Imp. Rulings - Section 12A, Withdrawal Application

Imp. Rulings - Section 12A, Withdrawal Application 

Index;

1. NCLT ND-III  (2024.08.28) in Pratham Expofab Pvt. Ltd. and Anr. Vs  Anil Matta (RP) and Anr. [IA/188/2024 in C.P.(IB)-995 of 2018] [Section 12A application post approval of Resolution Plan by CoC]

2. NCLAT (2024.08.29) in Asha Chopra and Ors. v. Hind Motors India Ltd. and Ors..[(2024) ibclaw.in 531 NCLAT, Company Appeal (AT) (Insolvency) No. 1425-1428 of 2024 & I.A. No. 5180-5183 of 2024] [Withdrawal application during Liquidation process]

3. NCLT Bangaluru (06.06.2022) in Shri. V S Varun,  Vs. M/s. South Indian Bank   [I.A. No. 63 of 2022 in CP (IB) No.366/BB/2019] [Liquidation period]

4. Supreme Court (03.06.2022) in Vallal Rck v. M/s. Siva Industries And Holdings Limited And Ors [Civil Appeal Nos. 1811-1812 of 2022] [Commercial wisdom of CoC]

5. NCLT  Mumbai-5 (06.08.2021) in Dinesh Gupta Vs. Rolta India Limited [M.A. No. 1196/2021 In C.P. No.1069/I&BP/NCLT/MAH/2020] [Proceeding-in-rem]

6. NCLAT (28.11.2019) in Shweta Vishwanath Shirke & Ors. Vs. The Committee of Creditors & Anr. (Company Appeal (AT) (Insolvency) No. 601 of 2019) [Section-29A not applicable]

7. NCLAT (28.08.2019) in Andhra Bank vs Sterling Biotech Ltd. [Company Appeal (AT) (Insolvency) No. 612 of 2019] [Section-29A not applicable]

8. Supreme Court (25.01.2019) Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors.[Writ Petition (Civil) No. 99 of 2018].

9. Supreme Court (14.12.2018) in Brilliant Alloys Private Limited Vs. Mr. S. Rajagopal & Ors. [Petition(s) for Special Leave to Appeal (C) No(s). 31557/2018] [Regulation - After EOI, not mandatory]

10. NCLAT(09.08.2018) in V. Navaneetha Krishnan vs. Central Bank of India & Anr. [Company Appeal (AT) (Insolvency) Nos. 288 & 289 of 2018] [Liquidation process]

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1). NCLT ND-III  (2024.08.28) in Pratham Expofab Pvt. Ltd. and Anr. Vs  Anil Matta (RP) and Anr. [IA/188/2024 in C.P.(IB)-995 of 2018] held that;

• # 6. The Ld. Counsel for the RP, on the other hand, stated that the prayers made in the I.A. cannot be allowed as the CoC of CD has already approved the Resolution Plan and an application under Section 30(6) of IBC, 2016 being C.A. No. 1489 of 2020 for approval of the Resolution Plan was filed by the RP way back on 21.02.2020. It is further stated that the settled position of law is that once the CoC has approved a Resolution Plan under Section 30(4) of IBC, 2016, it does not have jurisdiction or authority to consider a settlement proposal. 

• 6.1 To support his contention, reliance has been placed on the judgement of Hon'ble NCLAT in “Hem Singh Bharana v. Pawan Doot Estate Pvt. Ltd.”, [CA (AT) (Ins) No. 1481 of 2022] in which it has been held that after approval of the Resolution Plan, CoC cannot entertain a settlement proposal.The order has also been affirmed by the Hon'ble Supreme Court on 30.01.2023 in “Hem Singh Bharana v. Pawan Doot Estate Pvt. Ltd”, [2023 SCC OnLine SC 769]. Further, it is submitted that in “Nehru Place Hotels & Real Estates Pvt. Ltd. v. Sanjeev Mahajan & Ors.” [CA (AT) (Ins) No. 1715 and 1716 of 2023], it has been held that a settlement proposal under Section 12A of the IBC, 2016 cannot be put before the CoC after the approval of the Resolution Plan by the CoC. This view has also been affirmed by the Hon'ble Supreme Court on 05.02.2024 “Sanjeev Mahajan v. Nehru Place Hotels and Real Estates Pvt Ltd & Ors.”, [Civil Appeal Nos 602-603 of 2024]. Further, in the matter of “Union Bank v. Mr. Kapil Wadhwan & Ors.” [(2022) ibclaw.in 88 NCLAT] also it has been held that there is no scope for negotiations once the CoC has approved the Resolution Plan. Relying on the above, the RP submitted that no such direction can be issued to the CoC. 

