Section 12A: A Tool for Withdrawal of CIRP Proceedings under IBC

Introduction

Insolvency and Bankruptcy Code, 2016 (hereinafter “IBC” or “the Code”) was enacted with the objective of providing an efficient mechanism for revival, reorganization, and resolution of distressed or bankrupt entities/persons in a time-bound manner to resolve the issues of the creditors. Within a period of just 5 years, the Code has been amended many times to make it more efficient and market-driven. One such case was the insertion of Section 12A into the Code vide IBC amendment Act of 2018 which paved the way for erstwhile management of Corporate debtor (hereinafter ‘CD’) to settle matters between the creditors and withdraw the cases under Corporate Insolvency Resolution Process(hereinafter ‘CIRP’).

Why was 12 A introduced?

Section 12A was added to the code IBC (Second Amendment) Act, 2018, w.e.f. 6-6-2018 with retrospective effect. The code before the amendment did not have any provisions for settlement of debts between the creditors and the promoters. Even the NCLT or NCLAT did possess the inherent powers to grant withdrawal of admitted application under sections 7, 9, and 10 of the Code even if the applicant, creditors and erstwhile management/promoters of CD agreed to settle the matters outside IBC1 after admission of application by Adjudicating Authority (hereinafter ‘AA’). On one hand the code was introduced to ensure timely disposal of insolvency matters but on the other it failed to recognize the way of settlement with the creditors as a viable option for resolution, which could ensure maximization of assets and timely settlement of dues between parties. Therefore, parties started approaching the Apex court for relief, and the court under Article 142 passed orders for allowing withdrawal of applications against CD under CIRP. In November, 2017 the Hon’ble Supreme Court (hereinafter ‘Apex Court’) in the case of Uttara Foods & Feeds (P.) Ltd v. Mona Pharmachem2 directed the government to incorporate a provision under the Code allowing for post-admission withdrawal, and preventing such applications to be filed before the Supreme Court.

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