Rectifying the Law: CoC Approval for Withdrawal of CIRP Proceedings

[Pradhyuman Singh is a V year student of law from Gujarat National Law University, Gandhinagar]

On 4 January 2022 in Vinayak Deshpande v. Nexo Industries, the National Company Law Appellate Tribunal (“NCLAT”), Chennai allowed a corporate debtor to settle the matter with the creditor. Accordingly, the National Company Law Tribunal (“NCLT”) was directed to allow the application for withdrawing the corporate insolvency resolution process (“CIRP”) application in compliance with section 12A, Insolvency and Bankruptcy Code, 2016 (“IBC”) and regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Section 12A of the IBC reads as follows:

“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 per cent. voting share of the committee of creditors, in such manner as may be specified”  

Section 12A provides that an application for withdrawal may be made by an applicant after obtaining consent from the committee of creditors (“CoC”). It further allows the Insolvency and Bankruptcy Board of India to make regulations to prescribe the manner in which such an application may be made.

This has been done in the form of regulation 30A. This regulation provides-

“(1) An application for withdrawal under section 12A may be made to the Adjudicating Authority –

(a) before the constitution of the committee, by the applicant through the interim resolution professional;

(b) after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be:….”

Thus, the regulation creates a distinction in the manner in which an application may be made. This is based on whether the application is made before or after the constitution of the CoC.

If an application is made after the CoC is formed, the interim resolution professional (“IRP”) forwards the same to the CoC to obtain their approval through a 90% majority. If such approval is obtained, the application is then presented to the NCLT. However, if an application is made before the CoC is formed, then the IRP directly forwards the request to the NCLT for approval. In this scenario, the approval of CoC is not sought at all.

In the facts of the present case, the CoC had not yet been formed. Accordingly, the NCLAT directed the IRP to process the application for withdrawal and directly send the same to the NCLT for approval. This post will argue that, in so far as regulation 30A allows withdrawal of applications without the approval of the CoC, it is ultra vires the IBC and non-est in law. 

Context of the Law behind Section 12A and Regulation 30A

After the IBC and the relevant regulations were brought into effect in 2016, there were many practical and legal issues in the law’s implementation. To iron out the issues that were cropping up, the Ministry of Finance and Corporate Affairs constituted the Insolvency Law Committee on 16 November 2017. The recommendations of this committee formed the basis for the subsequent amendments made to the IBC in 2018. For this reason, the recommendations serve as an interpretive guide and help establish the context in which the changes were suggested. 

As the IBC originally stood, there was no provision for the withdrawal of CIRP applications once they were admitted. This caused hardship in some instances where the parties wanted to settle the matter and honour the financial obligations of their creditors. In the absence of any provision at the time, judicial decisions had allowed for settlements to be made even after the admission of CIRP Petitions. Reference may be made here and here. In pursuance of this, the Insolvency Law Committee made the recommendation of altering the law to allow for withdrawal.

In this backdrop section 12A and regulation 30A were introduced to the IBC through appropriate amendments in 2018. It is to be noted that regulation 30A was amended in 2019. Regulation 30A as it originally existed did not create a bifurcation based on whether withdrawal is sought before or after the constitution of CoC. At the time, the text provided:

“(1) An application for withdrawal under section 12A shall be submitted to the interim resolution professional or the resolution professional, as the case may be, in Form FA of the Schedule before issue of invitation for expression of interest under regulation 36A….”

Prima facie, it appeared that an application could only be made before the issue of public invitation for claims by the IRP (due to the expression “shall”). However, the legal position was clarified when the constitutionality of the IBC and the CIRP Regulations was challenged in Swiss Ribbons v Union of India. The Supreme Court reiterated its decision in Brilliant Alloys v S. Rajagopal, where it was held that an application for withdrawal under regulation 30A can also be made after the public invitation for claims was issued. The expression “shall” was to be read as “may” and, consequently, the provision was held to only be directory.

Further, while adjudging on the constitutionality of section 12A, it held the provision to be intra vires the Constitution and not arbitrary. It found the rationale behind the provision to be reasonable by looking into the recommendations made by the Insolvency Law Committee. However, despite appreciating the context of the law from the Committee Report, the Court went on to hold:

“A question arises as to what is to happen before a committee of creditors is constituted (as per the timelines that are specified, a committee of creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers Under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement.” [Emphasis added]

In these words, notwithstanding the text of section 12A, the Supreme Court held that in the event the CoC was not yet formed, an application for withdrawal may be directly forwarded to the NCLT. To recognise this dictum of the Supreme Court, regulation 30A was subsequently amended to reflect the law as it stands today.  

Analysis

The basis of asserting the invalidity of regulation 30A is that, as a piece of delegated legislation, is ultra vires the parent Act (in this case, the IBC). It is a long standing and consistent principle of administrative law that any subordinate legislation cannot be ultra vires the parent law. (reference may be made here and here) The parent legislation is the source of authority for the executive to make laws. For this reason, it has to necessarily be bound by the legislative policy laid down in the statute and cannot be inconsistent with it.

The text of section 12A provides that withdrawal may be allowed by the NCLT on an application made by the applicant with the approval…. of the committee of creditors, in such manner as may be specified. The last part of sentence “in such manner” is qualified by the requirement of approval from the CoC. Therefore, section 12A provides administrative discretion only to prescribe the procedure for making such an application. This is made clear by use of the expression “in such manner”. The substantive requirement of the application (CoC approval) has already been provided in the statute itself. It is only the manner in which such an application would have to be made that is to be prescribed by delegated legislation.  As regulation 30A permits withdrawal without the mandatory approval of the CoC, to that extent, the regulation is ultra vires section 12A.

Apart from the textual argument, the context in which section 12A and the original regulation 30A were enacted ought to be kept in mind while examining this issue. These provisions were introduced in 2018 on the basis of the report of the Insolvency Law Committee. When the Committee recommended introducing a provision that allowed for withdrawal of CIRP proceedings, they did so with a caveat. It was observed that up until that point, judicial approval of settlements was only made where an agreement was made between the corporate debtor and all the creditors. It was specifically stated that a provision for allowing withdrawal ought not to be made in pursuance of a settlement between just the applicant creditor and the corporate debtor. (Refer Para 29.1/29.2 of the Insolvency Law Committee Report- March 2018)

Such private arrangements would be against the object and spirit of the IBC which created the CIRP process as a proceeding in rem. It required the interests of all stakeholders in the public at large to be taken into consideration before any decision could be made. Therefore, it was suggested that withdrawal may be permitted only when there was a near unanimous decision of the CoC with 90% vote. The requirement of obtaining the consent from the CoC would represent the interest of all the stakeholders and prohibit private settlements that would adversely affect other stakeholders.

Accordingly, the language of Section 12A represents an institutional check on private settlements by making the CoC approval mandatory. Rather than taking rules of grammar lightly, the language of the provision should be read strictly. Consequently, any regulation directly inconsistent with the provision ought to be held ultra vires.

The Supreme Court in Swiss Ribbons overlooked these considerations in reading section 12A and made an erroneous finding. The decision on this count requires reconsideration. Further, as this unfortunately formed the basis of the amendment of regulation 30A, this provision too is liable to be struck down to the extent it is ultra vires.

Pradhyuman Singh

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