This article is written by Sneha Asthana pursuing Diploma in Business Laws for In-House Counsels from LawSikho.
Table of Contents
Introduction
The Insolvency and Bankruptcy Code 2016 is a consolidation of all Insolvency and Bankruptcy laws that allow insolvent and bankrupt companies top of the game exit plans and shifts the title from “debtor in possession” to “creditor in control”. The Code holds utmost value for all stakeholders as its main focus lies on easy settlements between debtors and creditors, increased availability of a line of credit, set boundaries between genuine business failures and simple malfeasance and providing painless revival mechanisms. The Code helped the country get away with a few other Acts like Sick Industrial Companies (Special Provisions) Act, 1985, The recovery of debts due to Banks and Financial Institutions Act, 1993 etc., which were valuable Acts in themselves, however, the scattered provisions of such settlements only began confusing people more. The 2016 Code helps put it all together and remove all bottlenecks and streamlining the process of corporate insolvency resolution.
The main objective of the Code was to simplify the process of initiating the corporate insolvency resolution process and put timelines to each step of the process to ensure the process goes smoothly. The Code also clearly determines the parties, documents etc. that are involved in the process. Sections 7, 8, 9 and 10 say that the corporate resolution process can be initiated by financial creditors, operational creditors and corporate debtors themselves. The processes of each are slightly different in terms of fixed periods, submissions etc. The Code elaborately talks not only of the various parties who can initiate corporate insolvency resolution proceedings and what are all the compliance that have to be met to initiate the proceedings but also expands on the procedures and penalties that have to be adhered to. This article intends to understand the different modes of solving a dispute and the old and new withdrawal provisions of the same with the help of case laws. The article also emphasizes the different modes of settlement of such matters.
Initiating corporate insolvency resolution proceedings
Who can initiate CIRP?
Financial creditor
When the application for initiation of CIRP is filed by a financial creditor under Section 7, at NCLT it shall include the following:
- Record of Default or some Evidence of Default,
- The name of the Interim Resolution Professional,
- Any other document asked by the Board.
The Tribunal is then ought to either admit the application or reject it within 14 days from applying. Upon acceptance of the application, the proceedings commence immediately and a notice of the same is sent within 7 days to the Creditors and Debtors. However, upon rejection, the Board sends a notice to the applicant to rectify any defects in the application within 7 days of receiving such notice and thereby reject the same if no rectifications were to be made.
Operational creditor
Operational creditors are required to first send out a Demand Notice to the Corporate Debtor of their due payments. Upon receiving such Notice, the corporate debtor is either to pay the amount or send out a Notice of Dispute in the Tribunal within 10 days. If the creditors receive neither, they can file an application to initiate CIRP against the corporate debtor at NCLT under Section 8. This application should include:
- A copy of the Demand Notice or Invoice of demanding payment.
- An affidavit to the effect that no payment was by the Corporate Debtor.
- A copy of the certificate stating there has been no payment made by the corporate debtor. Such certificate is to be taken from any financial institution handling the operational creditor’s accounts.
- A copy of the record with the information utility showing no such payment has been made.
- Any other proof as required.
Similar to the process of the financial credit’s application, upon receiving the operational creditor’s application, the Tribunal is to accept or reject the application within 14 days and before rejecting, the Tribunal should send a notice to the applicant to rectify any errors of the same.
Corporate debtors (applicant)
Similar to the other applicant processes, the corporate debtor also has to file the following documents while applying for initiating CIRP against himself under Section 10, viz.:
- Information relating to their books of accounts and other such prescribed information.
- Information of the interim resolution professional.
- A copy of the Special Resolution or the Resolution passed by at least 3/4th majority of the shareholders approving the filing of such an application.
The Tribunal then follows the same process of accepting or rejecting the application within 14 days and before rejecting, sending a notice to the applicant to rectify any mistakes in the same.
What is the procedure for initiating corporate insolvency proceedings?
Once the applications are admitted by the Tribunal, the process of corporate insolvency resolution begins and according to Section 12, it was to be completed within 180 days subject to an application of extension by the debtor of only for 90 days. If such an application is accepted then an extension beyond 180 days was permissible but such an extension was neither to exceed 90 days nor was it to be given more than once. However, the duration of 180 days seemed unrealistic for a process involving huge filings and decisions and tonnes of litigation work. Therefore, the Code was amended to increase the period of the process to 330 days.
Following this, the moratorium period and public announcement of such proceedings are to be made and an interim resolution professional is to be appointed by the Tribunal who can either be one appointed by the Tribunal or one who was proposed in the initiation applications. All duties under Section 18 of collecting information of the assets, finances, operations, collating claims, constituting Committee of Creditors, filing information etc. become the responsibility of the Interim Resolution Professional.
