Withdrawing the CIRP can save the debtor company

JThe purpose of the Insolvency and Bankruptcy Code, 2016 (IBC) is to maximize the value of the debtor company’s assets while protecting and balancing the interests of all stakeholders. The IBC discourages individual enforcement actions and strives to settle company debts for the benefit of all creditors. To further these objectives, Section 12A was introduced by the IBC (Second Amendment) Act 2018 allowing for the withdrawal of a request to invoke corporate insolvency resolution proceedings (CIRP) previously admitted under Sections 7, 9 or 10 of the IBC.

Shreya Sircar
Partner
Bharucha & Partners

A request for withdrawal may be filed either with the approval of 90% of the voting rights of the Creditors’ Committee (CoC), or, where the CoC has not been constituted, by addressing the National Company Law Court (NCLT) who may, at its discretion, accept or reject the request. The high threshold for obtaining approval of 90% of the voting rights of the CoC militates against withdrawals which would allow the recovery of individual claims to the exclusion of other creditors. All financial creditors can then participate and collectively assess the viability of the negotiated resolution proposal. When withdrawal requests are filed before the CoC is incorporated, the NCLT does not benefit from the commercial wisdom of the CoC. In making its decision, the NCLT should ensure that the interests of all stakeholders are considered. To ensure that this is done, the NCLT tends to reject withdrawal requests when it is not clear that the interests of all stakeholders have been considered. (To see Dinesh Gupta v Rolta India Ltd).

Section 12A can allow creditors to recover higher amounts than they would usually in a CIRP, where they are often forced to take massive haircuts or quietly accept the available proportion in the cascade in the event of liquidation. The section seems to indicate a shift from a creditor-centric approach, seeking to maximize or recover individual debts, to a debtor-controlling process. It appears to give promoters the opportunity to regain control of the affairs of the debtor company.

Section 12A is not without its share of criticism. The possible misuse of the section by those who are intentionally excluded from the resolution process under other provisions such as Section 29A, which prohibits promoters and related parties from acting as resolution applicants, deserves to be examined. A settlement reached between the promoters with specific creditors is similar to a resolution plan proposed by a related party, which is prohibited under Section 29A, thereby allowing backdoor entry to those who drove the business into default.

A withdrawal request is likely to encounter opposition from other financial creditors or any other creditors whose debts have not been settled under the resolution agreement. While it is true that the independent right to pursue claims and request the initiation of a CIRP by other creditors with whom the debtor company has not settled remains intact, this may lead to a multiplicity of proceedings, a possibility which should be avoided.

A transaction concluded between the debtor company and certain creditors may even be a privileged transaction, prohibited by article 53 of the CIB, and contrary to the interests of the rest of the creditors and the stakeholders. For example, an application filed by an operational creditor requesting the opening of a CIRP may be admitted by the NCLT. Subsequently, the debtor company settles the debts of this operational creditor, who then files a request for withdrawal under Article 12A before the establishment of the CoC. If this were allowed by the NCLT, it would place the operational creditor in a superior position to the financial creditors, which is outside the framework envisaged by the IBC.

Despite the issues, withdrawing a CIRP under Section 12A remains a viable option for both creditors, who can accept a proposal from the debtor company if the settlement amount is greater than the value they stand on. expect to receive at the conclusion of a CIRP or in compulsory liquidation, as well as to the debtor legal entity, which is offered the possibility of regaining control of its activity and perpetuating the company.

Shreya Sircar is a partner and Sanjukta Roy is associated with Bharucha & Partners.

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Bharucha & Partners

Equity Mansion,
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New Delhi – 110 019. India

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