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2). NCLAT (2024.08.29) in Asha Chopra and Ors. v. Hind Motors India Ltd. and Ors..[(2024) ibclaw.in 531 NCLAT, Company Appeal (AT) (Insolvency) No. 1425-1428 of 2024 & I.A. No. 5180-5183 of 2024] held that; 

• Section 12A itself contemplates withdrawal of the Application with the approval of the 90% voting share of the CoC in such manner as may be prescribed. The CoC exist till continuation of the CIRP and after the Order passed under Section 33 for Liquidation, the CoC does not continues so as to take a decision for withdrawal of an Application under Sections 7, 9 & 10. 

• The Statutory Scheme of IBC thus clearly contemplates that withdrawal of Application is permissible only during CIRP period with the approval of 90% vote shares of the CoC. The Scheme of Liquidation and the Liquidation Regulations do not contemplate any withdrawal under Section 12A.

• Thus, in the Liquidation Process, Compromise or Arrangement is contemplated as per Regulation 2B which clearly negates the submission of the Appellant that withdrawal is permissible only under Section 12A.

• In view of the clear Statutory Scheme as delineated by 12A, Section 33 and Regulation 2B of the Liquidation Regulation, we are of the view that during Liquidation period, an Application under Section 12A is not permissible.

• Regulation 31A did not require constitution of SCC with regard to the Liquidation which has commenced years ago from the provision for SCC came into the Regulation.

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3). NCLT Bangaluru (06.06.2022) in Shri. V S Varun,  Vs. M/s. South Indian Bank   [I.A. No. 63 of 2022 in CP (IB) No.366/BB/2019] held that;

• The Promoter submitted the letter dated 07.12.2021 along with the revival plan of the corporate debtor. The Bank also submitted its letter dated 07.12.2021 intimating their withdrawal of claim on account of settlement.

• “ Even during the Liquidation period, if any person, not barred U/s.29A of the Code satisfy the demands of the Committee of Creditors, such person may move before the Adjudicating Authority for withdrawal of the proceedings.

• If the CoC resolve with more than 90% voting share to accept the settlement proposal of the Petitioner and to allow for drawal of the CP, neither the NCLT nor the Hon'ble NCLAT shall interfere with the same unless the decision of the CoC is wholly capricious, arbitrary, irrational and de hors the provisions of the Statue or the Rules.

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4). Supreme Court (03.06.2022) in Vallal Rck v. M/s. Siva Industries And Holdings Limited And Ors [Civil Appeal Nos. 1811-1812 of 2022] held that;

• When 90% and more of the creditors, in their wisdom after due deliberations, find that it will be in the interest of all the stakeholders to permit settlement and withdraw CIRP, in our view, the adjudicating authority or the appellate authority cannot sit in an appeal over the commercial wisdom of CoC. 

• The interference would be warranted only when the adjudicating authority or the appellate authority finds the decision of the CoC to be wholly capricious, arbitrary, irrational and de hors the provisions of the statute or the Rules.

• It could thus be seen that this Court has found that if the CoC arbitrarily rejects a just settlement and/or withdrawal claim, the learned NCLT and thereafter the learned NCLAT can always set aside such decision under the provisions of the IBC.

