Withdrawal of CIRP Application under Section 12A of IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted with the objective of consolidating and amending laws relating to insolvency and bankruptcy in India. It introduced a time-bound process to resolve stressed assets, revive viable businesses, and protect the interests of stakeholders. The Code has played a transformative role in addressing the problem of non-performing assets and ensuring that companies either undergo revival or exit through liquidation in an organised manner.

While the Code aimed to create a creditor-driven process, a recurring concern was the lack of flexibility once a Corporate Insolvency Resolution Process (CIRP) application was admitted. Many companies that could have reached settlement outside the formal insolvency framework had no option to withdraw their application once admitted. To address this gap, the legislature introduced Section 12A through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. This section laid down a statutory mechanism to withdraw CIRP applications after admission, subject to safeguards.

Genesis of Section 12A

The journey of Section 12A began with judicial interventions.

• In Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers LLP (2017), the Supreme Court permitted settlement between parties even after initiation of insolvency proceedings by invoking its inherent powers under Article 142 of the Constitution.
• In Uttara Foods & Feeds (P.) Ltd. v. Mona Pharmachem (2017), the Supreme Court again exercised powers under Article 142 to allow withdrawal of an admitted CIRP application, though the National Company Law Appellate Tribunal (NCLAT) had declined to do so under Rule 11 of the NCLAT Rules.

These cases revealed the absence of a statutory provision for withdrawal after admission. The Insolvency Law Committee (2018) recommended that withdrawal should be permitted post-admission, but only with the approval of the Committee of Creditors (CoC) by a high voting threshold of 90%. This recommendation led to the insertion of Section 12A into the Code.

Statutory Provision: Section 12A of IBC

Section 12A provides that:

• An application admitted under Section 7 (financial creditor), Section 9 (operational creditor), or Section 10 (corporate applicant) may be withdrawn.
• The applicant must make the withdrawal request to the Adjudicating Authority (National Company Law Tribunal – NCLT).
• Withdrawal is allowed only with the approval of 90% of the voting share of the CoC.
• The Adjudicating Authority has the discretion to accept or reject such applications even after CoC approval.

Thus, Section 12A ensures that withdrawal is not left solely to individual creditors and is instead subject to collective decision-making by creditors.

Regulation 30A and Rule 8

The statutory framework of Section 12A is supplemented by rules and regulations:

• Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016: Allows withdrawal before admission of the application, on request of the applicant.
• Regulation 30A of the IBBI (CIRP) Regulations, 2016:
  • Withdrawal before CoC constitution: Application routed through Interim Resolution Professional (IRP).
  • Withdrawal after CoC constitution: Application routed through IRP or Resolution Professional (RP).
  • If withdrawal is sought after issuance of Expression of Interest (EOI) under Regulation 36A, applicant must state reasons justifying withdrawal.
  • Requires filing of Form FA for withdrawal.

Together, these provisions ensure procedural clarity for withdrawal at different stages of CIRP.

Procedure for Withdrawal under Section 12A

1. Filing of Application: The applicant files an application before the Adjudicating Authority through IRP or RP.
2. CoC Consideration:
   • If CoC is not constituted → IRP places withdrawal request directly before NCLT.
   • If CoC is constituted → RP places withdrawal request before CoC.
3. Voting Requirement: CoC considers the proposal. Approval requires 90% voting share.
4. Adjudicating Authority’s Role: After CoC approval, the application is submitted to NCLT, which exercises discretion to accept or reject the withdrawal.

This process ensures a balance between creditor autonomy and judicial supervision.

Judicial Interpretation of Section 12A

Before Constitution of CoC

• In Ashok G. Rajani v. Beacon Trusteeship Ltd. (2022 SC), the Supreme Court held that withdrawal before constitution of CoC is permissible without requiring CoC approval.
• In Anuj Tejpal v. Rakesh Yadav (2021 NCLAT), the NCLAT held that NCLT/NCLAT may use inherent powers under Rule 11 of their respective Rules to allow withdrawal at this stage.

After Constitution of CoC

In Vallal RCK v. Siva Industries and Holdings Ltd. (2022 SC), the Court held that once 90% of CoC approves withdrawal, the NCLT cannot interfere with the CoC’s commercial wisdom unless the decision is arbitrary or against law.

After Issuance of Expression of Interest (Form G)

• In Swiss Ribbons Pvt. Ltd. v. Union of India (2019 SC), the Court upheld constitutionality of Section 12A and clarified that Regulation 30A is directory, not mandatory. Exceptional cases may permit withdrawal even after EOI is issued.
• In Brilliant Alloys Pvt. Ltd. v. S. Rajagopal (2018 SC), the Court read “shall” in Regulation 30A as “may”, making withdrawal possible post-EOI in suitable circumstances.

After Approval of Resolution Plan

In Hem Singh Bharana v. Pawan Doot Estate Pvt. Ltd. (2023 NCLAT), it was held that once CoC approves a resolution plan, withdrawal under Section 12A is not permissible.

At the Stage of Liquidation

In V. Navaneetha Krishna v. Central Bank of India (2018 NCLAT), the Tribunal allowed withdrawal even during liquidation if CoC approved with 90% votes.

Intersection with Section 29A

In Shweta Vishwanath Shirke v. CoC (2019 NCLAT), it was clarified that promoters or shareholders are not barred by Section 29A from proposing settlement under Section 12A. Section 29A relates to eligibility of resolution applicants, whereas Section 12A is about withdrawal.

Purpose and Objectives of Section 12A

Section 12A serves multiple purposes:

• Facilitates Settlement: Encourages out-of-court settlement between creditors and corporate debtor even after admission.
• Protects Viable Businesses: Prevents unnecessary liquidation of companies that can be revived through settlement.
• Reduces Burden on NCLT: Helps avoid lengthy litigation where settlement is possible.
• Ensures Collective Decision-Making: 90% CoC threshold ensures withdrawal is not misused by a small group.
• Balances Stakeholder Interests: Protects creditors, shareholders, employees, and other stakeholders by ensuring efficient outcomes.

Conclusion

Section 12A of the Insolvency and Bankruptcy Code has introduced a much-needed mechanism for withdrawal of CIRP applications after admission. It reflects the principle that insolvency proceedings should not always end in liquidation, but should encourage resolution and settlement wherever possible. By requiring 90% approval of the Committee of Creditors, the provision ensures that withdrawal reflects the collective interest of stakeholders and not just bilateral arrangements.