The Insolvency and Bankruptcy Code (IBC) 2016 is a law in India designed to help struggling companies either recover or close down efficiently, focusing on saving businesses rather than shutting them down. Section 12A, added through an update in 2018, effective from June 6, 2018, and officially approved on August 17, 2018, fills a gap in the original law. Before this, there was no clear way for a company to stop the insolvency process after it had officially started. Section 12A allows companies to withdraw their insolvency applications after they’ve been accepted, helping businesses and creditors settle disputes outside of court. This guide explains Section 12A in simple terms, covering its rules, benefits, challenges, and court decisions, making it easy for everyone, including business owners, creditors, and legal professionals, to understand.
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What Is Section 12A of IBC, 2016
Section 12A of the IBC 2016 allows a company or the person who started the insolvency process to cancel it after it has been accepted by the court. This applies to applications filed under Sections 7, 9, or 10 of the IBC, which cover cases started by banks or financial institutions (financial creditors), suppliers or service providers (operational creditors), or the company itself (corporate debtor). The main requirement is that 90% of the creditors, through a group called the Committee of Creditors (CoC), must agree to the withdrawal. This rule is supported by Regulation 30A of the Insolvency and Bankruptcy Board of India (IBBI) rules, which took effect on July 4, 2018.
The steps to withdraw are:
The company or the person who filed the insolvency case submits a withdrawal request, usually using a form called Form FA.
The request goes to the Committee of Creditors, who vote on it, and 90% must say yes.
The National Company Law Tribunal (NCLT) reviews and gives the final approval to ensure everything follows the rules.
How Section 12A Facilitates Insolvency Application Withdrawal
To withdraw an insolvency application, the request usually needs to be made before a public announcement inviting companies to submit plans to take over or fix the business (called Expressions of Interest or EoI).
This is a key step in the Corporate Insolvency Resolution Process (CIRP). However, some court decisions, like Brilliant Alloys Pvt. Ltd. v. S. Rajagopal in 2022, have said that in special cases, withdrawals can happen even after this step if the creditors agree and the situation allows it.
A recent Supreme Court ruling in Abhishek Singh v. Huhtamaki PPL Ltd. & Anr. on March 28, 2023, made things even clearer. It said that a withdrawal request can be made even before the Committee of Creditors is formed.
This means companies can settle their issues early in the process. For example, in this case, the company and creditors agreed to a settlement just two days after the insolvency process started, and the payment was completed within five days.
The court emphasized that the IBBI’s rules (Regulation 30A) must be followed by the NCLT, allowing early withdrawals in such cases.
Practical Implications and Benefits of Section 12A of IBC
Section 12A brings several advantages for businesses and creditors:
Business Revival: It lets business owners use their knowledge to save the company, which can protect jobs and keep the business running.
Cost Efficiency: Settling outside of court avoids high costs like fees for the Resolution Professional (the person managing the insolvency) and legal expenses.
Asset Preservation: Quick settlements prevent the company’s assets (like property or equipment) from losing value during a long insolvency process.
Creditor Benefits: Creditors might get more money through a settlement than they would if the company’s assets were sold off in liquidation.
Data from December 2018 shows that out of 586 resolved insolvency cases, 63 were withdrawn using Section 12A, compared to 79 cases where a recovery plan was approved, showing how often this option is used.
Challenges and Criticisms
Even though Section 12A is helpful, it has some problems:
High Approval Threshold: Getting 90% of creditors to agree is difficult, especially when there are many creditors, as seen in cases like Y Shivram Prasad v. S Dhanpal.
Creditor Dynamics: The Committee of Creditors is often controlled by big banks or financial institutions, which can overshadow smaller creditors, raising concerns about fairness.
Risk of Misuse: Some might use Section 12A to delay the process or gain leverage in negotiations, which can weaken the purpose of the IBC and NCLT.
Lack of Transparency: There are no strict rules for how settlement talks should happen, which can lead to inconsistent or unfair practices, as noted in the Vallal RCK v. Siva Industries case in 2022.
Judicial Interpretations and Case Law
Several important court cases have shaped how Section 12A works:
Uttara Foods & Feeds (P.) Ltd. v. Mona Pharmachem: Before Section 12A existed, the Supreme Court allowed withdrawals using its special powers, showing the need for this rule.
Swiss Ribbons Pvt. Ltd. v. Union of India: This case confirmed that the 90% approval rule is fair and that the NCLT can step in early, before the Committee of Creditors is formed, using its authority under NCLT Rules.
Anuj Tejpal v. Rakesh Yadav: This 2021 case clarified that if the withdrawal happens before the Committee of Creditors is formed, the Resolution Professional can take the request directly to the NCLT.
These court decisions highlight the balance between helping companies recover and protecting creditors’ rights. In the Abhishek Singh case, the Supreme Court overturned an NCLT rejection, allowing a withdrawal because the company and creditors settled early.
Learn more about Corporate Insolvency Resolution
Summary
Section 12A of the IBC 2016 is an important rule that helps businesses and creditors settle insolvency cases outside of court, reducing the burden on the legal system. It offers benefits like saving businesses, cutting costs, and protecting assets, but faces challenges like the high 90% creditor approval requirement and risks of unfair practices. Court decisions continue to make the process clearer and fairer, with recent rulings allowing more flexibility, like withdrawals before the Committee of Creditors is formed. Understanding Section 12A is key for business owners, creditors, and legal experts to use it effectively while addressing its challenges.
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Section 12A of IBC 2016: FAQs
Q1. What is Section 12A of the IBC Act?
Section 12A of the IBC 2016 lets companies or applicants cancel an insolvency case after it’s been accepted, with 90% creditor approval and NCLT’s permission.
Q2. What is IBC Code Section 12?
Section 12 of the IBC 2016 sets a 180-day deadline for completing the Corporate Insolvency Resolution Process (CIRP), which can be extended up to 330 days.
Q3. What is Section 12 of the Insolvency Act?
Section 12 of the IBC 2016 sets the time limit for resolving insolvency cases, requiring the process to finish within 180 days, with a possible extension to 330 days.
Q4. What is the minimum amount for insolvency?
The minimum amount to start an insolvency case under the IBC is ₹1 crore in unpaid debt, as updated in 2020.
Q5. What is the threshold for 1 crore in IBC?
The ₹1 crore threshold is the minimum unpaid debt needed to file an insolvency case against a company under IBC Sections 7 or 9.
