Navigating complexities: Why the voting threshold is a major hurdle in insolvency application withdrawal
A key hurdle is the stiff requirement for a 90% voting threshold from the committee of creditors (CoC) to approve such a withdrawal, even when a viable insolvency resolution plan is near, they said.
"One of the key challenges is the requirement of a 90% voting threshold from the committee of creditors (CoC), which is often difficult to achieve," said Shardul Shroff, executive chairman at Shardul Amarchand Mangaldas & Co.
Shroff was pointing to section 12A of the Insolvency and Bankruptcy Code that allows withdrawal of insolvency application against a corporate debtor only with the approval of 90% voting share of the committee of creditors, which is often hard to achieve.
Shroff also noted another hurdle wherein once the insolvency proceedings are admitted, they are treated as proceedings in rem, meaning that they impact all stakeholders of the corporate debtor and not just the parties to the settlement. "As a result, even if the CoC consents to withdrawal, dissenting stakeholders such as operational creditors or minority financial creditors may object if their claims remain unpaid or unresolved."
Law firms have mentioned some insolvency cases, including Byju's, and Syska LED, wherein creditors have failed to settle matters outside of the formal insolvency process.
Also Read | Reform push: Insurance amendment bill heads to Parliament; changes to IBC, Companies Act will have to wait
Shroff highlighted the Byju's case wherein operational creditor BCCI (Board of Control for Cricket in India) moved the insolvency court in 2024 seeking dues worth ₹158 crore. Byju's settled its dues with BCCI. The same year, however, other creditors including Glas Trust and Aditya Birla finance opposed the settlement since financial creditors did not receive their dues before BCCI, an operational creditor.
On 23 October 2024 , the Supreme Court clarified the procedure for withdrawal under Section 12A and emphasized that the National Company Law Tribunal (NCLT) Mumbai bench cannot act merely as a 'post office" . "However, the Court did not lay down any clear test or criteria that the NCLT is supposed to apply if the statutory requirements for withdrawal are otherwise met. This lack of guidance can lead to legal uncertainty and add to the procedural delays, leading to erosion of value available for stakeholders," said Shroff.
Today, Byju's still continues to be under the corporate insolvency resolution process (CIRP). This was after SC in May 2025 admitted appeal filed by BCCI and refused to stay the ongoing CIRP, but issued notices to key creditors Glas Trust, Aditya Birla Finance, etc.
The next hearing is scheduled for 21 July, when the top court will decide whether to allow withdrawal and consider interim reliefs.
Others concur.
"While the 90% threshold aims to ensure consensus, it is increasingly being relied upon by courts to disallow settlements on a bilateral basis if the majority group is opposing," Kumar Saurabh Singh, a partner at Khaitan & Co who practises banking and finance restructuring and insolvency, said.
Also Read: IBC's weak spot: Slow, difficult recovery from dubious pre-bankruptcy deals
Bottleneck
Singh noted that when such bilateral settlements were challenged by other creditors or fresh applications were filed, they caused a 'judicial bottleneck".
According to an insolvency lawyer who practises in NCLT-Mumbai, the court rejected Syska LED Lights' application to withdraw the corporate insolvency resolution process initiated against them.
The bankruptcy case started in October last year, when Sunstar Industries, one of the operational creditors, initiated insolvency proceedings against the consumer electricals company Syska LED Lights. On 18 March 2025, Sunstar Industries filed a section 12A application for withdrawal of CIRP after reaching a settlement with Syska LED Lights. However, financial creditors, including IDFC First Bank and State Bank of India, intervened while strongly opposing the insolvency application withdrawal. The insolvency court rejected the withdrawal application this year in March.
"Given the criticality of the 12A process being the only avenue for withdrawal of a company from CIRP, commercial considerations should be paramount in the court's decision-making. Delays or any other form of judicial intervention may prove fatal," said Soumitra Majumdar, partner, JSA Advocates & Solicitors.
Majumdar is in favour of a high threshold of CoC approval. "Given the definitive nature of the 12A process, the consent threshold should be high, reflective of wide acceptance by the committee of creditors. Accordingly, a 90% threshold appears to be in order".
