The Insolvency and Bankruptcy Code (IBC) was introduced to ensure timely insolvency resolution while balancing the interests of all stakeholders. However, insolvency proceedings are not always meant to continue until the final resolution plan or liquidation stage. In many cases, parties arrive at a settlement after the Corporate Insolvency Resolution Process (CIRP) has already begun.
To address such situations, Section 12A of the IBC allows withdrawal of insolvency proceedings. Yet, this withdrawal is not automatic. One of the most debated aspects of the provision is the requirement of approval from the Committee of Creditors (CoC). The issue has become particularly significant in discussions surrounding CoC Approval under Section 12A of the IBC and whether it creates unnecessary hurdles for settlements.
Understanding Section 12A of the IBC
Section 12A permits withdrawal of an insolvency application admitted under Sections 7, 9, or 10 of the IBC. The withdrawal can only take place after obtaining approval from 90% voting share of the Committee of Creditors.
The provision was introduced through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, following judicial recognition that parties may genuinely wish to settle disputes even after initiation of CIRP.
Why Was CoC Approval Made Mandatory?
The requirement of CoC approval was introduced to prevent misuse of the insolvency framework and to protect the collective interests of creditors. Once CIRP begins, the matter no longer remains a private dispute between the debtor and the applicant creditor. It becomes a process involving all financial stakeholders.
Protecting Collective Creditor Interests
After admission of CIRP, multiple creditors may have claims against the corporate debtor. Allowing unilateral withdrawal based on settlement with only one creditor could prejudice the rights of others.
The CoC represents the financial creditors collectively, and their approval ensures that the settlement benefits the creditor body as a whole rather than a single party.
Preventing Abuse of the Insolvency Process
Without the CoC approval requirement, parties could misuse the IBC as a recovery mechanism. Creditors might initiate insolvency proceedings merely to pressure debtors into settlement and then withdraw the case immediately after receiving payment.
The 90% voting threshold discourages such practices and ensures that insolvency proceedings are invoked for genuine resolution purposes.
Ensuring Transparency in CIRP
CIRP affects several stakeholders, including operational creditors, employees, and sometimes homebuyers. CoC scrutiny helps maintain transparency and ensures that settlements are not conducted secretly or unfairly.
Preserving Commercial Wisdom of Creditors
Indian courts have consistently emphasized the “commercial wisdom” of the CoC. The Supreme Court has held that financial creditors are best equipped to decide whether a settlement is beneficial compared to continuing CIRP.
Therefore, Section 12A reinforces creditor autonomy by giving the CoC authority to approve or reject withdrawal requests.
Why Is the Approval Threshold Fixed at 90%?
The IBC prescribes a very high threshold of 90% voting share for withdrawal under Section 12A. This was intentionally designed to ensure that withdrawal happens only when there is overwhelming creditor consensus.
A lower threshold could have allowed influential creditors to dominate the decision-making process, potentially harming minority creditors.
Judicial Interpretation of CoC Approval Under Section 12A
Indian courts have repeatedly examined the scope of Section 12A and the role of CoC approval.
Swiss Ribbons Pvt. Ltd. v. Union of India
In this landmark judgment, the Supreme Court upheld the constitutional validity of Section 12A and recognized the importance of creditor approval in withdrawal decisions. The Court observed that once insolvency proceedings commence, they become proceedings in rem affecting all stakeholders.
Brilliant Alloys Pvt. Ltd. v. S. Rajagopal
The Supreme Court clarified that procedural requirements under Regulation 30A should not be interpreted rigidly if the objective of settlement can still be achieved. However, the necessity of CoC approval remained intact.
Challenges Created by Mandatory CoC Approval
Although the provision safeguards creditor interests, it has also led to practical difficulties.
Difficulty in Achieving 90% Voting Share
Obtaining 90% approval can be challenging, especially in cases involving numerous financial creditors with conflicting commercial interests.
Delays in Settlement
Even where parties are willing to settle quickly, the requirement of CoC approval may prolong the process and increase costs.
Possibility of Strategic Rejection
Some creditors may reject settlements for strategic or commercial reasons, even if the settlement amount is reasonable. This may push the corporate debtor toward prolonged CIRP or liquidation.
Is CoC Approval a Necessary Safeguard or a Stumbling Block?
The debate surrounding Section 12A largely revolves around balancing creditor protection with settlement flexibility. Supporters argue that CoC approval prevents abuse and protects collective creditor interests. Critics, however, believe the 90% threshold is excessively high and may obstruct genuine settlements.
Despite the criticism, courts have generally favored preserving CoC supremacy in insolvency matters. The legislative intent behind Section 12A clearly prioritizes collective decision-making over individual settlements.
Conclusion
CoC approval under Section 12A is mandatory because insolvency proceedings affect all creditors and stakeholders, not just the applicant and the corporate debtor. The requirement ensures transparency, prevents misuse of the IBC framework, and respects the commercial wisdom of creditors.
However, the high 90% voting threshold continues to generate debate regarding whether it facilitates fair insolvency resolution or unnecessarily delays settlements. As insolvency jurisprudence evolves, the balance between creditor autonomy and settlement efficiency will remain a key issue under the IBC.
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