Prior to the recent Insolvency Ordinance, Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 allowed the NCLT to permit the withdrawal of companies from insolvency “on a request made by the applicant”. This request had to be made before the admission of the insolvency application by the NCLT.

The logic behind not allowing the withdrawal of an insolvency applications after its admission appears to be simple. The admission of an insolvency application is a significant event. To admit an insolvency application, the NCLT has to satisfy itself of a default by the company. Once an application is admitted, it is no longer the sole concern of the applicant. The company becomes the headache of every one of its creditors, as they each have to contend with the fact that a defaulting entity stuck in insolvency court owes them money. If the promoters reach a settlement with the applicant and the applicant withdraws its application after admission, other creditors are entitled to feel shortchanged, as it is highly likely that once it is liberated from the shackles of the insolvency resolution process, the company will fail to repay their loans.

Another complication is that after admission of an insolvency application, as per the IBC, bids are called for the company. If these bids are received, it will be unfair for a withdrawal to be allowed at the cost of the bidders, who expend considerable resources on their bids, and mobilise enormous funds in expectation of winning.

While Rule 8 seemed faultless in theory, in practice it made things highly cumbersome, with parties who had settled their disputes having to approach the Supreme Court to exercise the Court’s power under Article 142 of the Constitution to do “complete justice” for allowing the withdrawal of their insolvency applications.

Clearly, the existing rule needed to be amended to permit withdrawals even after admission if the interests of third parties were not affected.

In a classic example of the kind of broad-brush legislative intervention that foments more handwringing and hair-pulling than it quells, the recent Insolvency Ordinance has permitted [LINK] the withdrawal of a company from insolvency at any time during the insolvency resolution process. The only condition is that creditors holding 90% of the company’s debt must give their consent.

What of stakeholders and bidders? The statute doesn’t say.

The saving grace is that the newly inserted section states that even after such consent is received, the NCLT “may” allow withdrawal, implying that it may not allow withdrawal in a given case. This means that in future, the NCLT is expected to keep a watchful eye on the kind of cases that are sought to be removed from insolvency.

I suggest the following.

When an application for withdrawal comes up before it, if the NCLT arrives at the conclusion that the company will not be able to pay off its debts to other creditors in the future, it must decline the request to withdraw.

Even if the NCLT thinks that the company is otherwise solvent and able to pay its debts, its reluctance to allow withdrawal should increase with the stage at which proceedings are:

• If bids have been called, it should allow withdrawal only if it arrives at the conclusion that bidders’ rights are not affected.
• If bids have been opened and a winning bidder has been declared, then the winning bidder must consent to the withdrawal.

Millions are often involved in IBC proceedings, and there has been no shortage of wily strategy to get at the money. We recently saw the promoters of the insolvent Binani Cement collude with second highest bidders Ultratech Cement and attempt to have insolvency proceedings withdrawn to negate another party’s winning bid.

Tribunals should be vigilant about the new statute not being misused to indelicately nullify the IBC’s painstakingly devised scheme for insolvency resolution.