15 hours ago
IBC amendments plug a major gap in the insolvency process
MUMBAI
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NEW DELHI
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The Insolvency and Bankruptcy Code (Amendment) Bill, 2025, tabled in the Lok Sabha on 12 August, closes a key exit route, making it harder for companies to quit insolvency proceedings for an early out-of-court settlement.
The amendment makes the Committee of Creditors' (CoC) approval mandatory for an applicant to withdraw from bankruptcy proceedings under Section 12A of the IBC.
A CoC—a group of financial creditors—is set up by the interim resolution professional (IRP) after the corporate insolvency resolution process (CIRP) is initiated. As of now, companies can withdraw the CIRP application even before the CoC is formed by securing approval from 90% of the creditors.
However, the proposed Clause 8 in Section 12A permits only the IRP to seek withdrawal—and only within a narrow window after the CoC is formed but before the first call for resolution plans. Early or late withdrawals would be barred, and the National Company Law Tribunal (NCLT) must rule within 30 days.
'The ban on withdrawals before CoC formation and after the first plan invitation will likely discourage early, informal settlements that were sometimes reached between the debtor and a few creditors,"said Mohit Adatiya, director at NPV Insolvency Professionals Pvt. Ltd.
'It will push stakeholders to resolve disputes within the formal CoC framework, reducing scope for back-channel deals but potentially prolonging timelines," he added.
The popular loophole
To be sure, many firms in high-profile bankruptcy cases have attempted to exit at an early stage—before the CoC is formed—by offering quick settlements to lenders. One prominent example is the edtech major Buyu's.
In 2024, edtech major Byju's sought to quit the legal proceedings after settling dues with its lead operational creditor Board of Control for Cricket in India (BCCI). The Supreme Court, however, stayed the bid, noting that the CoC had already been formed. The case is still being heard before multiple forums.
On Wednesday, in SKIL Infrastructure Ltd's matter, the NCLT rejected the IRP's request to withdraw from the insolvency was admitted into insolvency in February 2024 after its financial creditor, Amluckie Investment Co. Ltd, filed for bankruptcy in February 2020. Other creditors blocked attempts to settle outside the formal process, underscoring the practical challenges of reaching consensus.
Similarly, in March 2025, the NCLT rejected Syska LED Lights' bid to withdraw from insolvency proceedings initiated by operational creditor Sunstar Industries. Even after a settlement, financial creditors, including IDFC First Bank and State Bank of India, opposed the withdrawal.
A mixed bag
Though experts fear the proposal will give dissenting creditors more leverage, they also believe it will prevent the filing of frivolous applications under Section 12A.
'Even a small minority holding more than 10% of the voting share can now effectively veto settlements, as seen in high-profile matters like the one involving Byju's. This could lead to prolonged proceedings unless a broader consensus is built early," Adatiya pointed out.
The amendment will facilitate discussion between all financial creditors at a very early stage prior to admission, considering that 90% CoC approval will anyway be required for post-admission withdrawal, added Siddharth Srivasta, partner, Khaitan and Co.
Experts also said the ban on withdrawals before the formation of the CoC and after the first invitation for resolution plans will fundamentally change settlement behaviour.
Srivasta said the change would also 'inculcate discipline in the CoC members and will reduce any complacent behaviour to consider settling at an advanced stage".
He said this will nudge debt-laden companies' promoters to submit and finalize proposals before the first request for resolution plans rather than at a fairly advanced stage, wherein the corporate debtor's assets have already depleted, and there would be no option of withdrawal.
According to law firms, while the amendment could be challenging, another area of concern is the criteria for the 90% voting threshold from the CoC, which is often difficult to achieve.
'The amendment is expected to bring a behavioural shift in cases where there is potential for early settlement and creditor exit. It will also help curb frivolous litigation, where proposals are submitted merely to derail the resolution plan process," said Surbhi Pareek, partner, Cyril Amarchand Mangaldas.
Besides, now companies will have to undergo the CIRP right from the beginning. 'Many cases will have no alternative but to undergo the entire process. This may prolong cases and add costs, but will also ensure a comprehensive and transparent process, reducing the risk of collusive or side deals. Parties aiming for settlement must now design far more inclusive and robust proposals to win broad-based approval," said Alay Razvi, managing partner, Accord Juris.
Lawyers also noted that the amendment changes who will be in charge of filing a withdrawal application. Earlier, such applications were generally filed by an operational or a financial creditor. Now, the IRP must file the application.
'As the IRP acts on the instructions of the CoC, the CoC will deliberate on whether such an application should be filed at all, rather than deciding whether to approve an application that has already been submitted," said Durgesh Khanapurkar, partner at Desai & Diwanji.