A Committee of Creditors is to be constituted under Section 21 which shall constitute all financial creditors of the corporate debtor. Further conditions of operational creditors who are also financial creditors are also focused upon in Section 21. Shortly after the Committee is constituted, it shall select a Resolution Professional upon majority vote under Section 22. The duties of the Resolution Professional are similar to the duties of the Interim Professional, given under Section 25 require the RP to conduct meetings, collating information, taking control of the assets etc. After meeting a few more formalities, any resolution applicant can propose a Resolution Plan to the RP under Section 30 which needs to focus on payment of creditors, payment of such insolvency proceeding costs, management of Corporate Debtor’s affairs and cannot contravene any other laws.
Once the Tribunal approves the Resolution Plan, the moratorium period shall cease to operate, the debtors and creditors are all to be bound by the Plan and the RP is to record all information regarding the Plan. The objective for creating and implementing a Resolution Plan was first, to pay off the debts and secondly, it acts as a Revival Mechanism for the Corporate Debtor. The implementation of the Resolution Plan marks an end to the process.
What is liquidation?
Upon any such event that the Insolvency of the Debtor is not resolved because of the following:
- If the Resolution Plan is not submitted to the Tribunal in the specified time,
- If the Resolution Professional believes to do so,
- If during the implementation of the Resolution Plan, the Corporate Debtor does anything to contravene the Plan or the law then the Tribunal can order for Liquidation of the Corporate Debtor under Section 33.
The Resolution Professional appointed under the insolvency proceedings is to continue to act as the Liquidator unless replaced by the Tribunal. Some of the powers and duties of the liquidator under Section 35 are to verify all claims, to re-evaluate all the assets, to carry on the affairs of the Corporate Debtor, endorse any negotiable instruments, create a liquidation estate out of all the assets of the Corporate Debtor, consolidate claims etc. Following this and a few other legal requirements, the liquidation takes place and the proceeds from such a sale are distributed according to Section 53. Once the liquidation has taken place successfully, the Liquidator applies to the Tribunal to declare the Corporate Debtor as Dissolved. Upon receiving such an application and approving it, the Tribunal is to send out a Notice of the same within 7 days.
Fast track corporate insolvency proceedings
Fast Track Corporate Insolvency Proceedings, given under Chapter IV of the Code specifically cater to organizations that make a lesser turnover or have debts in lesser amounts or whose assets do not cross the value of Rs. 1 crore. Such organizations are usually Start-Ups, Unlisted Companies and Small Companies. FTCIRP is essentially the same as the regular CIRP. The only difference between the two is, while the regular CIRP allows 300+ days to complete the process of Corporate Insolvency, companies to which FTCIRP applies don’t require that long hence, the period for them is 90 days which is subject to the application of extension not beyond 45 days. Every other aspect of the proceedings mirrors the proceedings of the regular CIRP.
What is voluntary liquidation?
Before 1st April 2017, voluntary liquidation was governed by the Companies Act, 2013 but after the Code came into existence, it elucidated on such liquidation and transferred the jurisdiction to the NCLT under Chapter V. For any corporate person to apply for voluntary liquidation, they must:
- Make a declaration comprising the approval of the majority of directors for such voluntary liquidation and stating through an affidavit that they have looked into all financial affairs of the Corporate Person and its safe to conclude that the Corporate Person has no debts to be paid or if he does then he has the capability to pay them
- That the liquidation is not done to defraud a person.
- Have a special meeting to appoint a Resolution Professional to act as their Liquidator.
- Have a resolution from the members that this liquidation is only taking place as the expiration of the company has come.
Where all such conditions are fulfilled, the company must notify the Registrar of Companies of liquidating the company within 7 days of such information. The commencement of the liquidation, after creditors’ approval, can be considered as the date of passing such a resolution. After all the assets of the company have been liquidated, the liquidator is to apply to declare the company dissolved.
The above are the four different ways of resolving insolvency matters which have been given in a crystal-clear form under the Insolvency and Bankruptcy Code. However, the nature of companies, the continuity of assets and the perpetuity of business changes drastically with the times. Therefore, the Code had to be amended before to accommodate all the changes. The Code has seen several amendments through the years which have been done in the best interest of all parties involved. Some of these amendments have been made for the extension of the CIR process from 270 days to 330 days or giving more power to the creditors or including home-buyers as financial creditors etc.
Who can withdraw CIRP?
While the IBC code speaks at length and changes often in regards to the Insolvency proceedings, for a long time it remained mum about the withdrawal of the same. The Code only contained one provision of Rule 8 under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which allows the application for initiation of corporate insolvency proceedings to be withdrawn only before it has been admitted by the National Company Law Tribunal. These brought to light questions such as “What happens when parties come to a settlement after admission of application?”, “Can such withdrawals be accepted or made?”, “Will such settlements stand valid?” etc. Luckily, for the country, these questions were broadly answered in the case of Lokhandwala Kataria Construction Pvt. Ltd. vs. Nisus Finance and Investment Managers LLP.
