Collective in Name, Exclusive in Practice: The Structural Blind Spot of Section 12A

Diya Jain*

Introduction

The Insolvency and Bankruptcy Code (Amendment) Act 2026 (“Amendment Act”), passed on 6 April 2026, amended Section 12A of the Insolvency and Bankruptcy Code 2016 (“IBC”), the procedural provision for withdrawal of an admitted Corporate Insolvency Resolution Process (“CIRP”) application. The Amendment aims to strengthen the procedure by eliminating the bypass the Hon’ble Supreme Court of India (“SC”) identified in GLAS Trust Company LLC v. Byju Raveendran (“Byju Raveendran”).

The amended Section 12A(2) tightens the timeline for withdrawal of an admitted application, allowing withdrawal only after the constitution of the Committee of Creditors (“CoC”) and before the issue of the first invitation for resolution plans. While the Amendment plugs the gap identified in Byju Raveendran: bypassing the 90% approval threshold through withdrawing the CIRP application before the constitution of the CoC, it deepens the structural flaw of the provision. The Section 12A threshold operates exclusively through the CoC, a body composed solely of financial creditors (“FCs”), excluding operational creditors (“OCs”), who initiate the majority of withdrawn CIRPs.

This article first examines the constitutional and statutory fault lines arising from the exclusion of OCs; second, it evaluates how this omission is not merely a policy shortcoming, as it opens the door to questioning the constitutional validity of the Section; and finally, it suggests a re-examination.

The Architecture of Collective Decision-Making

Prior to the insertion of Section 12A, there was no direct mechanism for withdrawing applications post-admission. Having no statutory remedy, the parties either approached the Adjudicating Authority (“AA”), invoking its inherent power under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016, or the SC under Article 142 of the Constitution of India. In Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem, the SC approved the out-of-court settlement, suggesting a need for legislative reform to permit post-admission settlement. Further, Report of the Insolvency Law Committee (“ILC”) 2018, reaffirmed that once the CIRP initiates, it is not merely a bilateral proceeding; it includes all the creditors of the corporate debtor (“CD”). Section 12A was thus inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018.

The Constitutional Fault Line: Article 14 Revisited

Routes of challenges here tracks two-pronged tests used for reviewing the legislative classifications. First, the classification must rely on an intelligible differentia, distinguishing the included group from the excluded group. Second, that the differentia reasoning must bear reasonable nexus with the object of the specific provision under challenge.

The first route of constitutional challenge arises from the Swiss Ribbons (P) Ltd. v. Union of India (“Swiss Ribbons”) through Article 14, of the Constitution of India, with respect to the FC-OC classification. The SC upheld the classification, holding that the distinction has a rational nexus with the object of the IBC since the FCs participate in restructuring decisions and long-term sustainability of the company, whereas OCs are primarily seeking payment for goods or services rendered.

However, this differential reasoning cannot be applied to Section 12A. Unlike Part II provisions of the Insolvency Resolution and Liquidation for Corporate Persons, Section 12A serves procedural rather than the commercial function. Here the contention is not about the restructuring of the company but simply about whether the CIRP should proceed at all. The Swiss Ribbons upheld the classification differentia for the object of the resolution; it did not address and cannot be interpreted to satisfy the rational-nexus prong for the distinct object of withdrawal.

The second route of Constitutional challenge arises from Shayara Bano v. Union of India, 2017 (“Shayara Bano”). Shayara Bano holds that a provision is arbitrary if it is excessive or disproportionate to the purpose it claims to serve. This principle has been applied in the insolvency proceedings, in the case laws Pioneer Urban Land and Infrastructure Ltd v. Union of India, & Manish Kumar v. Union of India, confirming that insolvency legislation must bear a proportionate relationship to its stated objectives. Here, the purpose of the Section is to protect collective interests, yet it systematically excludes a class of creditors. Limiting withdrawal approval to CoC cannot be held proportional when a whole class is left unrepresented in the withdrawal decision, and thus is arbitrary to the object.

Section 12A cannot sustain its reasonable-classification at the withdrawal stage on either prong. Thus, what Swiss Ribbons validated for resolution, and what Shayara Bano’s held for proportionality test does not extend here.