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5). NCLT  Mumbai-5 (06.08.2021) in Dinesh Gupta Vs. Rolta India Limited [M.A. No. 1196/2021 In C.P. No.1069/I&BP/NCLT/MAH/2020] held that; 

•  . . when a petition under is admitted/triggered it becomes a proceeding in rem and even the creditor who has triggered the process would also lose control of the proceedings as Corporate Insolvency Resolution Process is required to be considered through the mechanism provided under the IB Code.

• Decisions of the Hon’ble Supreme Court and the Hon’ble NCLAT clearly demonstrate that even in the event the original creditor and corporate debtor settle their disputes prior to constitution of the COC, this Hon’ble Tribunal still has sufficient jurisdiction to reject an application under Section 12A of the IBC if the facts and circumstances of the case before it warrant such rejection.

• It is settled law that a judicial authority ought not to pass orders which would aid and/or further multiplicity of proceedings. In the present case, considering that over 75 nos. of Petitions under Sections 7 and 9 of the IBC are already pending against the Corporate Debtors, allowing the present withdrawal will evidently result in multiplicity of proceedings which ought to be avoided by this Tribunal.

• Hon’ble Supreme Court in “Swiss Ribbons Pvt. Ltd. vs. Union of India” held that “at any stage where the Committee of Creditors is not yet constituted, a party can approach NCLT directly, the Tribunal may in exercise of the inherent powers under Rule 11 of NCLT Rules may allow or disallow an application for withdrawal of CIRP. The claim and rights of other creditors as it stands is not prejudiced/altered by the withdrawal of CIRP of Corporate Debtor.”

• The Bench has no doubt in its mind that considering that CIRP proceedings are in rem, the substantial claims of Financial Creditors cannot be disregarded or ignored in view of the purported settlement of certain employees of the Corporate Debtor.

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6). NCLAT (28.11.2019) in Shweta Vishwanath Shirke & Ors. Vs. The Committee of Creditors & Anr. (Company Appeal (AT) (Insolvency) No. 601 of 2019) held that;

• # 12. From Section 12A and the decision of the Hon’ble Supreme Court in ‘Swiss Ribbons Pvt. Ltd. & Anr.’ (Supra), it is clear that the Promoters/Shareholders are entitled to settle the matter in terms of Section 12A and in such case, it is always open to an applicant to withdraw the application under Section 9 of the ‘I&B Code’ on the basis of which the ‘Corporate Insolvency Resolution Process’ was initiated.

• # 13. In view of the aforesaid provisions of law, we hold that Section 29A is not applicable for entertaining/considering an application under Section 12A as the Applicants are not entitled to file application under Section 29A as ‘resolution applicant’.

• # 14. In the present case, the ‘Corporate Insolvency Resolution Process’ was initiated pursuant to an application under Section 7 filed by the ‘Andhra Bank’ (Appellant herein). The application under Section 12A having been approved by the ‘Committee of Creditors’ more than 90% of the voting share, it was not open to the Adjudicating Authority to reject the same and that too on a ground of ineligibility under Section 29A, which is not applicable.

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7). NCLAT(28.08.2019) in Andhra Bank vs Sterling Biotech Ltd. [Company Appeal (AT) (Insolvency) No. 612 of 2019] held that;

• “As the  application under Section 12A having been approved by the ‘Committee of Creditors’ more than 90% of the voting share, it was not open to the Adjudicating Authority to reject the same and that too on a ground of ineligibility under Section 29A, which is not applicable.

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8). Supreme Court (25.01.2019) Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors.[Writ Petition (Civil) No. 99 of 2018]. Held that;

• Section 12A  is not violative of Article 14 

• # 52. It is clear that once the Code gets triggered by admission of a creditor‘s petition under Sections 7 to 9, the proceeding that is before the Adjudicating Authority,  being a collective  proceeding, is   a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim. A question arises as to what is to happen before a committee of creditors is constituted (as per the timelines that are specified, a committee of creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the concerned parties and considering all relevant factors on the facts of each case.

