The National Company Law Tribunal, Mumbai (“NCLT“) in the case of Satyanarayan Malu vs SBM Paper Mills Limited (“Corporate Debtor“) vide its Order dated 20th December, 2018 deliberated upon two questions of law viz., (i) whether an applicant who has filed an application for initiation of Corporate Insolvency Resolution Process (“CIRP“) under Section 10 of the Insolvency Bankruptcy Code (“Code“) on behalf of the Corporate Debtor can withdraw the same? and (ii) whether a resolution applicant who has submitted a resolution plan which has been approved by the Committee of Creditors of the Corporate Debtor can withdraw the same when the plan is placed before the NCLT for approval?
In the aforementioned case, the Corporate Debtor was under financial distress and was unable to repay its debts to Allahabad Bank (“Financial Creditor“). The Corporate Debtor through one of its director viz., Mr. Satyanarayan Malu (“CIRP Applicant“) filed an application for initiation of CIRP under Section 10 of the Code. The said petition was admitted by the NCLT vide its order dated 17th October, 2017 (“CIRP Order“). In pursuance thereof, CIRP was initiated, a moratorium was imposed and an Interim Resolution Professional (“IRP“) was appointed by the NCLT.
In accordance with Section 21 of the Code, the Committee of Creditors (“CoC“) of the Corporate Debtor was constituted comprising only one member, i.e the aforesaid Financial Creditor. The IRP in accordance with the Code, proceeded to publish an advertisement inviting ‘Expression of Interest’ (“Expression of Interest“) from prospective Resolution Applicants.
The resolution plan filed by one M/s Khandesh Roller Floor Mills (“Resolution Applicant“) was accepted by 66% of the Financial Creditors in the CoC. Thereafter in accordance with Section 30(6) of the Code, the IRP submitted the said resolution plan before NCLT for approval of the resolution plan which had been accepted by the CoC.
Simultaneously, the CIRP Applicant himself filed a withdrawal application under Section 12A of Code since the Corporate Debtor had made an offer of a one time settlement to the Financial Creditor, wherein the Corporate Debtor stated that it was agreeable to pay an amount greater than the amount offered by the Resolution Applicant.
Interestingly, the Resolution Applicant also filed an application for withdrawal of the Resolution Plan before the NCLT.
KEY ISSUES BEFORE NCLT
- Whether a Corporate Debtor who has filed a petition for initiation of CIRP (through its Director) under Section 10 is entitled to withdraw the same under Section 12A of the Code, especially when an Expression of Interest inviting resolution plans had already been published?
- Based on the facts and circumstances as stated above, the NCLT observed that the CIRP Applicant is a Director of the Corporate Debtor and the application for initiation of CIRP under Section 10 is signed by him and now the CIRP Applicant himself is the signatory to the withdrawal application and thus, the CIRP Applicant is entitled to withdraw the same.
Before reaching this conclusion, the NCLT referred to Section 12A of the Code and Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016 introduced vide notification dated 3rd July, 2018 (“Notification“)
Section 12A of the Code:
“Withdrawal of Application under Section 7,9 and 10.
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.”.
Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016
“Withdrawal of application.
(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.
(2) The application in sub-regulation (1) shall be accompanied by a bank guarantee towards estimated cost incurred for purposes of clauses (c) and (d) of regulation 31 till the date of application.
(3) The committee shall consider the application made under sub-regulation (1) within seven days of its constitution or seven days of receipt of the application, whichever is later.
(4) Where the application is approved by the committee with ninety percent voting share, the resolution professional shall submit the application under sub-regulation (1) to the Adjudicating Authority on behalf of the applicant, within three days of such approval.
(5) The Adjudicating Authority may, by order, approve the application submitted under subregulation (4).“
After going through the above provisions, the NCLT held that the date of enforcement of the said Notification is from the date of publication in the official gazette and shall apply only to prospective CIRP commencing on or after the date of the Notification i.e. on or after 3rd July, 2018. The present CIRP commenced prior to 3rd July, 2018, and therefore, the application for withdrawal is maintainable since the Notification was not retrospective in nature.