The Byju Raveendran's Paradox: Collective Reasoning, Selective Application

In Byju Raveendran, the application was filed under Section 9 of the IBC for dues amounting to ₹158 crores arising out of an operational contract. The National Company Law Tribunal (“NCLT”) approved the application and initiated the CIRP. However, before the CoC could be constituted, the promoters reached a settlement with the initiating OC. The National Company Law Appellate Tribunal (“NCLAT”) approved this settlement and stayed further proceedings. However, the SC reversed this, stating the CIRP cannot be withdrawn under Section 12A without following the procedural 90% mandate approval from the CoC.

The court shielded GLAS Trust, an FC. However, the remedy for exclusion of one party (here, GLAS Trust, an FC), was to channel all withdrawal decisions to a body which structurally excludes the other party (here BCCI, an OC). A creditor that initiates a CIRP in the post Byju Raveendran world is not allowed to withdraw upon settlement, but neither is it given any representation in the withdrawal. This structural paradox is further compounded by Abhishek Singh v. Huhtamaki PPL Ltd and Anr, where it was held that the independent rights of the remaining creditors of CD would not be adversely affected if the settlement between the CD and OC is accepted and the proceedings are allowed to be withdrawn before the CoC constitution.

The Structural Lacuna: OCs as Initiators

The Quarterly newsletter of Insolvency and Bankruptcy Board of India (“IBBI”) shows that by June 30, 2025, 1,223 cases, approximately 14% of all admitted CIRPs, had been withdrawn under Section 12A, with 837 (68%) of these initiated by OCs, the category that holds no representation in the withdrawal decision. The OC-initiated CIRPs are larger in number due to their structural vulnerability and relative willingness to settle. OC-initiated cases have lower resolution rates, with approximately 52% resulting in settlements or withdrawals under Section 12A of the IBC.

The judiciary has emphasised in Swiss Ribbons that once the application gets admitted under Sections 7 to 9 of the IBC, the proceedings are in rem proceedings. Further, the finance minister, while presenting the Amendment Act, emphasised that the intent of the IBC was to rescue viable businesses and provide equitable resolution for all creditors and not to act as a debt recovery tool.

Comparative Perspectives

By contrast, comparative jurisdictions have adopted more inclusive frameworks. The position in the United States is expansive. Section 305(a) of Chapter 11 of the Bankruptcy Code, 1978 allows courts to dismiss a case when an out-of-court settlement works better and serves the interests of both the CD and its creditors, providing an exit ramp for informal settlements. Further, here the power lies with the judge and not with the body of creditors.

By contrast, under the United Kingdom's Company Voluntary Arrangements (“CVA”) mechanism, Sections 1–7 Insolvency Act 1986, all creditors vote on a settlement proposal, with approval requiring 75% by value. No creditor class is structurally excluded, directly contrasting with Section 12A’s FC-only the CoC vote.

A Possible Corrective: What Reforms could look like

This article does not argue that OCs must disapprove of withdrawal or override the commercial wisdom of the CoC. The argument advanced here is narrower: targeted procedural refinements should bring Section 12A into alignment with the collectivist philosophy it claims to embody.

First, India can consider the United Kingdom’s CVA approach; OCs with claims above the prescribed threshold should be given formal representation. This addresses the structural exclusion and reiterates IBC’s collective philosophy. It can mirror the approach taken under Section 24 of the IBC for the CoC meetings: OCs may attend CoC meetings, but will not have a right to vote. This acknowledges OCs stake without disturbing the CoC’s decisional authority. As a protective regulatory measure, AA should be empowered to return the application for procedural rectification when the notice is not given.

Second, a due-process clause for OCs. Drawing from Section 30(2)(b) of the IBC, it requires resolution plans to protect OC dues to at least liquidation value. A parallel provision amendment can be made in Section 12A, requiring the withdrawal applications to address the OC dues to be paid in full, or secured by equivalent value, or consented to in writing by the affected OC as a condition precedent to CoC approval.

Together, these refinements would improve procedural fairness and make Section 12A proportionate to its stated object of collective creditor protection.

Conclusion

Section 12A was constructed on the idea of collective creditor protection philosophy, however it delivers selective creditor governance. It has been overlooked by the legislature so far; the way forward is legislative, and not interpretive. It must act, whether by OC consultation, express due protection, or reasoned CoC decisions, to meet OC interests. Until withdrawal law reflects the collectivism it claims to embody, Section 12A will remain collectivist in name and exclusive in practice.

*The author is a Third year student at National Law University Odisha.