• # 53. The main thrust against the provision of Section 12A is the fact that ninety per cent of the committee of creditors has to allow withdrawal. This high threshold has been explained in the ILC Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantially all the financial creditors, have to grant their approval to an individual withdrawal or settlement. In any case, the figure of ninety per cent, in the absence of anything further to show that it is arbitrary, must pertain to the domain of legislative policy, which has been explained by the Report (supra). Also, it is clear, that under Section 60 of the Code, the committee of creditors do not have the last word on the subject. If the committee of creditors arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT, and thereafter, the NCLAT can always set aside such decision under Section 60 of the Code. For all these reasons, we are of the view that Section 12A also passes constitutional muster.

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9). Supreme Court (14.12.2018) in Brilliant Alloys Private Limited Vs. Mr. S. Rajagopal & Ors. [Petition(s) for Special Leave to Appeal (C) No(s). 31557/2018] held that;

• The only reason why the withdrawal was not allowed, though agreed to by the Corporate Debtor as well as the Financial Creditor -State Bank of India and the Operational Creditor-Respondent No.3, is because Regulation 30A states that withdrawal cannot be permitted after issue of invitation for expression of interest. 

• According to us, this Regulation has to be read along with the main provision Section 12A which contains no such stipulation. 

• Accordingly, this stipulation can only be construed as directory depending on the facts of each case. 

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10). NCLAT(09.08.2018) in V. Navaneetha Krishnan vs. Central Bank of India & Anr. [Company Appeal (AT) (Insolvency) Nos. 288 & 289 of 2018] held that;

• Even during the liquidation period if any person, not barred under Section 29A, satisfy the demand of ‘Committee of Creditors’ then such person may move before the Adjudicating Authority by giving offer which may be considered by the ‘Committee of Creditors’, and if by 90% voting share of the ‘committee of creditors’, accept the offer and decide for withdrawal of the application under Section 7 of the I&B Code.............the order of liquidation passed by the Adjudicating Authority will not come in the way of Adjudicating Authority to pass appropriate order.

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Shweta Vishwanath Shirke & Ors. Vs. The Committee of Creditors & Anr. - In view of the aforesaid provisions of law, we hold that Section 29A is not applicable for entertaining/considering an application under Section 12A as the Applicants are not entitled to file application under Section 29A as ‘resolution applicant’.

 NCLAT (28.08.2019) in Shweta Vishwanath Shirke & Ors. Vs. The Committee of Creditors & Anr. (Company Appeal (AT) (Insolvency) No. 601 & 612 of 2019) held that;

• # 12. From Section 12A and the decision of the Hon’ble Supreme Court in ‘Swiss Ribbons Pvt. Ltd. & Anr.’ (Supra), it is clear that the Promoters/Shareholders are entitled to settle the matter in terms of Section 12A and in such case, it is always open to an applicant to withdraw the application under Section 9 of the ‘I&B Code’ on the basis of which the ‘Corporate Insolvency Resolution Process’ was initiated.

• # 13. In view of the aforesaid provisions of law, we hold that Section 29A is not applicable for entertaining/considering an application under Section 12A as the Applicants are not entitled to file application under Section 29A as ‘resolution applicant’.

• # 14. In the present case, the ‘Corporate Insolvency Resolution Process’ was initiated pursuant to an application under Section 7 filed by the ‘Andhra Bank’ (Appellant herein). The application under Section 12A having been approved by the ‘Committee of Creditors’ more than 90% of the voting share, it was not open to the Adjudicating Authority to reject the same and that too on a ground of ineligibility under Section 29A, which is not applicable.

