IBC UPDATE | APPLICATION FOR WITHDRAWAL OF CIRP IS MAINTAINABLE PRIOR TO FORMATION OF COC

The Supreme Court in the matter of Abhishek Singh Vs Huhtamaki Ppl Limited & Anr has held that Section 12A of the Insolvency and Bankruptcy Code 2016 (IBC) does not debar admission of applications for withdrawal of Corporate Insolvency Resolution Process (CIRP) before the constitution of the Committee of Creditors (COC). The Supreme Court also held that Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2018 (IBBI Regulations) is binding upon the National Company Law Tribunal (NCLT).

Facts:

Manpasand Beverages Limited (Corporate Debtor) was in the business of manufacturing and distribution of fruit beverages. Huhtamaki PPL Limited (Operational Creditor) used to supply packaging material to the Corporate Debtor. The Operational Creditor filed a petition under Section 9 of IBC before the NCLT, seeking a total outstanding amount of around INR 13 million against the Corporate Debtor. The NCLT admitted the petition vide its order dated 1 March 2021.

The parties thereafter entered into settlement two days after the initiation of CIRP and before the COC could be constituted. The Parties thereafter complied with the terms of the settlement and in view of the same, the Interim Resolution Professional (IRP) moved an Application under Regulation 30A of the IBBI Regulations seeking withdrawal of CIRP against the Corporate Debtor. The Operational Creditor also filed an application under Section 12A of the IBC.

Meanwhile, the Corporate Debtor also filed an appeal before the National Company Law Appellate Tribunal (NCLAT) against the order of the NCLT dated 1 March 2021. NCLAT vide its order stayed the formation of the COC till the disposal of the application filed by the Operational Creditor under Section 12A of the IBC.

NCLT vide its order dated 13 April 2021 rejected the Section 12A application on the ground that as many as 35 creditors have filed their claims and withdrawal of the proceedings would adversely affect their rights and that Regulation 30A of the IBBI Regulations was not binding upon the NCLT. The same was challenged by the suspended director of the Corporate Debtor by way of an SLP before the Supreme Court.

Issues:

1. Whether CIRP can be withdrawn before formation of the COC under Section 12A of the IBC.

2. Whether Regulation 30A of the IBBI Regulations is binding upon the NCLT.

Contention of the Parties:

The Appellant before the Supreme Court contended that Regulation 30A of IBBI Regulations and also to Rule 11 of the NCLT Rules, 2016 clearly permit settlement between the creditor and the debtor and withdrawal of proceedings prior to the constitution of COC. The Appellant also contended that the NCLT has no jurisdiction to declare or hold that Regulation 30A of the IBBI Regulations was not binding on it and that it was beyond the power of the NCLT to have discarded a statutory provision.

The Respondent contended that similar arguments were raised by the Appellants before the NCLT which had rejected the same. The Respondent further contended that the Appellants ought to have availed of the alternate remedy of filing an Appeal before the NCLAT.

Held: The Supreme Court after considering the submissions made by all parties held that Section 12A of IBC did not specifically debar entertaining applications for withdrawal even before constitution of CoC. Therefore, the application under section 12A for withdrawal cannot be said to be kept pending for constitution of COC even where such application was filed before constitution of COC. Insolvency and Bankruptcy Board of India (IBBI) had the power to frame regulations wherever required for the subjects covered therein and had accordingly substituted Regulation 30A for dealing with the procedure for disposal of application for withdrawal filed under section 12A of IBC prior to the formation of COC.

The Supreme Court relied upon its judgment of Swiss Ribbons Judgement wherein it held that at any stage where the COC is not yet constituted a party can approach the NCLT directly and the tribunal may in exercise of its inherent powers under Rule 11 of NCLT Rules 2016 allow or disallow an application for withdrawal or settlement. The Supreme Court also noted that regulations framed by the IBBI may be subordinate in character but would still carry a statutory flavour and is binding on the NCLT.

MHCO Comment:

This judgment provides much needed clarity on the applicability of Section 12A prior to the Constitution of the COC. It further affirms the statutory validity of various regulations framed by the IBBI by ensuring that the same are binding upon the NCLT which will ultimately stand to benefit the parties before the NCLT.

This article was released on 25 April 2023.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

 LEGAL UPDATE | AMENDMENT TO IT RULES: REGULATION OF ONLINE GAMING AND FALSE IMFORMATION FACT CHECK

The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 was recently amended and is called the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023 ( Rules ). The objective of the said Rules is to facilitate and regulate the online gaming eco-system and attempt to eliminate false and misleading information about the government.

AMENDMENT

In accordance to the Rules, the intermediaries are obligated to not host, publish, or share any online game that might harm a user or that has not been certified as a legal online game by one or more self-regulatory bodies for online gaming designated by the Central Government. The intermediary must also make sure that no advertisement or surrogate advertisement of a non-permissible online game is hosted on its platform.

Further, the self-regulatory body shall have a framework created regarding safeguards against user harm and contain measures to safeguard through parental control, and the authority to inquire and satisfy itself that the online game does not involve wagering on any outcome. The online gaming intermediary and the game must comply with the rules and the legal requirements for being competent to enter into a contract i.e. at 18 years, sound mind etc.

The said Rules have further imposed obligations on the online gaming intermediaries to appoint a Chief Compliance Officer ( CCO ), a nodal contact person and a resident grievance officer all of whom must be residents of India. CCO will be the person in charge of ensuring compliance with the Information Technology Act, 2000 (21 of 2000) on behalf of the gaming entity under the Rules.

In relation to online games that use real money, the said Rules also have enforced further responsibility on such online gaming intermediaries. These include (a) having a physical contact address in India published on its website, mobile based application or both; (b) showing a seal of approval or verification mark from the self-regulatory body on such games; (c) informing their users of the policies for withdrawal or refund of deposits; (d) how winnings are calculated and distributed, fees, and other charges that are due; and (e) obtaining the KYC information of the users; and refusing to extend credit or allow third parties to finance the users.

The Rules provide that the requirements will not take effect until a sufficient number of self-regulatory bodies have been designated and appointed, giving the online gaming sector sufficient time to fulfil its commitments.

Further, the said Rules now require intermediaries to refrain from publishing, disseminating, or hosting fictitious, inaccurate, or misleading information regarding any activity of the Central Government.

The Central Governments Fact Check Unit will be informed and will identify any fake, inaccurate, or misleading information. It should be highlighted that the intermediaries were already compelled by the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 to take reasonable precautions not to host, publish, or share any information that was obviously incorrect and deceptive in nature.

These Rules have laid down the obligation of intermediaries to make reasonable efforts not to transmit, disclose or post information which is false, untruthful and incorrect in nature.

MHCO COMMENT

The recent amendment has invited a plethora of dismay against the Fact Check Unit of the Central Government. The said Rules though operational, are currently sub-judice and challenged through a Writ Petition filed before the Bombay High Court. Even the obligation to have a physical contact address in India for all online real money games (including foreign online real money games) is challenging to comply with. However, given the ever-growing pace of the online gaming ecosystem it is essential that the same to be regulated under the Indian laws.

This article was released on 17 April 2023.