India: IBC: Latest Position On Withdrawal Of An Application By Creditor(s) Post Settlement

Last Updated: 17 August 2018
Article by Sharad Tyagi and Kartik Arora

The Insolvency and Bankruptcy Code, 2016 ("IBC") is considered as an important legislation for early detection of sickness of any corporate debtor and to deal with such sickness in a time bound manner by allowing the implementation of the effective resolution plan, if possible. Such legislation is a paradigm shift in comparison to the  erstwhile legislation The Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA"). The erstwhile SICA was not so successful in dealing  with the revival and restructuring of sick companies due to the long-drawn pendency of the cases before the Board for Industrial and Financial Reconstruction. 

The insolvency resolution process for revival or restructuring of defaulting corporate debtor can be invoked by any operational creditor or financial creditor by filing an application with the National Company Law Tribunal ("NCLT"). If the NCLT is satisfied that the application filed by such operational creditor or financial creditor meets the criteria as laid down under IBC, it will accept the application and shall order the appointment of an Interim Resolution Professional ("IRP"). Consequently, the insolvency resolution process will start and the entire management and control of the corporate debtor shall be taken over by the IRP.

Change in management and control of the corporate debtor is very critical from the perspective of existing promoter(s) since it adversely affects their interest in the company. No promoter(s) wants to lose his / their control over the affairs of the company. Hence, such promoter(s) prefer to settle the matter with the operational creditor or financial creditor before the acceptance of an application by the NCLT for initiating the insolvency resolution process against the corporate debtor. Sometimes, such creditor succeeds in settling the matter before the application is accepted by the NCLT or sometimes, settlement happens post acceptance of the application and appointment of IRP by the NCLT.  

In this article, we have discussed and analyzed the legal provisions and judicial precedents pertaining to withdrawal of the application by the operational creditor or the financial creditor under the following heads:

Withdrawal of an application before its acceptance by the NCLT

In terms of the provisions of Rule 8 of The Insolvency and Bankruptcy (Adjudicating Authority) Rules, 2016 ("Relevant Rules"), the NCLT / Adjudicating Authority has the  power to permit the corporate debtor to withdraw its application as filed before it prior to its acceptance. The relevant texts of such Rule 8 are reproduced below for ease of reference:

"The Adjudicating Authority may permit withdrawal of the application made under rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission".

Hence, the NCLT may permit withdrawal of an application filed before it, prior to its acceptance. 

Withdrawal of an application post its acceptance by the NCLT and appointment of the IRP

Withdrawal of an application by the operational creditor or the financial creditor post its acceptance by the NCLT was a debatable issue since there was no specific provision(s) under IBC, which empowers the NCLT to allow withdrawal of the application for invoking insolvency resolution process post its acceptance. The operational creditor or the financial creditor, which has already settled the matter with the corporate debtor, did not have any option except filing of an  appeal to the National Company Law Appellate Tribunal ("NCLAT") for appropriate relief. However, the NCLAT did not grant any relief to the corporate debtor.

Thereafter, the aforesaid controversy also reached  the Hon'ble Supreme Court in the matter of Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Manager LLP (Civil Appeal No. 9279 of 2017).

Facts of the Case

In this case, Lokhandwala Kataria Construction Private Limited ("Lokhandwala") has provided its guarantee on behalf of Vista Homes Private Limited ("Principal Debtor") for the amount to be paid by the Principal Debtor towards redemption of the debentures. Nisus Finance and Investment Manager LLP ("Nisus") being the financial creditor filed an application under Section 7 of IBC before the NCLT, Mumbai against  Lokhandwala, as the Principal Debtor failed to repay the due amount under the Debenture Trustee Agreement ("DTA"). The NCLT, Mumbai, accepted the application of Nisus and passed the order for commencement of insolvency resolution process.

Thereafter, parties agreed to settle the matter and an appeal was filed by Lokhandwala before the NCLAT to allow withdrawal of application by Nisus in terms of the agreed settlement. The NCLAT dismissed the appeal and held that there are no specific provisions under IBC, which allow withdrawal of an application filed by the financial creditor and held that the inherent power as given under Rule 11 cannot be exercised post acceptance of application by the NCLT. 