Excerpts of the order;

28.08.2019 The main grievance of the Appellant – ‘Shweta Vishwanath Shrike & Ors’ (employees of the ‘Corporate Debtor’) is that though the application under Section 12A of the Insolvency and Bankruptcy Code, 2016 (for short, ‘the I&B Code’) was filed at the instance of the ‘Promoter’ approved with more than 90% voting share of the ‘Committee of Creditors’, but it was rejected by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Mumbai on the ground that the ‘Promoter’ not eligible to file the ‘resolution plan’ under Section 29A cannot file the application under Section 12A of the ‘I&B Code’. The impugned order dated 8th May, 2019 passed by the Adjudicating Authority has also been challenged by the ‘Andhra Bank’ in Company Appeal (AT) (Ins.) No. 612 of 2019 and the ‘Resolution Professional’ in Company Appeal (AT) (Ins.) No. 527 of 2019, but on different grounds.

 

# 2. Learned counsel appearing on behalf of the ‘Andhra Bank’ submits that Section 29A is not applicable to an application filed under Section 12A for withdrawal of application under Section 7 filed by Andhra Bank, if the Committee of Creditors accept the same with more than 90% of the voting share.

 

# 3. The ‘Resolution Professional’ has challenged the order dated 8th May, 2019 insofar it relates to observations made by the Adjudicating Authority against Mr. Sundaresh Bhat (‘Resolution Professional’).

 

# 4. Notices were issued on the Respondents. The ‘Andhra Bank’, lead Bank of the ‘Committee of Creditors’, has already filed an appeal and challenged the impugned order.

 

# 5. Mr. Nitesh Rana, learned counsel for ‘Enforcement Directorate’; Mr. Vishwanath, Advocate for ‘SEBI’; Mr. C. Balooni, Assistant Director, Ministry of Company Affairs and Mr. Sukant Vats, Public Prosecutor, Central Bureau of Investigation, appear and submit that they are investigating the matter against the ‘Corporate Debtor’ and its promoters, Directors and officers and role of other public servants.

 

# 6. Learned counsel appearing on behalf of the ‘Enforcement Directorate’ submit that the assets of the ‘Corporate Debtor’ are based on the proceeds of the crime and therefore, it cannot be given to any person.

 

# 7. The question arises for consideration in these appeals is whether Section 29A of the ‘I&B Code’ is applicable to the applicant, if he intends to withdraw the petition under Section 7 or 9, if the Committee of Creditor, approves a proposal with 90% voting share, in terms of Section 12A.

 

# 8. Section 29A relates to ineligibility of a “resolution applicant”, which is as follows:

“29A. Persons not eligible to be resolution applicant.─ A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person—

(a) is an undischarged insolvent;

(b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949;

(c) has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:

Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan;

Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.

Explanation I.—For the purposes of this proviso, the expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date.

Explanation II.—For the purposes of this clause, where a resolution applicant has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset and such account was acquired pursuant to a prior resolution plan approved under this Code, then, the provisions of this clause shall not apply to such resolution applicant for a period of three years from the date of approval of such resolution plan by the Adjudicating Authority under this Code;’;

(d) has been convicted for any offence punishable with imprisonment —-

(i) for two years or more under any Act specified under the Twelfth Schedule; or

(ii) for seven years or more under any other law for the time being in force:

Provided that this clause shall not apply to a person after the expiry of a period of two years from the date of his release from imprisonment:

Provided further that this clause shall not apply in relation to a connected person referred to in clause (iii) of Explanation I;”

(e) is disqualified to act as a director under the Companies Act, 2013;

“Provided that this clause shall not apply in relation to a connected person referred to in clause (iii) of Explanation I;

(f) is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;

(g) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code;

“Provided that this clause shall not apply if a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction;

(h) has executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code and such guarantee has been invoked by the creditor and remains unpaid in full or part;

(i) has been subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or

(j) has a connected person not eligible under clauses (a) to (i)

Explanation.— For the purposes of this clause, the expression “connected person” means—

(i) any person who is the promoter or in the management or control of the resolution applicant; or

(ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or

(iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii):

Provided that nothing in clause (iii) of this Explanation I shall apply to a resolution applicant where such applicant is a financial entity and is not a related party of the corporate debtor:

Provided further that the expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date;

