SC: Insolvency case can be withdrawn even before creditors' committee formed

A company owed ₹1.31 crore. Within 2 days of insolvency, it settled for ₹95.72 lakhs. The NCLT said: no withdrawal. The Supreme Court said: yes, you can.

The company had 700 employees and a turnover of nearly ₹985 crore. The creditor—a packaging supplier—was owed money for goods delivered. The supplier filed for insolvency. The company paid up within a week. But the National Company Law Tribunal (NCLT) refused to let the case die. The Supreme Court had to decide one thing: can an insolvency case be settled and withdrawn before the creditors' committee is even formed?

When the payment arrived two days late

Manpasand Beverages Ltd. owed Huhtamaki PPL Ltd. about ₹1.31 crore for packaging material. Huhtamaki, the operational creditor (a supplier who is owed money for goods or services), filed a petition under Section 9 of the Insolvency and Bankruptcy Code (IBC) — the provision that lets a supplier push a defaulting company into insolvency proceedings.

The NCLT, Ahmedabad Bench admitted the petition on March 1, 2021. That admission triggered a moratorium under Section 14 of the IBC — a legal freeze that stops all debt recovery actions, lawsuits, and asset transfers against the company.

But within just two days of admission, the parties reached a settlement. Huhtamaki agreed to accept ₹95.72 lakhs. The company paid the full amount within a week. The suspended director of Manpasand Beverages then filed an application under Section 12A of the IBC (the provision that allows withdrawal of an insolvency case after admission) read with Regulation 30A of the IBBI Regulations (the procedural rule that governs how such withdrawals are made).

The application was filed through the Interim Resolution Professional (IRP — the person appointed to manage the company during insolvency). It was filed before the Committee of Creditors (CoC — the group of lenders who decide the company's fate) could be formed.

Why the NCLT said no

The NCLT rejected the withdrawal application on three grounds. First, it said the settlement and payments made during the moratorium period violated Section 14 — the freeze on all transactions. Second, it argued that other creditors of Manpasand Beverages might have claims, and allowing withdrawal would harm their interests. Third, it held that Regulation 30A of the IBBI Regulations was not binding on the tribunal.

The company's suspended director appealed to the National Company Law Appellate Tribunal (NCLAT), but withdrew that appeal with liberty to approach the Supreme Court. On April 20, 2021, the Supreme Court issued notice and ordered status quo — meaning the situation would remain frozen until the court decided.

The legal argument: what Section 12A really means

The Supreme Court bench of Justice B.R. Gavai and Justice Vikram Nath heard the case in March 2023. The core question was this: does Section 12A of the IBC allow withdrawal of an insolvency case before the Committee of Creditors is constituted?

The provision says that after admission of an insolvency petition, withdrawal is allowed only with the approval of 90% of the CoC. But the Regulation 30A procedure contemplates a different path for pre-CoC withdrawals — where the IRP files the application, and the NCLT decides based on the facts.

The NCLT had taken the position that since the CoC had not been formed, the withdrawal could not be processed. It also said Regulation 30A was merely a procedural guideline, not a binding rule.

The Supreme Court disagreed on every point.

What the Supreme Court held

The court first clarified that Section 12A does not bar withdrawal applications filed before the CoC is constituted. The provision sets a threshold for post-CoC withdrawals — 90% approval — but it does not say pre-CoC withdrawals are impermissible. Reading such a bar into the provision would defeat the purpose of allowing early settlements.

On Regulation 30A, the court was emphatic. The regulation is framed under Section 240 of the IBC (the power to make regulations). It carries "statutory flavour" — meaning it has the force of law. The NCLT cannot simply declare it non-binding. The tribunal is bound to follow it.

The court also rejected the argument about third-party creditor interests. Before the CoC is formed, there is no collective decision-making body. A settlement between the applicant creditor and the corporate debtor cannot be stifled by the mere possibility that other creditors might have claims. Those creditors retain independent remedies — they can file their own insolvency petitions or pursue other legal actions.

On the moratorium violation argument, the court held that even if transactions during the moratorium period amounted to wrongful trading (a situation where a company continues to trade while insolvent, harming creditors), the remedy lies under Section 66 of the IBC in separate proceedings. Such allegations cannot be used to block the settlement or the withdrawal of the Corporate Insolvency Resolution Process (CIRP — the formal insolvency proceeding).

Why this matters for practitioners

The judgment settles a recurring practical problem. Insolvency cases are often settled quickly after admission — sometimes within days. But NCLTs across the country had been taking inconsistent positions on whether such settlements could lead to withdrawal before the CoC is formed. Some tribunals insisted on waiting for the CoC to be constituted, which could take weeks or months. Others rejected pre-CoC withdrawals outright.

The Supreme Court has now made the position clear: if the parties settle before the CoC is formed, the application for withdrawal can be entertained immediately. The NCLT cannot keep it pending awaiting CoC constitution. Regulation 30A is binding. Third-party creditor claims cannot block the settlement.

THE PLAY: If you settle with the operational creditor before the Committee of Creditors is formed, file the withdrawal application under Section 12A read with Regulation 30A through the IRP immediately — the NCLT cannot refuse to entertain it.

The appeal was allowed. The NCLT's order was set aside. The withdrawal application was granted. The Section 9 petition was withdrawn. Any claim for expenses incurred during the process was left for the NCLT to decide separately.

The company paid within a week. The court said that was enough.