Inherent Powers Under Rule 11 Cannot Be Used To Subvert Well Entrenched Procedure Under Section 12A R.W. Regulation 30A,Supreme Court Observes In Byjus Insolvency Matter
In a significant development, the Supreme Court in GLAS Trust Company LLC Versus BYJU Raveendran & Ors. held that the NCLT cannot be considered a post office that merely puts a stamp on the withdrawal application submitted by the parties through the IRP.
The Insolvency Law Committee (ILC), based on whose recommendations Section 12A was introduced, reasoned that there should be a consensus among all the stakeholders involved before filing an application, and it should not be limited to an affair between the applicant and the corporate debtor. It was never fathomed by the ILC that withdrawal of claims would remain a unilateral process, even though the application is admitted and CIRP has been initiated.
The court further observed that the NCLAT was not justified in permitting CIRP withdrawal application filed by the former director of the corporate debtor when insolvency application was filed and the CIRP was initiated. The only recourse available was to file such an application through IRP as per well established legal procedure.
In this article, we will analyse the legal provisions related to withdrawal of the CIRP contained in the code.
Introduction
Initially, the IBC did not provide for withdrawal of insolvency petitions post-admission, leading to complications for parties who reached a settlement. In the absence of statutory provisions, the Supreme Court had previously exercised its extraordinary power under Article 142 of the Constitution to permit such withdrawals, as seen in Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers. This judgment pushed for some legislative changes to address the gaps which were further highlighted by the court in Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem wherein the court reiterated that suitable amendments should be made to arrest the existing gaps in the IBC framework.
Constitution of Insolvency Law Committee
Responding to these concerns, the Ministry of Corporate Affairs constituted the Insolvency Law Committee (ILC), which recommended the inclusion of provisions for CIRP withdrawal post-admission. The ILC proposed that such withdrawal should be subject to the approval of 90% of the Committee of Creditors (CoC), considering that insolvency proceedings involve all creditors rather than being confined to the applicant and the corporate debtor. Consequently, Section 12A was introduced through the 2018 Amendment Act, alongside Regulation 30A in the CIRP Regulations, outlining the procedure through which CIRP can be withdrawn. These amendments aimed to balance the interests of all stakeholders and align the regulatory framework with judicial observations.
Gaps In Existing Provisions- Brilliant Alloy Private Limited and Swiss Ribbons
Regulation 30A in its original form, was silent about withdrawal in cases where the application had been admitted, but the CoC had not been formed. Similarly, Regulation 30A(1) only spoke of withdrawal before the invitation of expression of interest had been issued and there was no provision which provided for withdrawal after it had been issued. Both these gaps were identified in subsequent judgements.
First issue was addressed by the court in Swiss Ribbons (P) Ltd. v. Union of India wherein it was held that ““we make it clear that at any stage where the Committee of Creditors is not yet constituted, a party can approach NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement.”
In the above case, the constitutionality of section 12A was challenged on the ground that approval of application for withdrawal by CoC with 90% voting shares is arbitrary. The court rejected this argument and held that “this high threshold has been explained in the ILC Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantially all the financial creditors, have to grant their approval to an individual withdrawal or settlement.”
However, it was pointed out that given the in rem nature of the proceedings, such an application must be decided only after hearing all the parties concerned and considering the relevant factors in the case.
While addressing the second issue, the Supreme Court observed in Brilliant Alloy Private Limited v. S Rajagopal that “the requirement in Regulation 30A, as it stood then, that the application must be made before the issuance of an invitation for expression of interest was only directory. The regulation, it was held, has to be read along with Section 12A, which does not contain any bar on withdrawal after the issuance of an invitation for expression of interest.”
From the above observations, it is established that application for CIRP withdrawal can also be filed after the issuance of expression of interest. The court opined that although Regulation 30A provided that the application can only be filed before the issuance of expression of interest, section 12A contains no such restrictions as to when such an application can be filed. This means that a combined effect of both the provisions is that an application can also be filed even before the constitution of the CoC.
After these developments, the concerned Regulation was further amended incorporating observations of the Supreme Court in the above cases. Regulation 30A (1) now provides for the procedure to make an application for withdrawal before the NCLT under Section 12A, both before and after the constitution of the CoC. Sub-clause (a) of Regulation 30A (1) states that in cases where the CoC has not been constituted, the applicant may place an application for withdrawal before the NCLT, through the IRP. Similarly, subclause (b) of Regulation 30A (1) states that in cases where the CoC is constituted, the applicant may place an application for withdrawal before the NCLT, through the IRP or the RP, as the case may be. In essence, at both stages – before and after the constitution of the CoC – the application for withdrawal may only be made through the person appointed to oversee the insolvency proceedings, i.e. the IRP or the RP.
The proviso to Regulation 30A (1) provides that when the application is made after the CoC has been constituted and after the invitation for expression of interest has been issued, the applicant shall state the reasons for withdrawal at this stage.The application can be allowed in the latter case only if proper justifications are provided for late withdrawal.
Conclusion
The court while summarising the principles from the above discussion observed that the process for withdrawal of applications under Sections 7, 9, or 10 of the IBC varies depending on the stage of the CIRP. Before the application is admitted, the applicant may approach the NCLT directly under Rule 8 of the NCLT Rules, 2016, to seek withdrawal. At this stage, proceedings remain in personam, involving only the applicant creditor and the corporate debtor. The NCLT limits its inquiry to these two parties, as other creditors are not stakeholders. Once the application is admitted but before the Committee of Creditors (CoC) is constituted, Regulation 30A of the CIRP Regulations, 2016, as amended after Swiss Ribbons Pvt. Ltd. v. Union of India, permits withdrawal through an application filed via the Interim Resolution Professional (IRP). Here, the proceedings become in rem, affecting broader interests, and the NCLT must exercise judicial discretion, ensuring that all relevant factors are considered.
For withdrawals post-admission and after the CoC is constituted, the process requires the CoC’s approval with a 90% voting share. If the invitation for Expression of Interest (EOI) has not been issued, the withdrawal application, submitted through the IRP or Resolution Professional (RP), must be approved by the CoC before being presented to the NCLT. Once the EOI is issued, the applicant must provide valid reasons for withdrawal at this advanced stage, as mandated by the proviso to Regulation 30A(1). The NCLT, as a quasi-judicial body, ensures that such requests are not approved without evaluating the fairness and transparency of the justification, considering the broader pool of stakeholders impacted by the withdrawal.
Applying the legal principles to the facts of the present case, the Court held that the NCLAT erred in invoking its inherent powers under Rule 11 to approve a CIRP withdrawal application. It emphasized that, after admission of an insolvency petition but before CoC constitution, the proper recourse would have been to file a withdrawal application through the Interim Resolution Professional (IRP) before the NCLT. The Supreme Court clarified that inherent powers under Rule 11 cannot be employed to bypass the established procedure under Section 12A and Regulation 30A.
1. 2024 INSC 811
2. 7 (2018) 15 SCC 589
3. (2018) 15 SCC 587
4. (2019) 4 SCC 17
5. (2022) 2 SCC 544.
