NCLAT (2024.04.30) in M/s Vijay Trading Co & Ors. Vs. Ms Reshma Mittal, & Ors. [Company Appeal (AT) (INS) NO.1029, 1046 & 1046 OF 2022] held that;
From the plain reading of Section 12A it is clear that withdrawal of CIRP has to satisfy twin requirements of an application by the applicant including approval of CoC by at least 90% voting share.
The application for withdrawal as per the Regulation 30A read with Section 12A has to be necessarily made by the applicant who has initiated CIRP by filing application under Section 7, Section 9 or Section 10 of IBC, 2016. The provisions of the Code and IBBI (CIRP) Regulations, 2016 regarding this are sufficiently clear.
It is clear that once the Code gets triggered by admission of the creditor’s petition under Section 7 to 9, the proceeding that is before the adjudicating authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim.
The main thrust against the provision of Section 12-A is the fact that ninety per cent of the Committee of Creditors has to allow withdrawal. it is clear, that under Section 60 of the Code, the Committee of Creditors arbitrarily rejects a just settlement and/ or withdrawal claim, NCLT, and thereafter, NCLAT can always set aside such decision under Section 60 of the Code.
There appears to be no room for any other interpretation to Section 12A to include in its discretion, the claims/ objections of remaining operational creditors, even after 90% votes in CoC are in favour of such application and the applicant is willing to withdraw the application filed u/s 7, 9 or 10 of IBC, 2016.
Excerpts of the order;
30.04.2024: The present three appals are filed against the same impugned order dated 07.07.2022 passed by the Adjudicating Authority, National Company Law Tribunal, Chandigarh allowing CA No.846/2019 of RP seeking withdrawal of CIRP under Section 12 A of the Code thereby rendering the CA No.737/2019 filed by the Appellant as infructuous. We are disposing the above appeals by this common order.
FACTS OF THE CASE:
# 2. M/S Aayush Trading Co (Respondent No. 3) had filed an application under Section 9 of the Insolvency & Bankruptcy Code, 2016(hereinafter refered to ‘Code’) for initiating Corporate Insolvency Resolution Process (hereinafter referred as CIRP) against Monika Freshway Foods Pvt Ltd (hereinafter referred to as Corporate Debtor). The Ld. Adjudicating Authority admitted the CP(IB) No.191/Chd/Hry/2018 on 28.11.2018 and vide order dated 04.12.2018 the orders for declaring the moratorium in terms of Section 14 of the Code was passed and Mr. Tarun Batra was appointed as an Interim Resolution Professional.
# 3. The IRP commenced the CIRP and constituted the Committee of Creditors (hereinafter referred to as CoC). Thereafter, the IRP in terms of Section 13(I)(b) of the Code read with Section 15 called for the submission of claims against Corporate Debtor in the 1st CoC Meeting. The Appellant has supplied the goods to the Corporate Debtor therefore falls under the definition of Operational Creditor and submitted its claim under Form B.
# 4. The Appellant was made a member of CoC as Operational Creditor without voting rights, in terms of the provisions of the Code. In the first meeting of CoC conducted on 03.01.2019 the IRP informed the factory premises has been in the possession of the Union Bank of India i.e. one of the Financial Creditors. It was also informed by the IRP that on visit, IRP found some of the machineries of the Unit missing and assured for the recovery of the lost machinery. However, nothing was informed of the action taken either by the Union Bank of India or the IRP to report the missing machinery which ultimately affected the going concern of the Corporate Debtor.
# 5. The second CoC was conducted on 22.02.2019 wherein the Respondent No. 2 objected for inclusion of Respondent No. 3 as financial creditor considering the fact the Respondent No. 3 is an Operational Creditor being supplier to the Corporate Debtor. The IRP informed the claim of Respondent No. 3 has been provisionally admitted based on the claim form received which is yet to be verified since the books of the Corporate Debtor are still not available. The IRP also informed he kept requesting the Respondent No. 2 for handover of the possession of the factory but there was no response from UBI. The UBI stated since they wish to appoint RP out of their own panel and choice, they will handover the possession of the factory to the newly appointed RP only. The Promoter stated they were in talks with UBI over settlement. The UBI allegedly not only delayed in handover of possession but also in appointment of valuers, transaction auditor in order to have their chosen Resolution Professional. UBI also stated if the IRP appoints any professional, the same will be changed as soon as new RP is appointed.
The dues of Appellant alongwith other Operational Creditors constitute 74% of the total debt amount.
# 7. The RP conducted 4th meeting and published/republished the Form-G of Expression of Interest (hereinafter referred as 'EOI') inviting submission of resolution plan for Corporate Debtor on 19.03.2019 and on 26.04.2019 respectively.
