The Honourable Supreme Court, in the matter of Abhishek Singh v. Huhtamaki PPL Ltd. and Ors.^[1] recently rendered a significant ruling, establishing that a plea for the withdrawal of the Corporate Insolvency Resolution Process (‘CIRP’) can be allowed by the adjudicating authority even prior to the establishment of the committee of creditors (‘CoC’). This interpretation has devolved in accordance with Regulation 30A of the IBBI (Insolvency Resolution Process for Corporate Persons), 2016, (‘IBBI Regulations’) and the same is also in consonance with Section 12A of the Insolvency and Bankruptcy Code, 2016 (‘IBC/Code’).

Case overview:

In the present case Huhtamaki PPL Ltd. (‘Operational Creditor’) initiated Section 9 Proceeding against Manpasand Beverages Ltd. (‘Corporate Debtor’). The said Proceeding was filed before the Hon’ble National Company Law Tribunal, Ahmedabad (‘NCLT’). The NCLT admitted the Section 9 Petition, Interim Resolution Profession (‘IRP’) was appointed, and Corporate Insolvency Resolution Process (‘CIRP’) was initiated.

Subsequently, before the constitution of CoC, the Operational Creditor and Corporate Debtor reached a settlement. After the terms of the settlement were honoured, IRP filed an application under Regulation 30A of the IBBI Regulations before the NCLT for withdrawal of the CIRP against the Corporate Debtor (‘Withdrawal Application’). Considering the same, the Operational Creditor also filed an application under Section 12A of the IBC.

The NCLT rejected the Withdrawal Application, citing various reasons, including:

1. Payments to the Operational Creditor from the Corporate Debtor have been made during the moratorium period, which was in violation of the moratorium provision.
2. Allowing the Withdrawal Application would negatively impact the rights of other creditors who had already filed their respective claims against the Corporate Debtor.
3. The NCLT deemed that Regulation 30A of the IBBI Regulations did not hold binding authority.

Against the decision of the NCLT (‘Impugned Order’), the Corporate Debtor appealed before the Hon’ble National Company Law Appellate Tribunal (‘NCLAT’). NCLAT vide its order stayed the formation of the CoC till the disposal of the application filed by the Operational Creditor under Section 12A of the IBC. Further, the issues arising in the Impugned Order were challenged before the Hon’ble Supreme Court vide a Special Leave Petition, and the Hon’ble Apex Court framed the following issues for consideration:

Issues:

1. Whether an application for withdrawal of the CIRP under Section 12A of the IBC can be allowed by the NCLT prior to the constitution of the CoC?
2. Whether Regulation 30A of the IBBI Regulations is binding upon the NCLT?

The legal position on the withdrawal of CIRP is as follows:

1. Section 12A of the IBC Code enables the withdrawal of CIRP that has been admitted under Section 7, 9, or 10 of the Code. However, the same is permitted only with the approval of ninety percent of the voting share of CoC as per the manner prescribed.
2. Regulation 30A of the IBBI Regulations outlines the stages regarding withdrawal of IBC Proceeding:
3. Before the formation of CoC: The applicant can submit the withdrawal application through IRP.
4. After the constitution of CoC: The applicant can make the withdrawal application through the interim resolution professional or the resolution professional, depending on the case.

Analysis and findings:

In the matter at hand, the Honourable Supreme Court allowed the appeal and made the following observations:

1. Section 12A of the Code does not explicitly prohibit the consideration of applications for withdrawal before the constitution of the CoC.
2. Despite being of subordinate nature to the IBC, the IBBI Regulations carry binding authority over NCLT.
3. Reliance was placed on the precedent set by the case of Swiss Ribbons (P) Ltd. v. Union of India^[2] wherein it held that at any stage where the COC is not yet constituted a party can approach the NCLT and the tribunal vide its inherent powers under Rule 11 of NCLT Rules 2016 may allow or disallow an application for withdrawal or settlement.
4. Regulation 30A of the IBBI Regulations was amended to allow the consideration of applications for withdrawal of CIRP even before the formation of the CoC. It was clarified that Regulation 30 of the IBBI Regulations does not conflict with Section 12A of the IBC; rather, it complements the provisions introduced by Section 12A of the IBC.
5. Besides, the NCLT possess inherent powers under Rule 11 of the NCLT Rules of 2016 to either permit or reject an application for withdrawal of the CIRP even prior to the formation of the CoC.
6. The other creditors of the Corporate Debtor will retain their independent rights against the Corporate Debtor, which would remain unaffected even if the settlement between the Corporate Debtor and the Operational Creditor is accepted and the proceedings are allowed to be withdrawn.

In light of the above considerations, the Hon’ble Supreme Court has set aside the Impugned Order. Furthermore, it has expressly clarified that its observations shall not impact the rights of other creditors, who shall retain the freedom to assert their independent claims in appropriate proceedings, which shall be adjudicated in accordance with the relevant legal provisions. Moreso, through its ruling, the Supreme Court has not only addressed the existing gap in Section 12A of the IBC by affirming that IBC proceeding can be withdrawn prior to constitution of CoC even if CIRP is initiated, but it has also recognized the obligatory status of Regulation 30A of the IBBI.

[The author is an Associate in Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, Hyderabad]

1. [1] [MANU/SC/0312/2023]
2. [2] WRIT PETITION (CIVIL) NO. 99 OF 2018