IBC: Bankruptcy Regulator Proposes Easier Withdrawal Framework
India’s bankruptcy regulator has proposed to ease its regulations relating to withdrawal of an insolvency application under the Insolvency and Bankruptcy Code, 2016. The proposal was prompted by various court decisions on this issue, the Insolvency and Bankruptcy Board of India has said.
Effective June 2018, via section 12A, an amended IBC permits withdrawal from insolvency if an application is made by the creditor who triggered the insolvency process, and if 90 percent of the committee of creditors (by vote share) approve the withdrawal. The regulations prescribe that such an application can be made before the expression of interest has been issued by the resolution professional.
There’s been much litigation around the section and accompanying regulations. Consequently, the Supreme Court and the National Company Law Appellate Tribunal have laid down the following principles with regards to withdrawal of an insolvency application:
- The application for withdrawal must be made by the creditor who triggered the insolvency process. It cannot be made by the resolution professional.
- Regulation 30A of the insolvency regulations does not permit withdrawal after EoI invitation has been issued by the resolution professional. But the apex court held that this provision is only directory and an application for withdrawal may be allowed in exceptional cases even after issue of invitation for EoI.
- If in a given case, the committee of creditors has not been constituted, an application of withdrawal can be made directly to the NCLT, which can allow or disallow it after hearing all the concerned parties and considering the facts of each case.
The IBBI has now proposed to incorporate the jurisprudence on withdrawal of insolvency application in the law. It has recommended that:
“Withdrawal of an insolvency application be allowed at any stage: before constitution of CoC, after constitution of CoC but before invitation of EoI, or after invitation of EoI in exceptional cases, on an application made by the applicant.”
When the apex court had taken a similar view, Suharsh Sinha, partner at law firm AZB & Partners had told BloombergQuint that this will lead to uncertainty and complexities in the process.
It means that a section 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
But Amir Arsiwala, advocate at Bombay High Court, said the Supreme Court decision to allow any time withdrawal of insolvency would help smaller,less attractive companies unable to attract a bidder.
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.Amir Arsiwala, Advocate, Bombay High Court
Besides proposing changes to the withdrawal framework, the IBBI has also recommended that if an insolvent company doesn’t have any liquid assets to bear the cost of liquidation, the secured institutional financial creditors be mandated to bring in interim finance.
“The CoC must consider the estimated amount of liquidation costs, the availability of liquid assets to meet liquidation costs, and balance amount required for meeting liquidation costs and require the secured institutional financial creditors to bring in upfront balance amount of liquidation cost, in an escrow account with a scheduled bank, within seven days of the liquidation order.”
The money brought in by secured institutional financial creditors plus interest shall be included in the liquidation cost, the IBBI has proposed.