‘Explanation II.—For the purposes of this section, “financial entity” shall mean the following entities which meet such criteria or conditions as the Central Government may, in consultation with the financial sector regulator, notify in this behalf, namely:—

(a) a scheduled bank;

(b) any entity regulated by a foreign central bank or a securities market regulator or other financial sector regulator of a jurisdiction outside India which jurisdiction is compliant with the Financial Action Task Force Standards and is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding;

(c) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor, where the terms shall have the meaning assigned to them in regulation 2 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 made under the Foreign Exchange Management Act, 1999;

(d) an asset reconstruction company registered with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(e) an Alternate Investment Fund registered with the Securities and Exchange Board of India;

(f) such categories of persons as may be notified by the Central Government.”

 

# 9. If any person, including the ‘Promoter’/ ‘Director’ is ineligible in terms of any one or more clauses of Section 29A, he/she is not entitled to file any ‘resolution plan’ individually or jointly or in concert with another.

 

# 10. In so far Section 12A is concerned, it relates to withdrawal of the application filed by an “applicant” under Section 7 or Section 9 of the I&B Code, if the ‘Committee of Creditors’ with more than 90% voting share approves the proposal as is apparent from Section 12A and reads as follows:

• “12A. Withdrawal of application admitted under section 7, 9 or 10. ─

• The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.”

 

# 11. In ‘Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors.- ‘2019 SCC Online SC 73’, the Hon’ble Supreme Court of India considered the stages in which an application can be withdrawn including Section 12A observed and held :

• “75. Since the financial creditors are in the business of moneylending, banks and financial institutions are best equipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno-economic valuation report, evaluation of business, financial projection, etc. Since this detailed study has already been undertaken before sanctioning a loan, and since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan. On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of business. The BLRC Report, already quoted above, makes this abundantly clear.

• 76. Quite apart from this, the United Nations Commission on International Trade Law, in its Legislative Guide on Insolvency Law (the UNCITRAL Guidelines) recognises the importance of ensuring equitable treatment to similarly placed creditors and states as follows:

• “Ensuring equitable treatment of similarly situated creditors

• 7. The objective of equitable treatment is based on the notion that, in collective proceedings, creditors with similar legal rights should be treated fairly, receiving a distribution on their claim in accordance with their relative ranking and interests. This key objective recognises that all creditors do not need to be treated identically, but in a manner that reflects the different bargains they have struck with the debtor. This is less relevant as a defining factor where there is no specific debt contract with the debtor, such as in the case of damage claimants (e.g. for environmental damage) and tax authorities. Even though the principle of equitable treatment may be modified by social policy on priorities and give way to the prerogatives pertaining to holders of claims or interests that arise, for example, by operation of law, it retains its significance by UNCITRAL Legislative Guide on Insolvency Law ensuring that the priority accorded to the claims of a similar class affects all members of the class in the same manner. The policy of equitable treatment permeates many aspects of an insolvency law, including the application of the stay or suspension, provisions to set aside acts and transactions and recapture value for the insolvency estate, classification of claims, voting procedures in reorganisation and distribution mechanisms. An insolvency law should address problems of fraud and favouritism that may arise in cases of financial distress by providing, for example, that acts and transactions detrimental to equitable treatment of creditors can be avoided.”

• 77. NCLAT has, while looking into viability and feasibility of resolution plans that are approved by the Committee of Creditors, always gone into whether operational creditors are given roughly the same treatment as financial creditors, and if they are not, such plans are either rejected or modified so that the operational creditors’ rights are safeguarded. It may be seen that a resolution plan cannot pass muster under Section 30(2)(b) read with Section 31 unless a minimum payment is made to operational creditors, being not less than liquidation value. Further, on 5-10-2018, Regulation 38 has been amended. Prior to the amendment, Regulation 38 read as follows:

• “38. Mandatory contents of the resolution plan.—(1) A resolution plan shall identify specific sources of funds that will be used to pay the—

