CoC Approval under Section 12A of the IBC A Stumbling Block to Settlement
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It provides a settlement mechanism through Section 12A of the IBC which allows for the withdrawal of a corporate insolvency resolution process (CIRP) application after its admission, provided the applicant obtains the approval of at least 90% of the voting share of the Committee of Creditors (CoC). The requirement for CoC approval, white intended to protect the interests of all creditors and ensure consensual resolution, has sparked debate on whether it acts as a hurdle to genuine settlements, particularly when the CoC, representing a diverse group of creditors, may not be able to reach a consensus quickly or may block settlements that could benefit the corporate debtor and the broader stakeholder community.
Understanding Section 12A of the IBC
Section 12A of the IBC was introduced by the Insolvency and Bankruptcy (Second Amendment) Act, 2018, with retrospective effect from June 6, 2018 to address the previous lack of a formal mechanism for out-of-court settlements after CIRP initiation. Prior to this amendment, withdrawal was only possible before admission, and parties had to rely on the Supreme Court’s inherent powers under Article 142 of the Indian Constitution to seek relief, as seen in cases like Uttara Foods & Feeds.
Read more Section 34 of Arbitration Act
This provision empowers the Adjudicating Authority, the National Company Law Tribunal (NCLT) to allow the withdrawal of an application admitted under sections 7, 9, or 10, with the condition that 90% of the voting share of the CoC has been done. Regulation 30A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) provides the detailed procedural mechanisms for such withdrawal applications, including provisions for filing before the constitution of the CoC through the interim resolution professional (IRP), and ensures the process is not inconsistent with section 12A, thereby complementing it.
Process of Withdrawal under Section 12A
The process of withdrawal of an application under section 12 is:
- Application by Applicant Creditor or Corporate Debtor: An application for withdrawal can be filed by the applicant creditor, who initiated the insolvency proceeding, or by the corporate debtor. Withdrawal can be sought at any stage of the CIRP, including before the constitution of the CoC, after its constitution but before the issue of an invitation for expression of interest, or even after the issue of such an invitation, with the requirement to state reasons for withdrawal in the latter case.
- Requirement of 90% CoC Approval: A withdrawal application requires approval by a CoC representing at least 90% of the voting share. This threshold is mandated to ensure collective creditor agreement, discourage individual actions that benefit specific creditors at the expense of the broader group, and promote comprehensive settlements that reflect the collective interest of all creditors.
- Role of Adjudicating Authority: The final decision to approve or disallow the withdrawal rests with the NCLT, which exercises its discretion after considering the application and the CoC’s approval. The NCLT has inherent powers under Rule 11 of the NCLT Rules, 2016 to allow or disallow a withdrawal application.
Judicial Pronouncements on Section 12A
The Supreme Court in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal held that Regulation 30A is directory rather than mandatory for settlement even after this stage based on the facts of the case. This interpretation was affirmed in Swiss Ribbons v. Union of India, in which the Supreme Court upheld the validity of Section 12A of the IBC, emphasizing the need to balance the interests of all stakeholders, including the CoC and operational creditors, during the insolvency resolution process. The National Company Law Appellate Tribunal (NCLAT) in Hem Singh Bharana v. Pawan Doot Estate clarified that withdrawal of the CIRP under section 12A is not permissible after the approval of a resolution plan by the CoC, even if the plan is still pending NCLT approval, as the CoC’s decision becomes binding and final.
Challenges in Implementation
- The high 90% CoC approval threshold is difficult to achieve and can lead to prolonged insolvency proceedings. This threshold also empowers dissenting creditors, potentially allowing a small minority holding over 10% of voting rights to veto settlements, thereby hindering early resolutions.
- There are significant delays due to procedural hurdles, particularly the requirement of 90% voting share, which can be time-consuming and difficult to achieve, especially in cases with diverse creditor interests. This delay can severely impact the revival prospects of the corporate debtor as it creates uncertainty, may deter potential investors, and erode the value of the business.
- This provision brings forth the risk of frivolous withdrawals where corporate debtors may misuse the section 12A to delay proceedings or settle private disputes, undermining the collective nature of insolvency.
Comparative Perspective
Countries like the United Kingdom, the United States, and Singapore, permit the deferral of insolvency proceedings in favour of arbitration, thus allowing pirates to resolve disputes through agreed mechanisms before insolvency actions proceed. In the UK and Singapore, courts often stay winding up petitions if a valid arbitration agreement exists, recognising the need to uphold party autonomy and avoid forum shopping. India’s current regime under section 12A of the IBC allows for the withdrawal of insolvency applications following a settlement, but only after the CoC is constituted, creating a mor rigid process compared to the more flexible approaches in other jurisdictions. Observing the framework of other countries, India can adopt a more proactive stance by allowing earlier settlement mechanisms, similar to Singapore and the UK, to prevent unnecessary insolvency proceedings and foster a more efficient rescue culture.
The Way Forward of section 12A of the IBC
- The appropriate authorities may introduce potential reforms such as lowering the 90% threshold for withdrawal approval to enhance settlement flexibility, while granting the NCLT greater discretion to review such applications to prevent abuse and ensure fairness.
- Balancing settlement flexibility with creditor protection requires reforms like a lower voting threshold for withdrawal, coupled with safeguards such as mandatory disclosure of settlement terms and judicial review by the NCLT to prevent opportunistic withdrawals that undermine collective creditor interests.
- Strengthening creditor confidence while enabling out-of-court settlements can be achieved by introducing a lower voting threshold and mandatory NCLT scrutiny.
Conclusion
Section 12A is a vital tool for post-admission settlements. However, obtaining the required 90% voting share approval from the CoC often presents significant hurdles, potentially stalling or derailing settlements. The Supreme Court has acknowledged that in cases where the CoC has not been constituted, the NCLT may allow directly, exercising its inherent powers under Rule 11 of the NCLT Rules. This judicial interpretation suggests a need for flexibility, especially in the early stages of CIRP, to prevent bottlenecks. To ensure a smoother and more timely resolution, a combination of judicial pragmatism and potential legislative refinements of the withdrawal process is necessary.
FAQs
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What is Section 12A of the IBC?
Section 12A of the IBC allows the NCLT to permit the withdrawal of an insolvency resolution admitted under sections 7,9, or 10, provided the applicant obtains the approval of 90% of the voting share of the CoC.
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Why is 90% CoC approval required for withdrawal under Section 12A?
This approval is required to discourage individual settlements, ensure collective decision-making, and promote a comprehensive resolution that protects the interests of all creditors.
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Can NCLT allow withdrawal without CoC approval?
No, the NCLT cannot allow withdrawal under section 12A of the IBC without the CoC’s approval as it is a mandatory procedural condition.
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What did the Supreme Court rule in Swiss Ribbons on Section 12A?
The Supreme Court upheld the constitutionality of section 12A of the IBC, ruling that 90% voting threshold for withdrawal is a valid legislative policy and that the CoC does not have unchecked power, as the NCLT and NCLAT can set aside arbitrary decisions under action 60 of the IBC.
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Is Section 12A acting as a barrier to settlements in practice?
Yes, section 12A can act as a barrier to settlements due to its stringent requirement of 90% approval from the CoC, which can be difficult to achieve and may lead to delays or blocking of potentially available settlements.
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