The relevant texts of Rule 11 of National Company Law Appellate Tribunal Rules, 2016 ("NCLAT Rules") are reproduced below for ease of reference:

"Inherent powers – Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders or give such directions as may be necessary form meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal"

Subsequent to the dismissal of the appeal by the NCLAT, the corporate debtor made the appeal to the Hon'ble Supreme Court.

Supreme Court Judgment

The Hon'ble Supreme Court inter alia held that inherent power under Rule 11 of NCLAT Rules, 2016, cannot be adopted as the application has already been accepted and Rule 8 of Relevant Rules is only applicable before admission of the application.  The Hon'ble Supreme Court utilized power provided in Article 142 of Indian Constitution which states that the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it, and in view of the same, allowed the settlement between the parties by taking consent terms dated 28.06.2017 and 12.07.2017 on record. The Hon'ble Supreme Court adopted a similar view in the matter of Mothers Pride Dairy India Private Limited v. Portrait Advertising and Marketing Private Limited (Civil Appeal No. 9286/2017) and in Uttara Foods and Feeds Private Limited v. Mona Pharmachem (Civil Appeal No. 18520/2017), where the settlement was allowed and the said applications were disposed by utilizing its inherent power under Article 142 of the Indian Constitution.

Report of the Insolvency Law Committee

Subsequent to above, the Insolvency Law Committee ("Committee") was constituted on November 16, 2017, to make recommendation to the  Government in relation to the issues arising from the implementation of IBC ("Report"). The Committee recommended that Rule 8 of Relevant Rules may be amended and an application may be withdrawn post admission, only if the Committee of Creditors ("CoC") approves such action by a voting share of 90% (Ninety Percent). The aforesaid recommendation was based on the following criteria as mentioned in the Report:

".... all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution."

"Thus, it was agreed that once the CIRP is initiated, it is no longer a proceeding only between the applicant creditor and the corporate debtor but is envisaged to be a proceeding involving all creditors of the debtor. The intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors."

Subsequent Amendments in IBC

In line with the aforesaid recommendation of Committee, an ordinance was promulgated on June 6, 2018 and the hindrance in withdrawal of application after the acceptance by the Adjudicating Authority has been cured by inserting section 12A to IBC. The relevant texts of the provisions of Section 12A are reproduced below for ease of reference:

Section 12A:

"The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or 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 prescribed".

Application of Section 12A

Recently, the NCLAT has adjudicated upon the new Section 12A in the matter of Vijender Kumar Singla v. Oriental Bank of Commerce & Anr (Company Appeal (AT) (Insolvency) No. 143 of 2018), wherein, the withdrawal of application was allowed after the acceptance of the application filed by the financial creditor as the settlement was agreed between the corporate debtor and the financial creditor and withdrawal of such application was approved by 100% of the voting shares of the CoC fulfilling the mandatory requirement mentioned under Section 12A of IBC.

Conclusion

The insertion of Section 12A is a welcome move on the part of the Government. Now, the Government has settled the position regarding the withdrawal of an application post its acceptance by the NCLT.  However, the threshold of 90% (Ninety Percent) of voting share of CoC as mandatorily required for withdrawal of an application post its acceptance seems to be a stringent condition, which is not easy to be complied with since each lender may have its own view with respect to revival or restructuring of the corporate debtor.

The position regarding withdrawal of an application prior to or post its acceptance by the NCLT is summarized below in tabular form for ease of reference:

Relevant Situation

Whether Permissible

Relevant Provision(s)

Withdrawal of an application prior to its acceptance by the NCLT

Yes

Rule 8 of The Insolvency and Bankruptcy (Adjudicating Authority) Rules, 2016

Withdrawal of an application post its acceptance by the NCLT

Yes, only with the approval of ninety percent voting share of the committee of creditors

Section 12A of The Insolvency and Bankruptcy Code, 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions