is engaged in the business of manufacturing and distribution of fruit beverages. The Operational Creditor (OC)- Huhtamaki PPL Ltd. (respondent No.1) used to supply packaging material to the CD. The OCs filed a petition under section 9 of IBC before the NCLT, stating a total outstanding amount of Rs.1,31,00,825 against the CD.

The National Company Law Tribunal (NCLT) by order dated 1 March, 2021 passed an order admitting the petition and initiating CIRP. Two days thereafter i.e., 3 March, 2021, the OCs and the CD entered into a settlement wherein the CD was required to pay an amount of Rs.95.72 lakhs. The above settlement was arrived at even before the Committee of Creditors could be constituted.

Shri Shyam Divan, learned senior counsel appearing for the appellant referred to statutory provisions like section 12A of IBC, Regulation 30A of Insolvency and Bankruptcy Board of India, Regulations (IBBI Regulations) and also to Rule 11 of the NCLT Rules, 2016 and submitted that such provisions clearly permit settlement between the creditor and the debtor and withdrawal of proceedings prior to the constitution of CoC. According to him, once the settlement was arrived at and acted upon prior to the constitution of CoC, the NCLT committed a grave error in not allowing the withdrawal of the proceedings.

The Apex Court embarked upon to decide the issues raised and as to what should be the course adopted by NCLT in dealing with withdrawal matters before the constitution of CoC?

The bench dealt with the plea of alternative remedy and opined that it is a self-imposed restriction by the superior Courts and is never an absolute bar unless barred by the statute. Further, in the present case, the Court had entertained the Special Leave Petition in 2021 and had granted an order of status quo on 20 April, 2021 and substantial time had passed since then. Hence, the Court was not inclined to entertain the said objection relating to availability of alternative remedy of filing the appeal before the NCLT and noted that the IBC provides statutory timeframe for disposal of matters. Further, such matters being commercial in nature keeping these matters pending for long, frustrates the very object of IBC, stated the bench.

With respect to the objection raised for multiple claims of OCs, the Court held that the other creditors have their own right to avail such legal remedies as may be available to them under law with respect to their claims. The rights of the creditors for their respective claims do not get whittled down or adversely affected if the settlement with the OC in the present case was accepted and the proceedings allowed to be withdrawn.

Next the Court for the issue in context to claims for expenses for IRP observed, any amount spent by the IRP legally admissible to him could always be recovered in the same proceedings and the NCLT or the Adjudicating Authority would be well within its power to get the same cleared under Clause 7 of Regulation 30A of IBBI Regulations.

Lastly, the Court dealt with the primary issue of whether statutory provisions like section 12A of IBC, Regulation 30A of Insolvency and Bankruptcy Board of India, Regulations (IBBI Regulations) and Rule 11 of the NCLT Rules, 2016, permit settlement between the creditor and the debtor and withdrawal of proceedings prior to the constitution of CoC.

The Court observed that Section 12A of IBC permits withdrawal of applications admitted under Sections 7, 9 and 10 of IBC. The approval of 90% of CoC members would be required when withdrawal is being made after constitution of CoC. However, Section 12A does not debar entertaining applications for withdrawal even before constitution of CoC and thus the said application cannot be kept pending for constitution of CoC.

“The IBBI which had the power to frame Regulations wherever required and in particular section 240 of IBC for the subjects covered therein had accordingly substituted Regulation 30A dealing with the procedure for disposal of application for withdrawal filed under section 12A of IBC. The substituted Regulation 30A of IBC as it stands today clearly provided for withdrawal applications being entertained before constitution of CoC. It does not in any way conflicts or is in violation of section 12A of IBC. There is no inconsistency in the two provisions. It only furthers the cause introduced vide section 12A of IBC. Thus, NCLT fell in error in taking a contrary view,” the Court discerned.

The bench while noting that large number of creditors had filed their claim due to the delay on the part of NCLT was disposing of applications under Section 12A of IBC and Regulation 30A of CIRP Regulations. The inherent powers were required to be invoked in order to meet the ends of justice which the NCLT had failed to invoke, the Court held.

Accordingly, the Court set aside NCLT’s order and allowed the withdrawal application filed under Regulation 30A by the IRP.