Section 12A Application Not Permitted During Liquidation Period: NCLAT Principal Bench

Section 12A allows for the withdrawal of an insolvency application with the approval of ninety percent of the Committee of Creditors (CoC).

The bench noted that Section 12A is designed to facilitate the withdrawal of an application during the Corporate Insolvency Resolution Process (CIRP) before the insolvency resolution or liquidation proceedings have begun. Once the liquidation process commences, it held that the Committee of Creditors, which is instrumental in approving such withdrawals, ceases to exist in its original capacity.

The bench held that:

“In view of the clear Statutory Scheme as delineated by 12A, Section 33 and Regulation 2B of the Liquidation Regulation, we are of the view that during Liquidation period, an Application under Section 12A is not permissible.”

Brief Facts:

The Corporate Insolvency Resolution Process (CIRP) for M/s. Hind Motors India Ltd. (Corporate Debtor) was initiated by an order under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC) filed by the Corporate Debtor itself. An Order for Liquidation was issued.

Mr. Ashish Mohan Gupta, the Promoter and former Director, challenged this Liquidation Order; however, his appeal was dismissed. During the Liquidation proceedings, the Liquidator issued an e-Auction Notice, but Mr. Gupta sought a stay on the sale arguing that his Scheme under Section 230 of the Companies Act, 2013 should be considered. This request was rejected and the subsequent appeal was dismissed.

Later, the Appellant, who claimed to be depositors of the Corporate Debtor, filed an application under Section 12A of the IBC requesting the Liquidator to convene a Committee of Creditors (CoC) meeting to consider his application. The Liquidator contended that this application was not maintainable and issued a Sale Notice which Appellant No. 1 challenged by filing an application. The NCLT Chandigarh bench stayed the Sale Notice but it was withdrawn on January 6, 2022. A new Sale Notice was issued which prompting Appellant No. 1 to file another application. The NCLT dismissed all applications. Feeling aggrieved, the Appellants approached the NCLAT.

In challenging the Order, the Appellants contended that the Adjudicating Authority erred in dismissing the Section 12A application. They argued that Section 12A applications should be maintainable during Liquidation proceedings. Additionally, they contended that the Liquidator proceeded with the sale of assets without constituting a Stakeholders Consultation Committee (SCC), which they claim is required under the Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2022.

In response, the Liquidator argued that a Section 12A application is not maintainable during the Liquidation Process and that the Liquidation commenced before the 2022 amendments to the regulations, so the requirement for an SCC does not apply retroactively.

Observations by the NCLAT:

The NCLAT addressed the issue of whether Section 12A of the IBC, which allows for the withdrawal of insolvency applications during the CIRP can be applied during the liquidation phase. Section 12A, inserted by Act 26/2018 and effective from June 6, 2018, states that an application admitted under Sections 7, 9, or 10 can be withdrawn with the approval of ninety percent of the voting share of the CoC provided that it is done in the manner prescribed by the regulations.

The NCLAT noted that the order of liquidation under Section 33 was passed when no resolution plan is received or if the plan is rejected before the expiry of the CIRP. It held that liquidation can also be directed before the confirmation of a resolution plan, if the CoC, with at least 66% of the voting share, decides to liquidate the Corporate Debtor. Once liquidation commences, it held that the CoC ceases to exist in its capacity to decide on matters like the withdrawal of the application under Section 12A.

The NCLAT noted that Section 12A explicitly contemplates withdrawal only during the CIRP, not during liquidation. After liquidation begins, the NCLAT noted that the CoC is no longer in place to grant approval for withdrawal, and the statutory scheme of the IBC does not provide for such a withdrawal process during liquidation. Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016, allows for compromises or arrangements during liquidation but does not extend to withdrawals under Section 12A.

Therefore, the NCLAT held that Section 12A, Section 33, and Regulation 2B indicate that withdrawal of an application is not permissible during the liquidation process. It held that the Appellant's application was filed well after the commencement of liquidation, and it found no error in the NCLT's rejection of the application.

The NCLAT held that the statutory framework does not allow for withdrawal of an application under Section 12A once liquidation has commenced and affirmed the decision of the lower authority.

Therefore, the appeal was dismissed.

Case Title: Asha Chopra and ors vs M/s. Hind Motors India Limited and ors

Case Number: Company Appeal (AT) (Insolvency) No. 1425 – 1428 of 2024 & I.A. No. 5180 – 5183 of 2024

For Appellant : Mr. Saket Sikri, Ms. Anannya Ghosh, Mr. Ajay and Mr. Brian Moses, Advocates.

For Respondents : Mr. Kamal Satija, Advocate for R-1.

Date of Judgment: 29th August, 2024

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