Insolvency Cannot Be Withdrawn After Liquidation Begins: NCLAT Reaffirms

The National Company Law Appellate Tribunal at Chennai has reiterated that an insolvency case cannot be withdrawn once liquidation has begun, holding that the law allows withdrawal only during the resolution stage and not after a liquidation order is passed.

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain dismissed an appeal on Wednesday , filed by Narayan Maheshwari, promoter of Veerganapathi Steels Pvt Ltd. Maheshwari had sought withdrawal of insolvency proceedings after the company had already entered liquidation.

The tribunal made it clear that Section 12A of the Insolvency and Bankruptcy Code, which permits withdrawal of insolvency proceedings, applies only during the Corporate Insolvency Resolution Process. Once liquidation starts, the process moves into a separate and final phase, where such withdrawal is not permitted.

“Once the stage of liquidation is reached by passing an order appointing the Liquidator and initiating the liquidation process, and that too after crossing the stage at which Section 12A of the I & B Code could have been invoked, the process cannot be pushed back de novo,” the bench said.

Veerganapathi Steels was admitted into insolvency on April 26, 2018, on an application filed by Bank of India. As no resolution plan was approved within the prescribed time, the resolution professional sought liquidation. The National Company Law Tribunal, Chennai, allowed the request on July 19, 2023, and appointed Kavitha Surana as the liquidator.

After liquidation had commenced, the promoters and personal guarantors entered into talks with Bank of India for a one time settlement. The appellant claimed that the bank accepted the settlement on September 13, 2022, following which the promoters paid Rs 17 lakh as an advance and Rs. 1.27 crore shortly thereafter.

Relying on this settlement and a “No Dues Certificate” issued by the bank, the promoter sought withdrawal of the insolvency proceedings.

The NCLAT rejected this plea, noting that Section 12A was deliberately placed in the chapter dealing with resolution proceedings and does not apply once liquidation begins. Allowing withdrawal at that stage would undermine the structure and finality of the insolvency framework.

“The reason for this is that the legislature has deliberately not provided for withdrawal of proceedings at the stage of liquidation, as permitting such withdrawal would amount to an aberration and distortion of the process contemplated under the I & B Code, 2016,” the tribunal observed. It added that the provision cannot be expanded through interpretation once liquidation has commenced.

The bench also clarified that the tribunal's inherent powers under the Code cannot be used to permit withdrawal after liquidation, as doing so would defeat the legislative intent.

Holding that a withdrawal application filed after the start of liquidation is not maintainable, the NCLAT dismissed the appeal, allowing the liquidation of Veerganapathi Steels Pvt Ltd to continue