Authors: Jagyansh Kumar [1] & Mansi Awasthi [2]
I. Introduction
The Supreme Court’s decision in GLAS Trust Company LLC v. BYJU Raveendran & Ors. has reignited the discourse surrounding insolvency proceedings in India, particularly concerning the withdrawal application filed for closure of insolvency proceedings. The inherent powers are vested in the National Company Law Tribunal (“NCLT”) for the sole purpose of meeting the ends of justice and preventing the abuse of process of law. The very intent behind introducing this power was to provide an avenue to the court to act in interest of justice where there is no express provision of law. This article aims to dissect the Court’s interpretation of inherent powers, analyse the CIRP withdrawal procedure in other jurisdictions, and further in light of the rigid withdrawal process within India’s CIRP, propose three main initiatives based on the authors’ analysis.
II. Evolution of withdrawal provisions
Prior to the amendments introduced in 2018, in the absence of any provision providing for withdrawal of insolvency applications, the Supreme Court would frequently invoke its powers under Article 142 to allow compromise between the creditors and the corporate debtor. In Lokhandwala Kataria Construction v. Nisus Finance , the limitations of Rule 8 of the CIRP Rules, which only allowed withdrawal before the admission of the application, were pointed out, highlighting the necessity for amendments to include provisions for post-admission withdrawal.
Again, in the case of Uttara Foods v Mona Pharmachem, the Court exercised its powers under 142 to approve the settlement. While this approach allowed for the resolution of individual cases, it was not a sustainable solution in light of the increasing number of insolvency cases, since each withdrawal application would then require the intervention of the apex court. Apart from placing an undue burden on the Supreme Court, the use of Art. 142 led to inconsistencies in how withdrawal and settlement cases were handled, which could have given rise to uncertainty for creditors and debtors. This also meant, that the interests of all creditors were not adequately considered, undermining the collective nature of the proceedings.
Following these judgements, on the recommendations of the Insolvency Law Committee, the Act was amended to introduce Section 12A and further the amendment to CIRP rules to introduce Regulation 30A laying down a detailed procedure for the withdrawal of CIRP applications. It describes a four-staged withdrawal process:
Before admission of the application, governed by Rule 8 of CIRP rules.
After admission but before Constitution of CoC, the application to be submitted by Interim Resolution Professional before the NCLT, which after listening to all the parties, decide on it.
After constitution of CoC but prior to the issue of expression of interest, which must be approved by 90% of the voting share of the CoC. The resolution professional would then submit the application to the NCLT for final approval.
After the issue of invitation for EOI, wherein, along with approval from 90% of CoC, reasons justifying the withdrawal must also be provided at this stage.
This procedure ensures collective decision-making and transparency. It also strikes a balance between flexibility and structure, while allowing for early stages till after the issue of EOI, mandating a high threshold of 90% CoC approval and NCLT oversight. Concerning Trends in SC Judgments
The National Company Law Tribunal and the National Company Appellate have inherent powers that can be exercised to meet the ends of justice. It is well settled that the tribunals cannot go beyond the purpose and objectives of Insolvency and Bankruptcy Code.
In the previous judgements of the SC, namely, Kamal K Singh and Ashok G Rajani, the court had upheld invoking the inherent powers of the tribunal in approving the withdrawal applications which were admitted without any due regards to the comprehensive procedure laid down by Section 12A and Regulation 30A. Citing the same, he NCLAT approved the settlement and accepted the withdrawal application filed by Byju Raveendran.
III. Analysing the judgement
The question before the court was if the NCLAT could invoke its inherent powers to circumvent the procedure for withdrawal application in cases of settlement between the creditors and the debtor. It is pertinent to note that upon the admission of the petition, the proceedings become in rem and are no longer the preserve of the applicant creditor and the debtor alone.
In para 63, the Court explained the 4 stages at which procedure for the withdrawal of CIRP or settlement of claims can be made as per the existing framework. The creditor’s application for CIRP was initiated but the Committee of Creditors was not formed. A settlement agreement between BCCI (Operational Creditor) and the debtor was entered and therefore the withdrawal was filed before NCLAT by Byju Raveendran. The Court stayed the NCLAT order which ordered the closure of the insolvency proceedings initiated by the BCCI against BYJU’s based on a settlement agreement.
It has been held in the matter of Univalue Projects that the Tribunals derive their inherent powers from a delegated legislation and ergo, cannot supersede the statutory provisions of the Acts of the Parliament. Therefore, where there exists a laid down legislative procedure, the NCLAT can’t supersede it to grant a relief. Further, in the case of Sushil Ansal v. Ashok Tripathi, NCLAT refused to invoke the inherent powers to approve the settlement agreement since it was only in the interest of two financial creditors and would have been unjust towards other claimants. Further, in the case of Hem Singh Bharana v M/s Pawan Doot Estate Private Ltd. too, illustrated the same pivotal stance on the rigidity to the procedural adherence required in CIRP withdrawals. After the CoC had approved the Resolution Plan, the withdrawal application with a settlement proposal can only be filed by the Resolution Professional, with the 90% approval of the CoC with a reason justifying withdrawal.