What happened in the Lokhandwala Kataria Case?
Facts
The financial creditor and Petitioner, Nisus Finance and Investment Managers LLP had filed an application in 2016 in the Mumbai Bench, NCLT under Section 7 to initiate corporate insolvency resolution proceedings against the corporate debtor and Respondent, Lokhandwala Kataria Construction Pvt. Ltd, because of an unpaid debt. After the application was filed, the Tribunal took cognizance of the dishonour of the first cheque as payment by the Respondent and acknowledged the default occurred. Henceforth, the Tribunal admitted the application of CIRP as filed under Section 7. However, after such admission, the parties seemed to have come to a settlement personally.
Post settlement, the Corporate Debtor, appealed to the National Company Law Appellate Tribunal (NCLAT) to withdraw the application by using its inherent powers under Rule 11 of National Company Law Appellate Tribunal Rules, 2016, which allow the Appellate Authority to make such orders to give such directions which may be necessary for meeting the ends of justice or preventing any abuse to the Tribunal, as the same was not permitted under Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. However, NCLAT found no merit in the same and refused to use its inherent powers under Rule 11 thereby rejecting the appeal and not withdrawing the application to initiate CIRP.
Upon receiving the order of NCLAT, the corporate debtor approached the Apex Court and filed a plea for the same issue of withdrawing the application to initiate CIRP as the parties had already come to a settlement.
Issues
- Can the CIRP be withdrawn by the Tribunal?
Findings
The Hon’ble Supreme Court observed that since the parties had already come to a settlement outside the Court, there was no need to further proceed with the Corporate Insolvency Resolution Proceedings. The Hon’ble Supreme Court used its inherent powers given under Article 142 which says that the Court may make such orders or pass such decrees that lie in the best interest of justice to the people. Using the power of Article 142, the Supreme court allowed such a settlement between the parties thereby also permitting the withdrawal of the application of proceedings from the Tribunal.
The Supreme Court, subsequently, observed the same stand in other cases like Mothers Pride Dairy India Private Ltd Vs Portrait Advertising and Marketing Private ltd and Uttara Foods and Feeds Private Limited v. Mona Pharmachem and recommended that competent authorities make suitable amendments to ensure that such matters can be handled with the appropriate Authorities thereby removing the need for the Apex Court’s involvement.
Under the Mothers Pride Dairy case, the Petitioner, Mother Dairy had filed the application of initiating CIRP under Section 9 as an operational creditor. After filing such an application and receiving acceptance of the same by the Tribunal, the parties came to an Outside Settlement, upon which an appeal to withdraw the petition was made but rejected according to the provisions of Rule 11 of National Company Law Appellate Tribunal Rules 2016. Subsequently, a plea was filed in the Supreme Court for the withdrawal of the application post-admission and similar to the Lokhandwala Kataria case, the Hon’ble Supreme Court, in this case as well, used its inherent powers under Article 142 and allowed the withdrawal.
The Uttara Foods case also saw a similar outcome where both parties then appealed to NCLAT for withdrawal of the application of CIRP under Section 7 after deciding to reach an Outside Settlement. Considering Rule 11 of the NCLAT Rules, 2016, the Appellate Authority, yet again, refused to admit the appeal thereby rejecting the withdrawal. Post rejection, the parties approached the Apex Court for the same issue which then used its inherent powers under Article 142 and approved the withdrawal. Not only did the Hon’ble Supreme Court approve the withdrawal but also recommended making necessary amendments in the Code to give Authorities the necessary power to give orders of such nature.
Amendment
Considering the Court’s statement, the Insolvency Law Committee decided to deal with the CIRP post-settlement and released a report that talks about how the Code’s only objective was to ensure all creditors are compensated and paid by the Corporate Debtor but with the regularity of applications that are being settled outside Court before starting the process, the Committee unanimously decided to amend the rules allow the withdrawal of initiation applications even after being admitted. However, 90% of the Corporate Debtor’s creditors have to vote for such approval, after which the application can be withdrawn.
The amendment was shown in Section 12A which is to be read with Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which says that the Adjudicating Authority may withdraw any application made under Section 7, 9 or 10 only upon attaining a majority vote of 90% of creditors from the Committee of Creditors and such a withdrawal proposal is to be filed to the Resolution Professional.
Subsequently, in a 2019 matter between Shaji Purushothaman v. Union Bank of India, where the Union Bank of India got a Resolution Plan approved by the CoC offered an Outside Court settlement after the approval to which the NCLT responded by allowing Union Bank of India to file an application under Section 12A. The NCLT was of the opinion that if the CoC were happier and believed that the Outside Court settlement was more in their favour, then they may proceed to approve such withdrawal. However, the Tribunal did not comment further on that, completely leaving the decision in the hands of the CoC.
