CIRP closed despite failed Section 12A procedure after creditors settled and appellant undertook to pay costs; NCLAT cites procedural stalemate

Prime Impex, the Operational Creditor, initiated proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against Shalfeyo Industries Private Limited (“Corporate Debtor”), and the CIRP was admitted on 16 August 2022. Umang Jain was appointed as the Resolution Professional (“RP”).

Axis Bank was initially the sole Financial Creditor and constituted the sole-member Committee of Creditors (“CoC”). During the CIRP, the Appellant, a suspended director and personal guarantor, discharged Axis Bank’s financial exposure, following which the Bank’s claim was withdrawn and disputes arose concerning the constitution of the CoC.

The CoC resolved to pursue liquidation, and the RP filed an application under Section 33(2) of the IBC for liquidation, as well as a separate application for determination of CIRP costs.

The Appellant thereafter sought withdrawal of the CIRP under Section 12A read with Regulation 30A by offering the Operational Creditor’s entire claim and undertaking to pay the RP’s fees and CIRP expenses.

The NCLT dismissed the application on 18 December 2024, holding that the statutory procedure had not been followed, including filing through the prescribed Form FA, approval by 90% of the CoC, and furnishing security for CIRP costs.

During the appeal, Axis Bank confirmed that its dues had been fully discharged and that it had no subsisting financial claim. The Appellant ultimately agreed to pay Prime Impex ₹18 lakhs in full and final settlement and to pay the CIRP costs as determined by the NCLT.

Whether the Appellant’s application for withdrawal of the CIRP was rightly rejected for non-compliance with Section 12A of the IBC and Regulation 30A of the CIRP Regulations, including the requirements of Form FA, CoC approval, and security for CIRP costs?

Whether, despite the procedural deficiencies in the Section 12A application, the Appellate Tribunal could close the CIRP in view of the subsequent settlement of all creditor claims and the procedural stalemate concerning CIRP costs?

Whether the CIRP should be continued when no resolution plan was available, the Financial Creditor had been paid in full, the Operational Creditor had agreed to a full and final settlement, and continuation would serve no meaningful insolvency-resolution purpose?

The Tribunal applied Section 12A of the IBC, which permits withdrawal of an admitted CIRP after its commencement, subject to the prescribed statutory procedure and the requisite approval of the CoC.

Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 requires the withdrawal application to be made in Form FA and accompanied by security, including a bank guarantee equivalent to the CIRP costs incurred up to the date of application.

The Tribunal relied on Glass Trust Company LLC v. Byju Raveendran & Others, 2024 SCC OnLine SC 3032, which emphasises strict compliance with the statutory procedure governing withdrawal under Section 12A and Regulation 30A.

It also recognised that CIRP costs are legitimate statutory expenses requiring determination and payment, and that liquidation proceedings may be pursued under Section 33(2) where no resolution is achieved.

The Tribunal held that the NCLT was justified in finding that the original Section 12A application did not comply with the statutory mechanism, since it was not properly initiated through Form FA, lacked the required CoC approval, and was not accompanied by the prescribed security for CIRP costs.

However, the appeal had to be considered in light of subsequent developments. Axis Bank’s entire claim had been discharged; Prime Impex agreed to accept ₹18 lakhs in full and final settlement; and the Appellant gave a formal undertaking to pay the CIRP costs determined by the NCLT.

The Tribunal found that the requirement of a bank guarantee could not realistically be fulfilled because the CIRP costs had not yet been determined and Prime Impex was unwilling to furnish the guarantee.

In these exceptional circumstances, strict continuation of the CIRP merely because the ordinary Section 12A procedure had become impracticable would increase CIRP costs and waste judicial and insolvency resources, particularly when no resolution plan was available and all substantive creditor claims had been settled or secured.

The Appellant’s undertaking protected the RP’s legitimate entitlement to properly determined CIRP costs.

The Appellant was directed to pay ₹18 lakhs to Prime Impex within two weeks as full and final settlement.

The NCLT was directed to determine the CIRP costs in IA No. 160/2023 within four weeks of receiving the judgment, after considering the RP’s claim and the Appellant’s submissions.

The Appellant was further directed to pay the CIRP costs so determined within two weeks of the NCLT’s order.

Pending applications were closed, with no order as to costs.