IBC: Supreme Court Permits Anytime Withdrawal Of Insolvency Proceedings
The recent Supreme Court ruling in Brilliant Alloys’ insolvency may just prove to be the saving grace for promoters who have lost control of their insolvent company and whose hopes of ever regaining it were dismal.
The ruling now allows promoters, eligible or not, to take back control of their insolvent companies by enabling withdrawal of the admitted insolvency application at any point during the insolvency process.
The apex court has clarified that the National Company Law Tribunal can allow for withdrawal of an insolvency application at any stage, at their discretion, as long as 90 percent of the creditors’ committee by vote share gives the approval. Experts BloombergQuint spoke with are divided over the implications of this ruling.
The ruling interprets the newly introduced Section 12A of the Insolvency and Bankruptcy Code, 2016 that allows for withdrawal of an insolvency application. In addition to the 90 percent approval requirement, the only other condition imposed by the section is that the withdrawal application be made by the same person who initiated the insolvency process, i.e., the financial creditor, operational creditor or the company itself. The section was introduced via an amendment to the IBC in June last year. Prior to introduction of section 12A, IBC lacked the framework for post-admission settlement and subsequent withdrawal.
Soon after the introduction of Section 12A, bankruptcy regulator Insolvency and Bankruptcy Board of India, notified regulations laying down conditions for such a withdrawal through Regulation 30A. One of the conditions is that an application of withdrawal may be made before issuance of invitation for ‘Expression of Interest’, which is the invitation issued by the resolution professional calling preliminary bids for the company – one step before finalizing the list of eligible bidders.
Supreme Court: Regulations Can’t Go Beyond The Act
In Brilliant Alloys’ case, when an application of withdrawal was made by the resolution professional, on behalf of the insolvent company, the division bench of Chennai NCLT had denied it on grounds that a withdrawal is permitted only before an Expression of Interest is issued.
But the apex court has pointed out that Regulation 30A has to be read with Section 12A. Since the section itself does not stipulate any limitation on the time period within which the insolvency application can be withdrawn, the regulation imposing a timeframe - before inviting expression of interest- cannot be upheld.
This ruling is a truly a welcome step, it clarifies that the additional conditions imposed by the IBBI for a withdrawal application are not mandatory, said Amir Arsiwala, litigator at Bombay High Court and NCLT Mumbai. This clarification was much-needed as Section 12A itself does not prescribe any of the onerous conditions which came in through the regulation, Arsiwala told Bloomberg Quint.
On the other hand, Suharsh Sinha, partner at law firm AZB & Partners told BloombergQuint that this ruling may now lead to uncertainty and complexities in the process.
It means that a 29A disqualified bidder or really any other interested bidder can wait right till the end of the IBC process till all bids are disclosed, then make a higher offer and persuade the Committee of Creditors to withdraw the insolvency application. Legitimate bidders who have spent considerable time, money and effort participating in the IBC process may now be dissuaded from investing diligently in the process because of this risk.Suharsh Sinha, Partner, AZB & Partners
Unless a limited time frame is imposed under Section 12A applications by the legislature, the process may now become more litigious and time consuming, Sinha added.
However, Arsiwala sees this “withdrawal” as an added benefit to the insolvency scheme, helpful to smaller, less attractive companies, who now have an alternative in the event the insolvent company is unable to attract a bid. He pointed to IBBI data that shows that 80 percent of all concluded insolvency proceedings upto September 2018, which is four of every five IBC proceedings, ended in liquidation.
IBBI’s released data tells us that It is no secret that liquidation results in minimal recovery for creditors and loss of employment for employees and workmen. It is the absolute worst outcome for promoter-driven financially distressed companies. Unfortunately 29A has made matters worse. But now seeing that withdrawal is a very real possibility, gives hope not just to the creditors, but also to the workmen and operational creditors that they will be able to recover their dues.Amir Arsiwala, Litigator, Bombay High Court
The withdrawal has to be blessed by 90 percent of CoC, keeping nearly all stakeholders happy and saving majority of promoter-driven companies, Arsiwala added.
IBBI’s Regulations: Procedural Nightmare?
This judgment raises another interesting question- what happens to other regulations issued by IBBI which go beyond the IBC? Will they also be likely struck down?
For instance, the requirement for the withdrawing resolution applicant to provide a bank guarantee for the costs incurred in the IBC process till the date of application.
This will depend on the determination of whether the requirement is merely procedural or they impose restrictions or onerous conditions which are not contained in Section 12A, Sinha said. On the face of it, the other requirements, including provision of bank guarantee, are procedural in nature and in principle do not deprive any party from the statutory right of making an application under Section 12A, he added.
Arsiwala explained that the way the judicial process works is that every regulation will be presumed to be valid until someone successfully challenges it. That means there will always be some innocuous regulations that, though clearly beyond the regulation-making authority of the IBBI, parties will have to mandatorily follow.
There is always the possibility that several regulations being followed by the NCLTs and resolution professions in ongoing matters will be rejected later. This is just going to add to the already-palpable confusion in the insolvency resolution process.Amir Arsiwala, Litigator, Bombay High Court
Regulation 30A is not the first time IBBI has exceeded its powers. In September last year, NCLT Delhi in Su Kam Power Systems’ insolvency matter had raised concerns regarding Regulation 36A as well and had pointed out that the IBBI’s rules have to be consistent with IBC.
It is beyond our understanding as to how the IBBI has taken upon itself the task of framing Regulation 36A of the CIRP Regulation (procedure requiring the invitation of expression of interests)NCLT Order, Su Kam Power Systems
Just last week, the Supreme Court in Swiss Ribbons case, reiterated its stance and upheld the constitutional validity of section 12A. It dismissed the argument that the 90 percent approval threshold was arbitrary. But at the same time, it went one step ahead to say that if the committee of creditors arbitrarily rejects a just settlement or withdrawal claim, the NCLT, and thereafter, the NCLAT can always set aside such a decision under section 60 of IBC. Section 60 gives NCLTs power to entertain any question of law or facts arising from an insolvency process.