Still, commercial considerations should be allowed to be paramount while considering 12A processes, with absolute flexibilities and procedural safeguards.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Hindustan Times
8 hours ago
- Hindustan Times
IBC as a preventive for funds diversion
The Supreme Court ruling annulling its earlier order on the liquidation of Bhushan Steel under Insolvency and Bankruptcy Code (IBC) reignited the debate on the credibility and transparency of the existing corporate debt resolution framework. On May 2, the Supreme Court ordered the liquidation of Bhushan Power and Steel Ltd., marking one of the most significant tests of the IBC since its enactment in 2016. In that order, the court revoked the resolution plan by JSW Steel and directed the National Company Law Tribunal (NCLT) to initiate liquidation proceedings. The order, which was based on the finding that the resolution plan had procedural flaws and violated the IBC, was annulled on July 31. With promoters and creditors locked in courtroom battles, a key question arises: Does the bankruptcy law have hidden benefits? The prophylactic effects of such legislation often go unnoticed. A well-implemented bankruptcy law can act as an effective deterrent because the penalties arising out of bankruptcy accrue privately to the managers and lead to a large reduction in the need to conduct deep financial audits. (Mint) An important consideration in the context of India is the effect of the IBC reforms on how managers divert resources. The last decade saw several high-profile cases of fund diversions, leading to financial distress at firms and adverse consequences for their lenders. Can stronger creditor rights reduce fund diversion? The standard approach of using large-scale financial audits to achieve reductions in fund diversions is very costly and is unlikely to work given the fact that auditors are hired by the firms. A well-implemented bankruptcy law can act as an effective deterrent because the penalties arising out of bankruptcy accrue privately to the managers and lead to a large reduction in the need to conduct deep financial audits. Such hidden effects would, therefore, be a panacea to any country that cannot conduct large-scale audits every so often. A well-functioning bankruptcy law is, therefore, a substitute for the costly, time-consuming, and highly uncertain process of financial audits. The effect and the underlying mechanisms are tested in a research paper by the author of this article, along with Prasanna Gai, Akshat Singh, and Asha Sundaram. We studied the impact of the IBC reform within Indian business groups, focusing on financially distressed firms. Indeed, IBC does reduce fund diversions (using suspect Related Party Transactions, or RPTs, as a proxy). The strongest effect of the reform was seen in the form of reduced related party loan outflows — a clear indication of a reduction in fund diversion. What explains this change? The IBC law contains provisions that act in both directions — for creditors to force firms to reduce diversions as well as for firms to willingly reduce diversions to avoid bankruptcy. On the creditors' side, higher and quicker expected recoveries would make them more willing to initiate insolvency proceedings against firms. A streamlined, time-bound resolution process and the establishment of specialised courts (NCLTs and the appellate courts) further increase creditors' hopes of higher recoveries. On the firms' side, the fact that the control of the company shifts to a professional resolution manager upon admission of insolvency disincentivises managers when it comes to fund diversion. This threat in itself makes pre-default fund diversion a much costlier proposition. The research finds that after IBC, firms voluntarily reduced fund diversions and repaid banks. This is an ideal outcome, given the lower costs associated with voluntary changes in behaviour. Firms relied on internal funds by cutting back on dividends and related-party payments to reduce bank debt. However, there was no improvement in firm profitability, sales or investment after the reform, indicating that the reduction in dividends and RPTs was a result of improved financial discipline rather than firm performance. For the policy to continue to generate sound financial behaviour over time, the threat of penalty under bankruptcy must be sustained. The fact that most cases under IBC do not adhere to the prescribed timelines is not ideal. In line with this hypothesis, in the study, the most pronounced effects were observed in the first two years following the reform. The signs of early deterrence were strong as financial RPTs ceased altogether in many cases. By 2019, the effect weakened, becoming smaller and more uncertain, hinting that the law's grip may have loosened over time. The early outcomes from the IBC are promising and encouraging, though they also highlight the areas that require sustained attention. Amidst this, allowing creditors to start the insolvency process outside the court system — under the new Insolvency and Bankruptcy Code (Amendment) Bill — is a much welcome provision. Ensuring timely resolution, strengthening creditor rights, and addressing practices that undermine transparency can contribute to building a more resilient corporate insolvency framework. Gautham Udupa is with the Centre for Advanced Financial Research and Learning (CAFRAL), Mumbai. The views expressed are personal
News18
11 hours ago
- News18
Minister Khandre launches KSFIC e-commerce website
Agency: Bengaluru, Aug 20 (PTI) Forest Minister Eshwar Khandre on Wednesday launched the e-commerce website of Karnataka State Forest Industries Corporation Limited (KSFIC) here. Speaking after the launch, Khandre said KSFIC, established in 1973 under the Companies Act, has been manufacturing quality furniture, doors, door frames, cots, and other wooden products, supplying them to government buildings as well as the public. 'Keeping in line with the needs of the present times, the Corporation has now developed an e-commerce website," he said in a statement issued by his office. Khandre added that KSFIC, which supplies desks, chairs, benches, and tables to government schools, will now be able to reach a wider audience through digital transactions with the launch of PTI AMP SSK First Published: August 20, 2025, 17:15 IST Disclaimer: Comments reflect users' views, not News18's. Please keep discussions respectful and constructive. Abusive, defamatory, or illegal comments will be removed. News18 may disable any comment at its discretion. By posting, you agree to our Terms of Use and Privacy Policy. Loading comments...