• (a) insolvency resolution process costs and provide that the insolvency resolution process costs, to the extent unpaid, will be paid in priority to any other creditor;

• (b) liquidation value due to operational creditors and provide for such payment in priority to any financial creditor which shall in any event be made before the expiry of thirty days after the approval of a resolution plan by the adjudicating authority; and

• (c) liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan.” Post amendment, Regulation 38 reads as follows:

• “38. Mandatory contents of the resolution plan.—(1) The amount due to the operational creditors under a resolution plan shall be given priority in payment over financial creditors. (1-A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.” The aforesaid Regulation further strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors’ rights, together with priority in payment over financial creditors.

• Section 12-A is not violative of Article 14

• 79. Section 12-A was inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018 with retrospective effect from 6-6-2018. It reads as follows:

• “12-A. Withdrawal of application admitted under Sections 7, 9 or 10.—The adjudicating authority may allow the withdrawal of application admitted under Section 7 or Section 9 or Section 10, on an application made by the applicant with the approval of ninety per cent voting share of the Committee of Creditors, in such manner as may be specified.”

• 80. The ILC Report of March 2018, which led to the insertion of Section 12-A, stated as follows:

• “29.1. Under Rule 8 of the CIRP Rules, NCLT may permit withdrawal of the application on a request by the applicant before its admission. However, there is no provision in the Code or the CIRP Rules in relation to permissibility of withdrawal post admission of a CIRP application. It was observed by the Committee that there have been instances where on account of settlement between the applicant creditor and the corporate debtor, judicial permission for withdrawal of CIRP was granted [Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers LLP [Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers LLP, (2018) 15 SCC 589] ; Mothers Pride Dairy India (P) Ltd. v. Portrait Advertising and Marketing (P) Ltd. [Mothers Pride Dairy India (P) Ltd. v. Portrait Advertising and Marketing (P) Ltd., 2017 SCC OnLine SC 1789] ; Uttara Foods and Feeds (P) Ltd. v. Mona Pharmachem [Uttara Foods and Feeds (P) Ltd. v. Mona Pharmachem, (2018) 15 SCC 587] ]. This practice was deliberated in light of the objective of the Code as encapsulated in the BLRC Report, that the design of the Code is based on ensuring that “all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution.” Thus, it was agreed that once CIRP is initiated, it is no longer a proceeding only between the applicant creditor and the corporate debtor but is envisaged to be a proceeding involving all creditors of the debtor. The intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors.

• 29.2. On a review of the multiple NCLT and NCLAT judgments in this regard, the consistent pattern that emerged was that a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted, and not only the applicant creditor and the debtor. On this basis read with the intent of the Code, the Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post admission if the CoC approves of such action by a voting share of ninety per cent. It was specifically discussed that Rule 11 of the National Company Law Tribunal Rules, 2016 may not be adopted for this aspect of CIRP at this stage [as observed by the Hon’ble Supreme Court in Uttara Foods and Feeds (P) Ltd. v. Mona Pharmachem [Uttara Foods and Feeds (P) Ltd. v. Mona Pharmachem, (2018) 15 SCC 587] ] and even otherwise, as the issue can be specifically addressed by amending Rule 8 of the CIRP Rules.” (emphasis in original) Before this section was inserted, this Court, under Article 142, was passing orders allowing withdrawal of applications after creditors’ applications had been admitted by NCLT or NCLAT.”

 

# 12. From Section 12A and the decision of the Hon’ble Supreme Court in ‘Swiss Ribbons Pvt. Ltd. & Anr.’ (Supra), it is clear that the Promoters/Shareholders are entitled to settle the matter in terms of Section 12A and in such case, it is always open to an applicant to withdraw the application under Section 9 of the ‘I&B Code’ on the basis of which the ‘Corporate Insolvency Resolution Process’ was initiated.

 

# 13. In view of the aforesaid provisions of law, we hold that Section 29A is not applicable for entertaining/considering an application under Section 12A as the Applicants are not entitled to file application under Section 29A as ‘resolution applicant’.

