Expanding the Scope of Section 12A of IBC – By Mr. Raghav Agrawal

Expanding the Scope of Section 12A of IBC

– By Mr. Raghav Agrawal,
(Final year law student at Jindal Global Law School)

“Above all, bankruptcy law must give honest debtors a second chance, and penalise those who act with mala fide intentions in default.”[1]

Section 12A of the Insolvency and Bankruptcy Code 2016 (“the Code”) allows withdrawal of the application initiating the insolvency resolution process, provided the requisite number (90%) of votes are obtained in the COC meeting, and that the application is filed by the applicant creditor. However, the scope of the last criteria i.e., who can file a withdrawal application, is currently very restrictive. Under the extant framework, only the applicant creditor can initiate the process of withdrawing the application, which albeit a step in the right direction, only partially achieves the objective of the IBC. The following paper attempts to demonstrate that expanding the scope of the section by allowing the CoC to file a withdrawal application through the IRP/RP is not only in consonance of the objective of the Code but also necessary for the creation of a more efficient insolvency regime.

The current regime poses a unique challenge for a corporate debtor. Debtors need to not only mend their relationship with at least 90% of the financial creditors, but they are also required to reach an amicable solution with the applicant creditor irrespective of the value of debt. This creates a unique situation where even if 90% or more of the financial creditors are in favour of withdrawal of the insolvency application against the debtor, the same can’t be achieved unless the applicant creditor files the application, irrespective of the amount of money owed to them. This defeats the objective of revival of the corporate debtor, and therefore, there is a need to remove the possibility of one discordant creditor applicant refusing to withdraw the application, although it is in the best interests of all the stakeholders.

This is in tandem with the rationale for inclusion of Section 12A in the Code, as laid down in the Report of the Insolvency Law Committee.[2] The report highlights that this practice is in consonance with the objective of the Code as laid down in the Bankruptcy Law Reform Committee Report[3]. It states that the practice of withdrawal of the CIRP process based on a settlement between the applicant creditor and corporate debtor has already been permitted by the Adjudicating Authority in multiple situations before. For instance, in Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP, [2017] ibclaw.in 04 SC [4] the Supreme Court allowed a compromise between the corporate debtor and creditors after the admission of the insolvency application, thereby approving the withdrawal of the resolution process. Similarly, in the case of Mothers Pride Dairy India Private Limited v. Portrait Advertising and Marketing Private Limited [2017] ibclaw.in 05 SC,[5] although the NCLAT did not have the powers to approve the withdrawal of the application post its admission, it stated that if a settlement is reached between the corporate debtor and the creditors, then “the Resolution Professional can bring the matter to the notice of the Adjudicating Authority for closure of the resolution process.”[6]

As can be seen from the aforementioned cases, the courts did not focus on a settlement between the applicant creditor and the corporate debtor only; it emphasized on the need for all creditors involved in the process to consent to such a settlement. Furthermore, the NCLAT also suggested the initiation of withdrawal at the behest of the Resolution Professional in the case of Mothers Pride Dairy India, thereby indicating that the courts envisaged a withdrawal mechanism that was not initiated by the applicant creditor only. What was envisaged was a mechanism that favoured a settlement between the creditors and the debtor, irrespective of who initiated such a settlement.

The Supreme Court in Swiss Ribbons (P) Ltd. & Anr. v. Union of India & Ors [2019] ibclaw.in 03 SC [7] and Pioneer Urban Land v. UOI has clearly held that insolvency proceedings under the Code are “collective proceedings in rem, which seeks, in the first instance, to rehabilitate the corporate debtor.“[8] If the entire emphasis of the withdrawal mechanism is placed on the applicant creditor, then the objective of the CIRP process being a collective proceeding is not fulfilled. Thus, expanding the scope of the Section is not only envisaged by the legal precedents that have been set, but is also a step towards achieving the objective of the Code.  

Moreover, the BLRC report emphasized on how the CIRP once 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.[9] Arguably, a resolution process now encompasses a process for withdrawal of the application as well. The CIRP is a collective process with the COC as the body overseeing the resolution process.[10] Therefore, allowing any creditor, with the requisite majority, to make an application for withdrawal would be in consonance with the objective of the Code as well as the intent of the BLRC report.

The BLRC report stresses that the overall objective of the Code is to ensure that all efforts must be undertaken to revive the corporate debtor if it is economically viable to do so. The ideal solution to any insolvency issue requires a collective decision wherein ‘creditors and debtor will negotiate a potential new financial arrangement‘,[11] but the same is, more often than not, not possible. For such negotiations to be efficient, the information asymmetry between the two parties needs to be bridged first.[12] The debtor needs to be incentivized to aid the creditors in the resolution and restructuring process which can result in them regaining control of their enterprise, while the creditors need to look beyond their own investment interests and have faith in the debtor’s ability to revive the enterprise. Withdrawal of an insolvency application by any creditor, by expanding the scope of Section 12A, would serve to aid these negotiations by incentivizing the corporate debtor in sharing more information about the enterprise and their expertise, while also allowing the creditors to build confidence in the debtor’s abilities to run the enterprise to their satisfaction. By allowing for a withdrawal of the insolvency process merely based on the a certain number of votes from the financial creditors, the incentives for negotiated settlements increase manifold. It provides honest debtors a second chance to manage their enterprises in a more efficient manner, while allowing creditors to derive maximum value from their investments in the enterprise. It ensures more information symmetry and aids in achieving the Code’s objective of revival of distressed enterprises. 

Recently, there has been an increasing demand in India for moving towards a more debtor-in-possession approach for IBC, in situations where there is no trust deficit between the debtor and creditors.[13] This is in stark opposition to the creditor-in-control regime currently in India. Therefore, allowing any creditor to initiate a withdrawal application would be a step further towards plugging this trust deficit, while not diminishing the control exercised by the creditors either. It will serve as a great compromise between the two divergent approaches to IBC, making the Code more robust and efficient. Further, the recent proposal to include pre-packs in the insolvency process indicates that the legislature is now looking at new ways to revitalise the Code and ensure that the mechanism becomes more efficient while also leaning towards a more debtor friendly approach.

The arguments proposed in this paper aim to elaborate and stress upon the importance of a well-defined withdrawal mechanism. While the objectives of the Code may be achieved under the extant framework as well, it is imperative that the scope of 12A be expanded to encourage a more efficient mechanism. Therefore, the IBBI could consider an amendment to the Section which aims to broaden the scope of who can file an application to also include the interim resolution professional or the resolution professional.

Reference

[1] The Report of the Bankruptcy Law Reforms Committee (November 2015), Chapter 3.2.3 “What Can a Sound Bankruptcy Law Achieve?”. Available at ” https://ibbi.gov.in/BLRCReportVol1_04112015.pdf “

[2] Report of the Insolvency Law Committee (March 2018). Available at: ” https://ibclaw.in/wp-content/uploads/2019/08/Report-of-the-Insolvency-Law-Committee-March-2018.pdf “

[3] n 1.

[4] [2017] ibclaw.in 04 SC

[5] [2017] ibclaw.in 05 SC

[6] Ibid.

[7] [2019] ibclaw.in 03 SC

[8] [2019] ibclaw.in 13 SC

[9] Chapter 3.2.1: Assessing Viability, n 1.

[10] n 7.

[11] Chapter 3.2.1: Assessing Viability, n 1.

[12] ibid.

[13] Suman Batra, Insolvency & Bankruptcy Code Moving Beyond Creditor in Control, Financial Exrpress, September 2020. Available at: https://www.financialexpress.com/opinion/insolvency-bankruptcy-code-moving-beyond-credit-in-control/2093715/