Withdrawal & settlement under liquidation

While the corporate insolvency resolution process (CIRP) is underway, sometimes it is common for the creditor and the entity under CIRP (Corporate Debtor) to enter discussions where the parties may come to a mutual understanding to settle the debt. In such cases, a creditor may withdraw the application made against the Corporate Debtor for admission into the CIRP (CIRP Application). The issue under consideration in this article is whether a CIRP Application can be withdrawn post the Corporate Debtor being admitted into liquidation process. We share our thoughts on the above issue considering the decision of National Company Law Tribunal (NCLT) in VS Varun v. South India Bank (VS Varun Case).

NCLT in VS Varun Case

Pursuant to the initiation of CIRP, a resolution professional was appointed who constituted a Committee of Creditors (CoC). The CoC, comprised solely of a financial creditor i.e., South India Bank which resolved to liquidate the Corporate Debtor. Accordingly, a liquidator was appointed. However, during the liquidation process, the former promoter of the Corporate Debtor expressed its intention to settle the dues of the financial creditor and revive the Corporate Debtor. The former promoter settled the dues of South India Bank which provided a no-dues certificate to the Corporate Debtor. Subsequently, during the meeting of the Stakeholders Consultation Committee (SCC), South India Bank, the sole stakeholder informed the liquidator of the settlement and authorized the liquidator to take steps for withdrawal of proceedings against the Corporate Debtor. During the withdrawal proceedings, the NCLT dealt with the question of whether the CIRP Application can be withdrawn during liquidation.

The NCLT observed that South India Bank was the only stakeholder, and it approved the withdrawal of CIRP Application against the Corporate Debtor. The NCLT relied on another case and noted that a promoter / creditor interested in settling the matter is entitled to do so, only upon the satisfaction of all the creditors of the Corporate Debtor. Therefore, once all the creditors and stakeholders, being South India Bank in the present case, approved the withdrawal, the NCLT allowed the withdrawal of the CIRP Application during liquidation.

Insolvency law on withdrawal

The Insolvency and Bankruptcy Board (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) provides three stages at which the matter can be withdrawn after the initiation of CIRP: (i) before the constitution of CoC; (ii) after the constitution of CoC but before inviting resolution plans and, (iii) after inviting resolution plans, along with cogent reasons for such withdrawal. Moreover, as per the Insolvency and Bankruptcy Code, 2016 (Code), withdrawal can be pursued only after 90% approval of the CoC. While the Code clarifies the scope of withdrawal of a CIRP Application, such withdrawal is limited to the three stages mentioned above. More so, withdrawal after the constitution of CoC require the approval of 90% of the CoC.

CoC and SCC

As per the insolvency law, a CoC oversees the insolvency resolution process. The Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. and Vallal RCK v. Siva Industries and Holdings Ltd. & Ors. held that the CoC is the key decision maker on whether or not to rehabilitate the Corporate Debtor by means of acceptance of a particular resolution plan and is practically the best-equipped to oversee the CIRP. Once the resolution plan is approved by the insolvency courts, the CoC ceases to exist.

On the other hand, liquidation of a Corporate Debtor is initiated where (i) no resolution plan is approved; (ii) the resolution plan is rejected by the NCLT; or (iii) the CoC decides to initiate liquidation. Pursuant to the initiation of liquidation, a liquidator is appointed, and an SCC is constituted by the appointed liquidator. The SCC comprises of persons whose claims have been admitted against the Corporate Debtor.

Our analysis and thoughts

As per the provisions of the Code and the CIRP Regulations, a CIRP Application can be withdrawn only at the three stages. While in VS Varun Case, even though the matter went beyond the CIRP stage and the CoC ceased to exist, the NCLT allowed withdrawal of the CIRP Application upon the consent of the SCC.

The Report of Insolvency Committee from February 2020 (Report) culls out a clear distinction between the powers and responsibilities of CoC and SCC. The Report states that the CoC is entrusted with critical commercial decision-making powers and is accountable for not just the creditors but the other stakeholders as well. The Supreme Court in another case has observed that (i) the commercial wisdom of CoC has been given paramount status without any intervention by the courts; and (ii) there is an intrinsic assumption that financial creditors are fully informed about the viability of the Corporate Debtor and feasibility of the proposed resolution plan. On the other hand, while discussing the SCC, the Report states that even though the SCC supports and advises the liquidator, it is not binding on the liquidator. This is recorded in the Code as well. While the CoC strictly comprises of creditors of the Corporate Debtor, the composition of SCC is wide and includes creditors, workmen and employees, governments, shareholders or partners. Further the CIRP Regulations contain provisions relating to withdrawal of a CIRP Application, while the regulations governing the liquidation process under the Code does not. Moreover, the precedents referred by the NCLT in the VS Varun Case relate to the withdrawal with the approval of CoC.

In the facts and circumstances of VS Varun Case, our view is that the NCLT rightly allowed withdrawal of CIRP Application upon the approval of the SCC. The legislative intent behind the insertion of withdrawal provisions as highlighted in the Bankruptcy Law Reforms Committee Report, 2018 was to “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”. Accordingly, it may be understood that withdrawal of CIRP Application upon the approval of all stakeholders, irrespective of the stage of the proceedings, is in the interest of the creditors and the Corporate Debtor. The decision of the NCLT in VS Varun Case interprets the provision for withdrawal keeping in view the intent and spirit of the insolvency law i.e., resolution or rescue of the Corporate Debtor. However, the consent of the CoC and the consent of SCC would not be on the same footing for the reasons mentioned above. Both the CoC and SCC are formed for different purposes and to perform functions of distinct nature involving stakeholders.

That said, obtaining the consent of all stakeholders during liquidation process may not be as straightforward as was the case in VS Varun Case comprising of a single financial creditor. Accordingly, it is recommended that in the proposed amendments to the Code and the liquidation process regulations, the above issue should be considered, and unambiguous provisions should be incorporated in the law enabling settlement even at the liquidation stage if claims of all stakeholders are amicably settled by the Corporate Debtor.

Authors: Souvik Ganguly, Akhil Ramesh and Richa Phulwani 

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