Linking IBC application withdrawal to CoC formation will ensure discipline

Experts say new IBC amendment restricting withdrawal of cases after CoC formation may increase costs but enhance discipline, predictability and safeguard creditor interests

The Insolvency and Bankruptcy Code (IBC) amendment allowing for the withdrawal of application only after the constitution of the Committee of Creditors (CoC) may lead to additional costs but would also bring discipline and predictability to the insolvency process, experts said. 

 

The amendment bill, which has been passed by the Parliament, states that the “withdrawal shall be permitted only after the constitution of the CoC and before issuance of the first invitation for submission of resolution plan.”  

 

Withdrawal under section 12A of the IBC would require the approval of 90 per cent voting share of the CoC and the order on the application has to be passed within 30 days by the Adjudicating Authority. 

 

“This amendment underscores the primacy of the CoC’s commercial wisdom and ensures that settlements or withdrawal attempts do not undermine the interests of other creditors who are part of the collective insolvency process. It also strengthens procedural integrity by making CoC approval a mandatory safeguard once CIRP (Corporate Insolvency Resolution Process) has progressed beyond the initial stage,” said Navod Prasannan, partner, King Stubb & Kasiva, Advocates and Attorneys. 

 

Earlier, the application for withdrawal could be filed even before the CoC is constituted. Now, the application has to be routed through the resolution professional (RP). 

 

“The amendment is a much-needed correction that closes what had effectively become a strategic loophole in the insolvency process; the earlier regime, though flexible in theory, allowed parties to invoke withdrawal at virtually any stage often after substantial time and cost had been incurred thereby undermining bidder confidence and diluting the sanctity of a time-bound resolution,” Sonam Chandwani, managing partner, KS Legal & Associates said.

 

While this may increase upfront friction, it will ultimately enhance the credibility of the process, protect serious bidders, and prevent misuse of CIRP as a mere recovery threat rather than a resolution mechanism, she added.

 

The report of the committee on drafting regulations for the IBC Bill has suggested aligning the Insolvency and Bankruptcy Board of India’s regulations with the proposed amendments, while clarifying the role of RPs in the withdrawal process. It has also emphasised the need for safeguards related to CIRP costs prior to withdrawal. 

 

The Parliamentary Select Committee while examining the IBC Bill had said that the absence of clear timelines for withdrawing the CIRP causes disruption to process when applications for withdrawal are filed at belated stages. 

 

It said that since CIRP is an in-rem proceeding, it is essential for the CoC overseeing the process to be consulted before an application is withdrawn or any form of settlement is approved. 

 

Finance Minister Nirmala Sitharaman in a discussion on the IBC Bill had said that the number of cases getting settled even before the admission stage has reached 32,179 with an underlying default of ₹14.62 lakh crore.