 

# 14. In the present case, the ‘Corporate Insolvency Resolution Process’ was initiated pursuant to an application under Section 7 filed by the ‘Andhra Bank’ (Appellant herein). The application under Section 12A having been approved by the ‘Committee of Creditors’ more than 90% of the voting share, it was not open to the Adjudicating Authority to reject the same and that too on a ground of ineligibility under Section 29A, which is not applicable.

 

# 15. In so far the assets of the ‘Corporate Debtor’ is concerned, if it is based on the proceeds of crime, it is always open to the ‘Enforcement Directorate’ to seize the assets of the ‘Corporate Debtor’ and act in accordance with the ‘Prevention of Money Laundering Act, 2002’ (for short, ‘the PMLA’).

 

# 16. However, it will not come in the way of the individual such as ‘Promoter’ or ‘Shareholder’ or ‘Director’, if he pays not from the proceeds of crime but in his individual capacity the amount from his account and not from the account/assets of the ‘Corporate Debtor’ and satisfies all the stakeholders, including the ‘Financial Creditors’ and the ‘Operational Creditors’. There is nothing on the record to suggest that the individual property of the ‘Promoter’ / ‘Shareholder’/ ‘Director’ who proposed to pay the amount has been subjected to restraint by the ‘Enforcement Directorate’. Therefore, even if the asset of the ‘Corporate Debtor’ is held to be proceeds of crime, the Adjudicating Authority cannot reject the prayer for withdrawal of application under Section 7, if the ‘Promoter’ / ‘Director’ or ‘Shareholder’ in their individual capacity satisfy the creditors.

 

# 17. For the reason aforesaid, while we hold that the order of ‘Liquidation’ was uncalled for, we set aside the impugned order dated 8th May, 2019 passed by the Adjudicating Authority and allow the Appellant (who filed the application of Section 7 – ‘Andhra Bank’) to withdraw the application.

 

# 18. In the result, the ‘Corporate Insolvency Resolution Process’ initiated against the ‘Corporate Debtor’ namely— ‘M/s. Sterling Biotech Ltd.’ stands set aside subject to the payment of the amount as payable by the ‘Promoters’/Shareholders to all the stakeholders/financial creditors and operational creditors in terms of Section 12A as approved with 90% voting share of the ‘Committee of Creditors’. However, setting aside the order of initiation of ‘Corporate Insolvency Resolution Process’ will not amount to interference with any of the order passed by the ‘Enforcement Directorate’ with regard to the assets of the ‘Corporate Debtor’ and the proceedings under ‘PMLA’ will continue against the ‘Corporate Debtor’ etc. in accordance with law.

 

# 19. In view of the fact that the impugned order dated 8th May, 2019 is set aside, all the observations made against Mr. Sundaresh Bhat, ‘Resolution Professional’ also stand expunged.

 

# 20. All these appeals stand disposed of with liberty to the ‘Enforcement Directorate’, the ‘Central Bureau of Investigation’, the ‘Ministry of Corporate Affairs’, ‘Securities and Exchange Board of India’ and the other Authorities to continue/take any action against the Company, ‘Promoter’/ ‘Shareholder’/ ‘Director’ under the existing laws and will continue irrespective of the settlement made by the individual ‘Promoter’/ ‘Shareholder’/ ‘Director’ with the creditors under Section 12A of the ‘I&B Code’.

 

# 21. So far as the fees and resolution cost of the ‘Resolution Professional’/ ‘Liquidator’ are concerned, the ‘Committee of Creditors’ will determine the same and will be paid by ‘Andhra Bank’ on behalf of the ‘Committee of Creditors’ and may adjust the same with other members.

 

# 22. Till the ‘terms and conditions’ under Section 12A is complied, the ‘Resolution Professional’ will manage the company and ensure that the company remains a going concern and protect its assets.

 

All the appeals stand disposed of with aforesaid observations and directions.

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