Even in Satyanarayan Malu v. SBM Paper Mills Ltd, the NCLT Mumbai allowed the withdrawal application even after the expression of interest was given and the Resolution Plan was proposed. In this case, the Corporate Debtor, SBM Paper Mills had filed an application to initiate CIRP under Section 10 of the Code. The Tribunal had admitted the application, the moratorium was declared and the Interim Resolution Professional was also appointed. Resolution Plans were also proposed; however, they were refused by most creditors, therefore, leaving the fate of the application either to liquidation or withdrawal of the application. The case was to decide upon a very important issue: Whether the applicant is entitled to withdraw their own application under Section 12A? The Tribunal then decided that the withdrawal is maintainable even if it has been filed by the applicant himself. The case also decided that the one-time settlement proposal of the Corporate Debtor was in the benefit of both, the Debtor and creditors and hence, the withdrawal after proposing a Resolution Plan was also allowed.
Critical analysis
Studies suggest that until 2019, 526 cases were withdrawn mostly before coming to the stage of Resolution Plans. Most companies preferred Outside Settlement and were better equipped to do the same once they got the time they required. Outside settlements appear to have been more favourable to the creditors than the drafting of Resolution Plans. Perhaps the fear of loss of control over their company and the dedication to it has driven corporate debtors to offer several various proposals to pay their debts.
Section 12A has broadly given the flexibility of choice to both parties of the application by giving them a choice to withdraw the application of CIRP before:
- Before admission of the application under Sections 7 or 9 or 10,
- After admission but before the constitution of a committee of creditors (CoC),
- After the constitution of CoC but before the issue of invitation for expression of interest,
- After the issue of invitation for expression of interest.
However, it has been observed in previous cases that such withdrawal is accepted post invitation for expression of interest. Section 12A is to be read with Regulation 30A of the 2016 Rules as it provides the procedure for such withdrawal. The application of such withdrawal is to be filed by the Resolution Professional or the Interim Resolution Professional through Form FA. Certain time limits are given for such withdrawal before each stage which is to be adhered to.
Reports from the Insolvency and Bankruptcy Board of India also showed a sharp rise in the number of cases that were withdrawn. Creditors and Debtors found several reasons such as Direct Full Settlement, Direct Settlement with other Creditors, Settlement Promise in the Future, Other Settlements, Applicant not pursuing CIRP due to costs, Debtors not traceable etc. Most cases were settled directly with the applicant and thereby withdrawn. The country would have faced bigger problems had the Insolvency & Bankruptcy Code, 2016 not come to rescue by increasing the threshold limit for initiating CIRP to Rs. 1 crore and by inserting Section 10A in 2020 which suspends the application of the Code for 6 months for any default arising after March 25th 2020. If it were not for these changes, the outcome of such business functioning would be several CIRP applications filed only to be withdrawn later perhaps because of outside settlements or worse, high costs.
However, the amendment of the Code to bring this section into existence appears to be a great step towards providing the parties to such a matter with a higher level of flexibility. While the proper use of the Section is debatable, the silver lining for the creditors is that yet again, the Code has found a way to give them more power and rightly so! On the other hand, the debtors also get a second chance at paying their debts without having to go through the entire tedious and upsetting process of Insolvency or Liquidation. From a surface level, this also appears to be insulting to the Tribunals because if Outside Settlements were the ultimate motive, then the first step of such an application would mean that people are only wasting the Tribunal’s time. However, as such processes tend to take a toll on both, the debtor and the creditors, it lies in the best interest of everyone to give this second chance and take the slight risk of occupying the Tribunal’s time.
Conclusion
While the efficiency and use of this Section is still quite a debatable topic, what can’t be overlooked is that this is just another way of giving the debtors a second chance without having caused any loss to the creditors and in turn, giving them more power and control over this decision. Essentially, the main objective of the entire Code lies in the protection of interest of the Creditors and facilitating smoother settlements between both the debtors and creditors, two points which Section 12A seems to tick. Additionally, the Tribunals have also gone to longer lengths by permitting withdrawal of such applications even after reaching the fur stages as prescribed. The root for such decisions, again, lies in the best interest of the creditors to ensure they are helped in every way possible. As time changes, law changes. While Section 12A works for now and seems to have a consistent success rate, the country is yet to look and deal with all the challenges that await us post-pandemic. High rates of using Sections 7,9 and 10 can be predicted and hopefully, Section 12A will also be used equally for proper reasons without any misuse and help to work better for the Business part of our society!
References
- https://www.soolegal.com/synopsis?snpuid=Njc1
- https://ibbi.gov.in//uploads/legalframwork/4c4602a23823998ec110b97804386b38.pdf
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