# 8. In the 5th meeting of the members of COC the Respondent No. 1 informed no Resolution plan has been received in pursuance to the EOI published. The Respondent No. 2 Union Bank of India instantly informed that the Corporate Debtor has reached settlement with Bank and therefore the Bank has decided to file an application seeking withdrawal of CIRP under Section 12A of the Code. No representative for original Applicant i.e. R3 Aayush Trading Co. was present in the meeting. However, the meeting was adjourned for 2 hours and after two hours, the original Applicant made himself present and stated his dues also have been settled by Mr. Ramesh Sharma, Ex-director of Corporate Debtor and he wishes to withdraw the Application.
# 9. The Appellant and other Operational Creditors viz Vijay Trading Company, Paul Trading Co. inquired about settlement of their dues to which Mr. Ramesh Sharma assured them to settle in 3-4 days. However, with an intent to defraud the Appellant and other Operational Creditors, the Respondent No. 1 RP placed the agenda for withdrawal in the 5th meeting COC itself and the financial creditors resolved to withdraw Section 9 Petition filed by M/s Aayush Trading Co. under Section 12A of the Code without considering the fact the claim of the 74% of the total debt has not been settled.
# 10. As resolved in the 5th meeting of COC, and despite being aware of the fact the ex-management has not settled with the Appellant and other operational creditors constituting 74.24% of the total debt amount of Corporate Debtor, Respondent No. 1 filed an Application bearing C.A. No. 556/2019 seeking withdrawal of CIRP. The Respondent No. 1 did not make the Appellant and other as party. The said application, however, came to be dismissed on 23.08.2019 on account of non-compliance of Regulation 30A of the CIRP Regulation and the applicable provisions of the Code.
# 11. Pursuant to dismissal of withdrawal application bearing number 556/2019, the RP conducted the 6th COC meeting on 31.08.2019 in which the Appellant made the representation addressed to the RP regarding discriminatory treatment with the Appellant. It was submitted the Director had settled with the Original Applicant i.e. an Operational Creditor but has not settled with the Appellant till date despite being assured of and thus requested not to press section 12A application.
# 12. Despite pointing out several illegalities, the COC and RP again discussed and decided to file Section 12A application (Agenda No. 2 of 6th COC meeting). The Respondent No. 2 UBI suggested the RP to appoint their suggested lawyer for the proceeding. In the same meeting the Respondent No. 2 also raised objection of filing of application reporting fraudulent and preferential transactions. The Appellant, being aggrieved by this, filed an application under Section 60(5) of the Code read with Rule 11 of the NCLT Rules bearing No. 737/2019 praying to declare Agenda No. 6 in 5th COC meeting and Agenda No. 2 in 6th COC meeting as null and void, whereby RP was directed to move Section 12 A application.
# 13. During the pendency of hearing on the Application CA No. 737/2019, 737/2019 and 738/2019 the ex-management kept on seeking time from the Ld. Adjudicating Authority to negotiate and settle with all the three Operational Creditors including the Appellant.
# 14. Vide Impugned Order dated 07.07.2022 the Hon'ble Adjudicating Authority, without appreciating the grounds and without adjudicating on merit, dismissed all the pending applications (including Appellant's application bearing No. 737/2019 and avoidance application bearing C.A. No. 559/2019 filed by the RP filed way before of Section 12A Application) while allowing the Section 12A application bearing No. C.A. No. 846/2019 filed by the RP on 16.09.2019. Thus it is argued the impugned order is in violation of legal provisions, judicial precedents and also violates the right of the Appellant.
# 15. The appellants have challenged the impugned order on the ground the Ld. NCLT has approved a wholly arbitrary and capricious decision of COC by allowing CA No.846/2019 seeking withdrawal of CIRP against the Corporate Debtor in view of settlement with Respondent No.2 and 3, without acknowledging the claims of other Operational Creditors and that of the appellant forming majority (74%) of the total debt having not been settled. It is argued the Adjudicating Authority in a wholly mechanical manner has approved an application under Section 12A of the Code without deciding the pending applications interalia of the appellant and application seeking avoidance of transactions.
# 16. It is argued the CIRP is a proceeding in rem and, therefore, the ex-management has to propose omnibus settlement. It is argued despite the assurance given by the COC that it will settle 75% of the debt in favour of the appellant it had gone ahead with settlement without settling the debt of the appellant.
