Supreme Court: Inherent Powers Under Rule 11 Of NCLT Cannot Circumvent Withdrawal Procedure Under Section 12A of IBC And Regulation 30A

Supreme Court: Inherent Powers Under Rule 11 of NCLT Cannot Circumvent Withdrawal Procedure Under Section 12A of IBC and Regulation 30A

The Supreme Court bench, comprising Chief Justice of India D.Y. Chandrachud and Justices J.B. Pardiwala and Manoj Misra, has affirmed that inherent powers cannot be utilized to circumvent established legal procedures. The court emphasized that allowing the National Company Law Appellate Tribunal (NCLAT) to bypass detailed procedures by invoking inherent powers under Rule 11 would contradict the carefully constructed withdrawal process. The NCLAT's impugned judgment lacked justification for deviating from this procedure or for the urgency in approving the settlement without following the mandated guidelines.

In the judgment, the Supreme Court highlighted that the appropriate course of action for the NCLAT should have been to stay the constitution of the Committee of Creditors (CoC) and direct the parties to follow the prescribed course under Section 12A and Regulation 30A of the Corporate Insolvency Resolution Process (CIRP) Regulations, 2016.

In this case, the Supreme Court examined the evolution of law regarding withdrawal applications under the Insolvency and Bankruptcy Code (IBC), 2016. Initially, the IBC did not have provisions for withdrawing applications after the admission of an insolvency petition, which posed challenges for creditors and corporate debtors seeking to withdraw their petitions following a settlement. The Supreme Court had previously permitted such withdrawals by exercising its extraordinary power under Article 142 of the Indian Constitution, even post-admission of the insolvency petition.

In Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers (2018), the Supreme Court invoked Article 142 to record the settlement between the creditor and the corporate debtor after the application was admitted. However, the court noted that the NCLAT could not invoke its inherent powers under Rule 11 of the NCLAT Rules, 2016, to facilitate a settlement or withdrawal post-admission.

The Supreme Court also underscored existing gaps in the IBC framework that necessitated legislative amendments. In Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem (2018), the court recommended legislative changes to address issues concerning settlements after the admission of insolvency petitions.

Following these concerns, the Ministry of Corporate Affairs established an Insolvency Law Committee (ILC) tasked with addressing the identified gaps within the IBC framework. On March 26, 2018, the ILC submitted its report, recommending the incorporation of provisions allowing for the withdrawal of insolvency petitions after admission, contingent upon approval by 90% of the CoC.

The committee emphasized that the CIRP process, once initiated, involved all creditors and discouraged individual enforcement actions to benefit a select few. It recommended that the relevant rules be amended to allow for post-admission withdrawal, specifying that the NCLAT's Rule 11 should not be applied in this context.

As a result, Section 12A was added to the IBC via the Amendment Act of 2018, enabling the withdrawal of insolvency petitions under Sections 7, 9, or 10, provided the CoC approved with 90% voting shares. Regulation 30A was also introduced to align with Section 12A, detailing the withdrawal process post-admission but prior to the invitation for expressions of interest. The application for withdrawal must be considered by the CoC within seven days of submission, and if approved, it is forwarded to the NCLT.

Despite these amendments, lacunae persisted regarding remedies when the CoC was absent post-admission and the procedure for withdrawal after the invitation for expressions of interest was not explicitly outlined.

The Supreme Court addressed these gaps in Brilliant Alloy Private Limited v. S Rajagopal and Ors (2022), stating that Regulation 30A's requirement for application submission before the issuance of an invitation for expression of interest was only directory. It further clarified that Section 12A did not prohibit withdrawal after such issuance.

In Swiss Ribbons (P) Ltd. v. Union of India (2019), the constitutionality of Section 12A was upheld, reinforcing that withdrawal with 90% CoC approval was justified to protect the interests of all creditors. The court clarified that if the CoC was not constituted, a party could approach the NCLT directly for withdrawal or settlement under Rule 11.

In response to the Supreme Court's observations, Regulation 30A was amended again, allowing withdrawal both before and after the CoC's constitution and even post-invitation for expression of interest, provided valid reasons for the delay were presented.

The Supreme Court outlined the following principles:

1. Before Admission: Applications under Sections 7, 9, or 10 should be directed to the NCLT for withdrawal, as proceedings remain in personam between the applicant creditor and corporate debtor.

2. Post-Admission but Before CoC Constitution: Applications for withdrawal may be submitted via the Interim Resolution Professional (IRP) to the NCLT, which must consider all relevant factors before approval or rejection.

3. Post-Admission with CoC Formed, Before Expression of Interest Issuance: Withdrawal applications should be submitted to the NCLT through the IRP, requiring 90% CoC approval before forwarding to the NCLT.

4. Post-Admission with CoC Formed, After Expression of Interest Issuance: The same procedure applies, with the added requirement for the applicant to provide reasons for the belated withdrawal.

Supreme Court Clarifies Scope of Rule 11 in NCLT vs. Section 12A of IBC for Insolvency Withdrawals

Applying this framework to the present case, the Supreme Court determined that the NCLAT had erred in admitting the CIRP withdrawal application by misusing its inherent power under

Rule 11. The correct procedure would have been for the applicant to file a withdrawal application through the IRP before the NCLT. The court stressed that inherent powers under

Rule 11 should not undermine the established legal framework under Section 12A and Regulation 30A of the IBC. Consequently, the Supreme Court set aside the NCLAT's impugned order.