Imposition of cost on Financial Creditors for entering into settlement and seeking withdrawal under Section 12A is unsustainable.

Corporate Insolvency Resolution Process (CIRP) was initiated against Karnal Agriculture Industries Ltd. (Corporate Debtor/CD) on 10/12/2024 following a Section 7 application by Punjab National Bank (PNB).

On 18/12/2024, the NCLAT stayed the constitution of the Committee of Creditors (CoC) while allowing the Interim Resolution Professional (IRP) to collate claims.

During this interim period, the CD entered into One Time Settlements (OTS) with its financial creditors—PNB, SBI, and ARCIL—who collectively held 100% of the voting share.

PNB subsequently filed an application under Section 12A of the IBC for withdrawal of the CIRP.

While the Adjudicating Authority (NCLT) allowed the withdrawal on 30/10/2025, it imposed a cost of INR 5,00,000 on each financial creditor, citing "laxity," "lack of due diligence," and "unduly prolonged" negotiations.

The financial creditors appealed solely against the imposition of these costs.

Whether the Adjudicating Authority was justified in imposing a cost of INR 5,00,000 on each Financial Creditor while allowing an application for withdrawal under Section 12A of the IBC.

The court considered Section 12A of the Insolvency and Bankruptcy Code (IBC), 2016, which permits the withdrawal of an application admitted under Section 7, 9, or 10 with the approval of 90% voting share of the CoC.

It further noted the procedural requirement of filing Form-FA for such withdrawals.

The bench also referenced the Supreme Court's precedent in *Glass Trust Company (LLC)*, which acknowledges the right of other creditors to object to a Section 12A withdrawal proceeding.

The Appellate Tribunal found that because the NCLAT had expressly stayed the constitution of the CoC in its interim order dated 18/12/2024, the Financial Creditors were fully entitled to engage in settlement discussions with the Corporate Debtor.

Once the settlement was reached and the total debt resolved, PNB (as the original applicant) properly moved the Section 12A application through the IRP.

The Tribunal rejected the NCLT's observations regarding "preferential payments" or "prolonged delay," noting that no other claimants or creditors had filed objections to the withdrawal.

The Bench reasoned that if the Adjudicating Authority was satisfied that the legal requirements for withdrawal under Section 12A were met, there was no valid legal basis or "sufficient reason" to penalize the creditors for reaching a commercial settlement.

The Tribunal held that while the Adjudicating Authority has the discretion to allow or disallow a Section 12A application based on its merits, imposing a financial penalty for entering into a settlement—where no other creditor objected and procedural requirements were met—is not legally sustainable.

The appeals were allowed to this extent.