# 17. We have heard the counsel for the appellants.
# 18. After initiation of CIRP, the enabling provisions for withdrawal of CIRP are contained only in Section 12A of IBC, 2016. Section 12A is reproduced below for ready reference:-
“Section 12A, The Adjudicating Authority may 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 ninety percent voting share of the committee of creditors, in such manner as may be specified.
# 19. From the plain reading of Section 12A it is clear that withdrawal of CIRP has to satisfy twin requirements of an application by the applicant including approval of CoC by at least 90% voting share. The word applicant is defined in Regulation 2(1)(a) of IBBI (CIRP) Regulations, 2016 as under:-
“APPLICANT” means the person(s) filing an application under sections 7, 9 or 10, as the case may be;
# 20. Regulation 30A of IBBI (CIRP) Regulations, 2016 specifies the procedure and form in which application for withdrawal of CIRP has to be made. As per the provisions of IBBI (CIRP) Regulations, 2016 the application for withdrawal of CIRP under Section 12A of IBC, 2016 may be made to the Adjudicating Authority through IRP by the applicant in Form-A, specified in Schedule accompanied by a bank guarantee towards the estimated expenses made by the IRP. The application for withdrawal as per the Regulation 30A read with Section 12A has to be necessarily made by the applicant who has initiated CIRP by filing application under Section 7, Section 9 or Section 10 of IBC, 2016. The provisions of the Code and IBBI (CIRP) Regulations, 2016 regarding this are sufficiently clear. Admittedly in the present case these twin conditions stands satisfied viz; application u/s 12A being moved by the applicant who initiated CIRP and 90% voting is in favour of the application.
# 21. The counsel for the appellant however referred to Swiss Ribbons Private Limited and Another Vs. Union of India & Ors. 2019 SCC OnLine SC 73 to say provisions of Section 12 A of IBC, 2016 gives discretion to the Adjudicating Authority to even discuss such application even if twin conditions are satisfied, provided other facts are grave and support exercise of such discretion. Paras 82 and 83 of the judgment are referred to as under:-
82. It is clear that once the Code gets triggered by admission of the creditor’s petition under Section 7 to 9, the proceeding that is before the adjudicating authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim. A question arises as to what is to happen before a Committee of Creditors is constituted (as per the timelines that are specified, a Committee of Creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the Committee of Creditors is not yet constituted, a party can approach NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case.
83. The main thrust against the provision of Section 12-A is the fact that ninety per cent of the Committee of Creditors has to allow withdrawal. This high threshold has been explained in the ILC Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantially all the financial creditors, have to grant their approval to an individual withdrawal or settlement. In any case, the figure of ninety per cent, in the absence of anything further to show that it is arbitrary, must pertain to the domain of legislative policy, which has been explained by the Report (supra). Also, it is clear, that under Section 60 of the Code, the Committee of Creditors arbitrarily rejects a just settlement and/ or withdrawal claim, NCLT, and thereafter, NCLAT can always set aside such decision under Section 60 of the Code. For all these reasons, we are of the view that Section 12-A also passes constitutional muster.
# 22. The counsel for the appellant also referred to Gopal Krishna Bathla vs. Crown Realtech Pvt. Ltd. and Anr.: 2020 SCC OnLine NCLAT 1070 and Dinesh Gupta vs. Rolta India Ltd.: 2021 SCC OnLine NCLT 664. In both these cases CoC was never constituted and hence Section 12A (supra) application was rejected on facts but whereas in the present case COC was in place.
# 23. It is urged since in the present case assurances were given to the appellants by Suspended Directors as is recorded in various CoC meetings, the bench ought to have considered such facts before allowing application under Section 12(A) of the Code and discretion u/s 12(A) ought to have been exercised. We disagree. The impugned order passed was rather in line with para 83 of Swiss Ribbons’ Case.
# 24. The learned counsel for the appellant has failed to show any judgement to say beyond twin conditions as are given in Section 12A of the Code, the Adjudicating Authority ought to have considered other facts. The impugned order take notes of provisions of Section 12A of ‘Code’ and Regulation 30A of IBBI (CIRP) Regulation, 2016 while allowing such application and liberty was granted to the appellants to approach the Tribunal with their claim(s) independently and if required to seek recourse elsewhere, if advised so.
# 25. There appears to be no room for any other interpretation to Section 12A to include in its discretion, the claims/ objections of remaining operational creditors, even after 90% votes in CoC are in favour of such application and the applicant is willing to withdraw the application filed u/s 7, 9 or 10 of IBC, 2016. There appear to be no illegality in the impugned order and hence we are of the opinion the appeals are devoid of merit(s), hence are dismissed.
# 26. Pending applications, if any, also stand disposed of.
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