Brilliant Alloys Private Limited vs Mr. S. Rajagopal

Introduction to Case

Under Insolvency and bankruptcy code 2016, withdrawal of corporate insolvency resolution process can be done within the purview of the section 12A which is inserted in 2018 in this code under which the case can be withdrawn even if the CIRP has been initiated. Before passing of this section the case can be withdraw under Rule 8 Insolvency and bankruptcy Rules, 2016 which states that the Adjudicating Authority may permit withdrawal of the application, which is made under rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission. The case of Brilliant Alloys will shed light upon how an application of withdrawal can be allowed in certain cases, even after issue of invitation of interest.

Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 states Inherent Powers as under:

“Noting in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal.”

Section 12A of the Code provides that the Adjudicating Authority shall 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 90 percent of voting share of the committee of creditors at any time during the insolvency process.

Section 12A of IBC read with section 30A of the CIRP Regulation specifically deals with the withdrawal of CIRP after admission. Regulation under 30A imposes an additional condition for withdrawal of CIRP that such application shall be filed before issue of invitation for expression of interest under regulation 36A.

This case deals with withdrawal of case even when the invitation for expression of interest has been filed.

Facts of the Case

In this matter an application for withdrawal of CIRP before NCLT was filed by the Resolution Professional of the corporate debtor on the ground that all claims of operation and financial creditors of the corporate debtor are settled.

However, the application for withdrawal was filed under section 60(5) of the Insolvency and bankruptcy code instead of section 12A because the settlement happened after the issue of invitation for expression of interest under regulation 36A of CIRP Regulations, 2016.

Section 12A of Insolvency and bankruptcy code read with regulation 30A of the CIRP Regulations specifically deals with withdrawal of CIRP after admission of invitation.

Section 12A provides that CIRP can be withdrawn after admission, if the same is approved by ninety per cent voting share of the committee of creditors. Regulation 30A imposes an additional condition for withdrawal of CIRP that such application shall be filed before issue of invitation for expression of interest under regulation 36A. In the current matter invitation had already been issued. Then also, the application had been filed before NCLT under section 60(5), which gives a larger power on NCLT to decide any application or proceedings by or against the corporate debtor and not under section 12A.

The case was submitted to NCLT of Chennai and they dismissed the application on the ground that section 30A imposes the regulation that for withdrawal application that it has to be filed before invitation for expression of interest, NCLT cannot pass an order allowing the withdrawal while ignoring the conditional clause given under the code.

The special leave petition was issued in the court under article 136 but it was withdrawn as under this case the settlement was done as of which the special leave petition is disposed.

Issues in the Case

The main issue under this case was that:

How can NCLT pass an order allowing the withdrawal when there is conditional clause given under the code i.e., Section 30A which states that the withdrawal can be done only before the invitation for expression of interest is filed?

What happens to the proceedings initiated under the code where the CIRP has been initiated and the court proceedings has been started?
Whether in view of Rule 8 of the I&B Rules 2016 the NCLT could utilize the inherent power recognized by Rule 11 of NCLT,2016 to allow a compromise before it by the parties after admission of the matter?

Also Read Section 40: Securities to Be Dealt with in Stock Exchange

Summary of Court Decision and Judgement

According to the court 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. Accordingly, the court allowed Settlement that has been entered into and annul the proceedings.

The Hon’ble Supreme Court held that the regulation 30A has to be read along with Section 12A which contains no stipulation and can only be dealt as directory depending upon the facts of the case. Withdrawal of application before admission has been provided under Rule 8 of the Insolvency and Bankruptcy Rules 2016 however there has been cases where the parties has reached the settlement for this controversy the judgement in Brilliant Alloys is clear in its applicability of Regulation 30A on the other cases of withdrawal.

Analysis

Section 12A is inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018 on recommendation by Insolvency Law Committee Report to provide ease to withdraw application which are made under section 7, 9 or 10 on settlement even if CIRP has been initiated and invitation is been made. A matter can be settled between the parties and an application under Sections 7 or 9 or 10 can be withdrawn only at four stages before section 12 A was inserted:

Before admission of application under Sections 7 or 9 or 10
After admission but before constitution of committee of creditors
After constitution of CoC but before issue of invitation for expression of interest
After issue of invitation for expression of interest

Regulation 30A provides the procedure for withdrawal of an application. In absence of any settlement, if no withdrawal is made at the aforesaid four stages then Resolution Process continues and if any Resolution Plan is found to be qualified in terms of sub-section (2) of Section 30 and approved by 66% of voting shares of the COC, the Adjudicating Authority may pass order approving the plan under Section 31 of the code.