The Print
16 hours ago
- The Print
New insolvency frameworks to shorter timelines, how 2025 amendment bill proposes to transform IBC
The amendments seek to address concerns about the original IBC 2016, which has suffered from several problems, such as procedural delays and patchy implementation. The Insolvency and Bankruptcy Code (Amendment) Bill, 2025—introduced in the Lok Sabha on 12 August by Finance Minister Nirmala Sitharaman, and currently before a Joint Parliamentary Committee—introduces seven major changes, from creditor-led pre-insolvency resolution, to cross-border and group insolvency frameworks. New Delhi: Nine years after the introduction of the Insolvency and Bankruptcy Code (IBC), 2016, the government has unveiled a new bill proposing major reforms that seek to fix delays, streamline implementation and bring India's insolvency system in line with global standards. When first enacted, the IBC promised to transform India's approach to insolvency, aiming to rescue distressed companies through a time-bound process rather than forcing them to shut down. It improved accountability and credit discipline among debtors, but over time, delays and uneven implementation undermined its efficiency, often leaving creditors waiting years for recoveries. Although the code did deliver some high-profile resolutions, such as the Essar Steel case, it became equally known for its persistent flaws, including huge case backlogs, as well as protracted admission and resolution timelines. The absence of frameworks for cross-border and group insolvencies, as well as uncertainties created by rulings like the Rainbow Papers, compounded the challenges. In recent years, banks, investors and regulators repeatedly flagged these gaps, pressing for a redesign of the framework. The 2025 Bill responds to these concerns by introducing reforms that seek to restore efficiency and align India's insolvency processes in line with global best practices. The changes are also designed to both safeguard financial institutions and protect troubled companies that are still in a position to be revived. 'One of the government's biggest concerns has been the underperformance of the National Company Law Tribunal (NCLT), which has caused repeated delays. The new provisions are expected to address these frustrations,' insolvency lawyer and expert Sumant Batra told ThePrint, adding that the new bill was 'revolutionary'. The 2025 Bill draws heavily from a report by the 2023 Expert Committee constituted by the Insolvency and Bankruptcy Board of India (IBBI), which had already examined the potential use of mediation under the IBC. The report, submitted in January 2024, proposed a framework for mediation as a complementary tool to resolve disputes during insolvency, bankruptcy and liquidation processes. The 2025 Bill has adopted its recommendation to add structured pre-insolvency and dispute resolution mechanisms. Also Read: Defunct assets, robust economy — why cases under IBC are stretching ever longer & yielding less Pre-insolvency framework One of the key features of the 2025 Bill is a new creditor-initiated pre-insolvency process, which will open a narrow window for genuine promoters to retain control of their companies. The new model is expected to slightly relax an existing IBC provision barring defaulting promoters from participating in the insolvency process. It is more flexible and allows creditors to inform the NCLT by filing an application in cases where lenders still have confidence in a promoter. The NCLT's role will be limited to approving the final resolution plan, and the process will be carried out in a time-bound manner. Debtors will continue to run companies while lenders appoint an insolvency professional to supervise. Promoters will be given the first chance to present a resolution plan. 'This approach minimises disruption to management and prevents value erosion. Globally, many jurisdictions adopted similar practices after COVID-19,' said Batra. The government will notify the categories of companies and creditors to which this process will apply. Unlike the Pre-Packaged Insolvency Resolution Process (PIRP) for MSMEs—which allowed a debtor-in-possession model but was limited to small enterprises with defaults up to Rs 1 crore—this new framework applies to a wider category of companies. Cross-border insolvency Another key amendment introduces a long-pending cross-border insolvency framework, which will give the Centre the power to frame rules that, in turn, will allow the NCLT to deal with cases in multiple countries. Under the IBC amendment bill, India will adopt the United Nations Commission on International Trade Law (UNCITRAL) Model Law, already in force in nearly 50 countries. This will allow Indian insolvency professionals to seek recognition in foreign courts where debtor assets are located, similar to Chapter 15 of the US Bankruptcy Code. 