The apex court’s stance in previous judgements had started a concerning trend where inherent powers of the tribunals were used to bypass the structured procedures laid out in Section 12A, which ultimately defeats the very intent of having these provisions which ensure fair and collective decision-making process involving all creditors. Further, in insolvency process, the transformation of the process into one that in rem upon admission of the petition to ensure the collective interests of all the creditors. This necessitates a comprehensive approach where all stakeholders are considered, preventing any unilateral decisions that may favour any individual parties at the expense of the collective. Also, the very object of giving inherent power to the tribunals was to meet the ends of justice and prevent the abuse of process of law. The same, in the present case was used to the detriment of the GLAS Trust Company.
IV. Cross-Border Jurisprudence on CIRP Withdrawal
USA:
The U.S.A. counterpart to the CIRP has been given in Chapter 11 of the U.S. Bankruptcy Code under Section 1112. The U.S. relies on judicial discretion, where the court assesses factors like the debtor’s ability to reorganize and overall good faith, without a strict creditor voting threshold. The withdrawal provisions do not specify particular grounds for withdrawal; instead, they accentuate creditor consensus and the procedural requirement of filing an application through the resolution professional. Moreover, the dismissal process is directly under court supervision, where the court can make prompt decisions based on motions filed by interested parties and scheduled hearings, allowing for faster resolutions.
European Union:
The EU Restructuring and Insolvency Directive (EU) 2019/1023 is the lex loci of insolvency in European Union. Unlike India, where all withdrawals must be approved by the NCLT, in EU, withdrawal may occur with limited or no court involvement if initiated early in the restructuring. Many EU jurisdictions allow the corporate debtor to withdraw from the restructuring process before a court approval. Although, creditors or courts may withdraw or terminate restructuring proceedings if the debtor fails to comply with procedural requirements or if it becomes evident that restructuring would not benefit creditors. For example, in France, the “sauvegarde” allows restructuring withdrawals if restructuring efforts are unlikely to succeed, with court oversight. The directive emphasizes pre-insolvency stages, where companies can restructure before severe financial distress, allowing early withdrawal if restructuring appears unnecessary.
Japan:
In Japan, a withdrawal is only allowed up until the point at which an official order officially starts the bankruptcy process once a petition for bankruptcy has been filed. The petitioner must have the court’s approval to withdraw once the court has issued protective or provisional orders, such as a comprehensive ban order, a stay of specific transactions, or temporary restraining orders as defined in Article 28(1). For example, if a restraining order was issued to stop the debtor from transferring assets or making payments, the court will decide whether to lift the restrictions in order to treat creditors fairly or whether to keep them in place in order to better protect the debtor’s estate until a settlement is reached.
V. Conclusion
India’s rigid CIRP withdrawal process calls for necessary actions to improve the winding up/ liquidation process of insolvent companies. In order to do achieve this, we propose three main initiatives.
Firstly, withdrawal requests at the early stages of CIRP, where the CoC is not formed, could be approved by a simple majority (50%) of creditors by financial value, coordinated through mechanisms like an Inter-Creditor Agreement (ICA) or a meeting organized by the IRP. To protect minority creditors, safeguards such as transparent documentation and oversight can ensure settlements are fair and inclusive.
Secondly, India could empower the CoC to assess factors like the debtor’s good-faith efforts and financial stability, avoiding judicial intervention in commercial decisions as upheld in K. Sashidhar and Ngaitland Dhar. This ensures transparency and prevents misuse of the withdrawal mechanism without overburdening courts.
Thirdly, India could introduce a differentiated withdrawal approval framework based on the type of creditors involved. For instance, operational creditors and financial creditors could have distinct thresholds or criteria for approving withdrawal requests, reflecting their varying stakes and priorities in CIRP. This would ensure a more nuanced approach, balancing the interests of different creditor classes.
While the judgment offers closure on the CIRP withdrawal conundrum, a more precise regulatory framework is needed to address withdrawal requests at various stages of CIRP. Currently, the regulations provide for withdrawal “after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be.” However, as CIRP progresses through multiple stages post-CoC constitution and issuance of an EOI, clear guidelines are essential to ensure consistency and fairness until the Adjudicating Authority's final order.
Note: This article has been reviewed by Mr. Abir Lal Dey (Partner, Saraf and Partners) at the Tier II Stage.
[1] Jagyansh Kumar is a second year student at National Law Institute University, Bhopal
[2] Mansi Awasthi is a second year student at Hidayatullah National Law University, Raipur