- The NCLT further held that rules / regulations of the Insolvency and Bankruptcy Board of India (“IBBI“) do not control the provisions of the Code, but in fact it was vice-versa. Since, Section 12A of the Code does not require that a withdrawal application has to be made before an Expression of Interest has been published, the present withdrawal application is maintainable.
- The aforesaid position has now also been affirmed by the Hon’ble Supreme Court of India in the order dated 14th December 2018 in the matter of Brilliant Alloys Private Limited vs Mr. S. Rajagopal & Ors.1, wherein the Hon’ble Supreme Court held that Regulation 30A has to be read along with Section 12A, which does not mention that an application for withdrawal is to be filed before invitation for expression of interest and therefore the condition under Regulation 30A can only be considered as directory in nature which would further depend on the facts and circumstances of each case as to whether a withdrawal application would be admissible or not after the invitation of expression of interest.
- Whether a withdrawal application filed by a Resolution Applicant, after approval of the resolution plan by majority vote of Committee of Creditors, is maintainable?
- The NCLT answered this in the negative. The NCLT held that withdrawal of application by the Resolution Applicant at the stage when the resolution plan has already been approved by the CoC is to essentially thwart the CIRP. It is not appropriate for the Resolution Applicant to first bid and thereafter on its own, withdraw its application. However, based on the fact and circumstances in the above case, as the CIRP Applicant was granted the permission to withdraw the application, the present application of withdrawal by Resolution Applicant had become otiose. The NCLT held that since the main petition did not survive on account of withdrawal, then there was no requirement of restructuring the financial position the Corporate Debtor.
- While referring to Section 33(1) of the Code, the NCLT observed that, in case if the NCLT did not receive a Resolution Plan under section under Section 30(6) of the Code or rejected the Resolution Plan under Section 31 of the Code, then in such case only left with the NCLT was to order the liquidation of the Corporate Debtor.
- Therefore, in the present case, the NCLT held that withdrawal application by such Resolution Applicant could not be entertained as the petition for withdrawal of CIRP by the CIRP Applicant has already been accepted by the NCLT.
- In addition to the issues discussed above, the NCLT was posed with the question as to what would take precedence between the One Time Settlement (as proposed by the Corporate Debtor) or the resolution plan (as approved by the Committee of Creditors). The NCLT adopted the golden rule of interpretation of statutes and interpreted the Code keeping in mind the basic intent for which the Code has been formulated. The preamble to the Code mentions that the Code is enacted inter alia ‘to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders’. The NCLT took a practical approach, to protect the interest of all stakeholders and to ensure the recovery of the debt, since the amount offered by the Corporate Debtor to the Financial Creditor under the One Time Settlement exceeded the amount proposed to be paid by the Resolution Applicant and thus decided to accept the withdrawal application filed by the CIRP Applicant.
- This view of the NCLT has also been affirmed by the Hon’ble Supreme Court in the matter of Brilliant Alloys Private Limited vs Mr. S. Rajagopal & Ors., wherein it stated that the requirements laid down in the regulations are directory in nature.
- In light of the ratio of the Apex Court in the above, it is highly likely that there may be a surge in the number of withdrawal applications under Section 12A of the Code. It is now for the consideration of the legislature as to whether it would be prudent to insert a time frame in Section 12A itself, to deter misusing the valuable time of an already overburdened judiciary and all the stakeholders.
- Further, as regards the Resolution Applicant, the NCLT rightly decided to impose costs on the Resolution Applicant by retaining an amount of Rs. 25,00,000/- (Rupees Twenty Five Lakhs only) out of the earnest money deposited by the Resolution Applicant as deterrence, to be utilized towards the cost of CIRP and other expenses. An acceptance of a withdrawal application at a stage where the CIRP is over and the resolution plan has already been accepted by the CoC would be a blatant disregard of the precious time of courts/tribunal. It was necessary to discourage such an action and dismiss the withdrawal application filed by the Resolution Applicant by setting a compelling precedent.
1 Petitions for Special Leave to Appeal (C) No. 31557/2018
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.