'This move positions India as a globally ready economy and is expected to boost international investor confidence,' said Batra. Group insolvency The bill also introduces, for the first time, a framework for procedural consolidation of group companies' insolvencies. While practised informally in jurisdictions such as the US and UK, India will now formally allow group insolvency proceedings. This means that if a subsidiary faces insolvency, group entities can be handled collectively. Although the Committee of Creditors (CoC) will remain distinct, a single insolvency professional will coordinate the process, and a consolidated plan can be prepared. 'This is expected to significantly improve efficiency and reduce costs,' said Batra. Faster implementation of plans The new bill also aims to speed up resolution plans that often get stuck in the NCLT due to disputes among creditors despite CoC approval, by separating such distribution disputes from plan approval. Once the CoC approves a legally compliant plan, the NCLT will clear it without waiting for disputes over how proceeds should be shared among creditors to be resolved. Such distribution issues can be litigated later, allowing the resolution applicant to take charge immediately. The move is aimed at getting companies back on track immediately after the approval of the resolution plan. The NCLT will be required to decide approval applications within 30 days, with reasons recorded for any delay. If flaws are identified, 'the NCLT can remand the plan back to the CoC instead of rejecting it outright', Batra said. Also Read: Amid Trump's tariff bombs, India's business with America surged while imports from Russia dipped 10% Undoing the Rainbow Papers judgment The bill also aims to reverse the 2022 Rainbow Papers case ruling, where the Supreme Court held that dues owed to state governments under Value Added Tax (VAT) laws could be treated as secured debts under the IBC. This gave state tax authorities priority in liquidation, effectively recognising them as 'secured creditors'. The amendment narrows the definition of 'security interest' to only contractual security (like mortgages or pledges) created through agreements between debtor and lender. Statutory claims – like unpaid VAT, GST or excise – will no longer count as secured debts. In simple terms, banks and financial creditors will get priority over government tax claims, restoring the original design of the IBC where state dues rank below secured financial creditors. Liquidation reforms In the liquidation stage, the role of the CoC will continue. Creditors will retain the right to appoint or remove liquidators, addressing concerns that liquidation processes were falling through the cracks. The existing Stakeholders Consultation Committee mechanism will be replaced with CoC oversight, increasing accountability. Timelining avoidance applications The 2025 amendment Bill introduces timelines for various aspects of the insolvency resolution process, including the filing of avoidance applications. Under the IBC, an avoidance application is used to challenge and reverse certain transactions by a company before it enters insolvency. The new provision mandates a 14-day timeline for the Adjudicating Authority (NCLT) to decide on the admission or rejection of an application. Delays beyond this period require the NCLT to record reasons in writing. Stricter withdrawal norms Finally, the bill makes withdrawal of insolvency applications more stringent. Once the CoC is constituted within 30 days of admission, cases cannot be withdrawn on the basis of a settlement with a single creditor. After the issue of Form G inviting resolution applicants, withdrawal will not be permitted at all. 'A short window of 15–20 days will be available after the CoC constitution, ensuring that insolvency proceedings are not derailed midway,' Batra explained. (Edited by Sugita Katyal) Also Read: Slashing GST on waste can unlock Rs 1.8 lakh crore, high tax hurting circular economy goals—CSE