It is to be noted that expenses such as the fee is to be paid to the interim resolution professional, fee must be paid to insolvency professional entity, if any, and fee also to be paid to professionals, if any, and other expenses incurred till the date of filing of the withdrawal application on or by the interim resolution professional.

In case of application filed after constitution of Committee of creditor but before issue of invitation for expression of interest or after issue of invitation for expression of interest, following expenses as specified under Regulation 31 of CIRP incurred till the date of filing of the withdrawal application on or by the interim resolution professional to be considered for Bank Guarantee.

Section 30A provides for withdrawal of application. It states that:

An application for withdrawal under section 12A may be made to the Adjudicating Authority:
- before the constitution of the committee, by the applicant through the interim resolution professional;
- after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be:

Provided that where the application is made under clause (b) after the issue of invitation for expression of interest under regulation 36A, the applicant shall state the reasons justifying withdrawal after issue of such invitation.

The application under sub-regulation (1) shall be made in Form FA of the Schedule accompanied by a bank guarantee-
- towards estimated expenses incurred on or by the interim resolution professional for purposes of regulation 33, till the date of filing of the application under clause (a) of sub regulation (1); or
- towards estimated expenses incurred for purposes of clauses (aa), (ab), (c) and (d) of regulation 31, till the date of filing of the application under clause (b) of sub-regulation (1).
Where an application for withdrawal is under clause (a) of sub-regulation (1), the interim resolution professional shall submit the application to the Adjudicating Authority on behalf of the applicant, within three days of its receipt.
Where an application for withdrawal is under clause (b) of sub-regulation (1), the committee shall consider the application, within seven days of its receipt.
Where the application referred to in sub-regulation (4) is approved by the committee with ninety percent voting share, the resolution professional shall submit such application along with the approval of the committee, to the Adjudicating Authority on behalf of the applicant, within three days of such approval.
he Adjudicating Authority may, by order, approve the application submitted under sub-regulation (3) or (5).
Where the application is approved under sub-regulation (6), the applicant shall deposit an amount, towards the actual expenses incurred for the purposes referred to in clause (a) or clause (b) of sub-regulation (2) till the date of approval by the Adjudicating Authority, as determined by the interim resolution professional or resolution professional, as the case may be, within three days of such approval, in the bank account of the corporate debtor, failing which the bank guarantee received under sub-regulation (2) shall be invoked, without prejudice to any other action permissible against the applicant under the Code.[1]

Also Read Private Companies in India: An overview

In view of the above section, it is to be questioned that is Section 30A is only directory in nature, as under this case it was observed that this section is only directory in nature, the court did not pass any rule under this case, but it was stated that the withdrawal will be depended on the facts of each case.

In Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors.,[2] the Court has stated that Regulation 30A is not mandatory instead it is directory for the simple reason that it will be based on the facts of a given case, an application for withdrawal shall be allowed in exceptional cases even after issue of invitation of interest under Regulation 36A.

But the issue which may arise is that this case can be used as precedent under other cases and due to this misuse of the procedure of court will be increased, questions will be raised on the applicability of Section 30A.

Hence, a loophole is created where counsel and parties will not take this procedure seriously or many counsels and parties will also try to sabotage the case proceedings. There will be threat to the insolvency process so to avoid that there must be a rule or section which states the penalty to punish those who waste the time of the court intentionally when they have intention of settling in the first instance only.

Conclusion

Under this case an exception is made that in some cases settlement can be granted even after the invitation of interest has been sent. Section 30A holds the directory nature. The main focus is on the section 12A which has been inserted to ease the withdrawal of the cases under Insolvency and bankruptcy code 2016.

There are both advantages and disadvantages from this case. The major disadvantage is that in the future by using this case as precedent counsel and parties will use Section 30A as a directory section which is to be read with section 12A as the main section which will create a threat to the insolvency process for which there must be a rule or section which states the fine or penalty which is to be charged by the court for wasting time of the court. When the settlement can be done before the invitation of interest or when the CIRP is been constituted and the parties did not opt for such option. This will prove the intention of the parties as to sabotage or delay the case.

There are some minimal advantages also that this section which is inserted in 2018 is correct as it will reduce the burden on the court and is similar as mediation and conciliation proceedings where the case is been settled.

References:

[1] CIRP Regulations, 2016

[2]SLP (Civil) No. 31557/2018