From Insolvency to Settlement: Can Section 12A of the IBC Be Reconceptualised as an ADR Mechanism?
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This article argues that Section 12A of the Insolvency and Bankruptcy Code is more than a procedure for withdrawing insolvency cases and also creates an opportunity for negotiated settlements. However, the 90% creditor approval requirement, limited participation of operational creditors, and difficulties in enforcing settlements prevent it from functioning as a fully developed alternative dispute resolution mechanism. The 2026 amendment further restricts the scope for withdrawal without addressing these underlying concerns. The article therefore proposes a voluntary insolvency mediation framework, supported by clearer rules for creditor participation and settlement enforcement, to make Section 12A a more effective mechanism for resolving insolvency disputes.
Introduction
The Insolvency and Bankruptcy Code, 2016 (‘Code’) was implemented to offer a time-limited, creditor-friendly process of solving corporate insolvency in India. However, even in its very conditions, the Code had a structural loophole: there was no clause that allowed the withdrawal of an already presented insolvency application after the Corporate Insolvency Resolution Process (‘CIRP’) had been formally initiated. The Supreme Court had to, such as in Lokhandwala Kataria Construction Pvt. Ltd. v. Nisus Finance and Investment Managers LLP, use its extraordinary powers, as specified in Article 142 of the Constitution, to approve settlements. This legislative gap was initially addressed by the insertion of Section 12A through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, which established a statutory mechanism for withdrawing admitted insolvency applications. The provision has since been substituted by Section 8 of the Insolvency and Bankruptcy Code (Amendment) Act, 2026, effective from 26 May 2026. Under the amended Section 12A, withdrawal requires an application by the resolution professional and approval by creditors holding at least 90% of the Committee of Creditors’ (‘CoC’) voting share. Withdrawal is prohibited before the constitution of the CoC and after the first invitation for submission of a resolution plan.
It is contended in this piece that, however oddly placed in the formal insolvency procedure, Section 12A is functionally a structured Alternative Dispute Resolution (‘ADR’) mechanism, which facilitates multi-creditor negotiation, incentivises consensual commercial settlement, and produces outcomes ordinarily shaped by negotiation and conciliation. Drawing on the statutory framework and judicial decisions, this article examines whether Section 12A's resemblance to negotiated dispute resolution is merely incidental to insolvency proceedings or reflects a distinct model of consensual insolvency settlement.
The Layer of the law: Section 12A and Accompanying Provisions
In its report of March 2018, the Insolvency Law Committee suggested that post-admission withdrawal should be allowed by 90% CoC approval, specifically without relying on Rule 11 of the NCLT Rules as an alternative to the statutory provision. The reaction of the legislation vis-à-vis the insertion of Section 12A was prompt. Under the original 2018 framework, Section 12A permitted the Adjudicating Authority to allow withdrawal of an admitted application at the instance of the original applicant, subject to 90% CoC approval. Before this provision, post-admission settlements often depended on judicial intervention rather than a clearly prescribed statutory withdrawal procedure. Section 12A provided a more predictable route by specifying the approval threshold and procedural requirements for withdrawal. The application requirement has since been changed by the 2026 amendment to an application made by the resolution professional.
The relationship between Section 12A and the insolvency process reveals the limits of contractual autonomy within a collective statutory framework. In Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court upheld the 90% CoC approval threshold because an admitted insolvency proceeding affects creditors collectively rather than merely the original disputing parties. This establishes an important distinction from ordinary negotiated settlements: consensus under Section 12A must satisfy a statutory voting threshold and remains subject to adjudicatory supervision. The 2026 amendment reinforces this collective character by prohibiting withdrawal before the constitution of the CoC and after the first invitation for submission of a resolution plan. Although this promotes procedural certainty and protects the collective process, it also restricts the opportunity for consensual settlement. Consequently, Section 12A should be understood as a regulated settlement mechanism rather than an unqualified exercise of party autonomy.
Section 12A and Negotiated Insolvency Settlements
Section 12A reflects certain features of negotiation and mediation, particularly the emphasis on consensual commercial outcomes. However, unlike conventional party-driven settlements, its operation depends upon collective creditor approval and statutory supervision, making it a qualified rather than unrestricted form of negotiated dispute resolution. The corporate debtor and its creditors negotiate against the commercial consequences of an ongoing CIRP, including the moratorium, displacement of management, and the possibility of liquidation. Section 12A therefore creates an opportunity for negotiated settlement within an ongoing collective insolvency process: CIRP provides the institutional context, while the parties remain free to negotiate a settlement that must satisfy the statutory conditions for withdrawal.
The IBBI Expert Committee on Mediation, in its January 2024 report, examined the existing withdrawal and settlement framework under Section 12A and recommended a separate, voluntary insolvency mediation framework operating alongside the statutory insolvency process. Although the Committee did not expressly characterise Section 12A as a “proto-ADR mechanism”, its analysis supports examining the relationship between collective insolvency proceedings and consensual dispute resolution. The Mediation Act, 2023 provides a potential legislative reference point for structuring mediated settlements, but its general framework does not by itself establish a specialised mediation procedure for collective insolvency proceedings under the IBC. The functional similarity lies in the parties' ability to negotiate a commercial arrangement that avoids continuation of the insolvency process, subject to statutory approval. For example, in Vallal RCK v. Siva Industries and Holdings Ltd., the Supreme Court permitted withdrawal after a settlement proposal received 94.23% approval from the CoC. The case illustrates a negotiated commercial outcome facilitated through Section 12A, although the withdrawal itself remained a statutory process rather than formal mediation.
The Dilemma: Structural Tensions and Doctrinal Gaps
Despite its resemblance to negotiated settlement and mediation, Section 12A contains structural constraints that distinguish it from conventional consensual dispute resolution. The 90% approval threshold, upheld under the earlier statutory framework and retained by the 2026 amendment, gives a creditor or group of creditors holding more than 10% of the CoC's voting share an effective blocking position. In Narendra Jindal v. HDFC Bank Ltd., the NCLT declined to compel a dissenting financial creditor to approve withdrawal despite support from other consortium lenders. The Tribunal held that the statutory 90% requirement could not be displaced by majority-lender arrangements. This illustrates the blocking effect of the threshold, but does not itself establish that dissenting creditors seek preferential terms. Unlike mediation, which depends on the voluntary acceptance of settlement terms by the participating parties, Section 12A permits withdrawal through a statutory supermajority of the CoC rather than unanimous creditor agreement. This distinction makes Section 12A a hybrid mechanism: consensual in its commercial objective, but collective and regulated in its operation.
A second structural issue is the exclusion of operational creditors from voting in the CoC. Since operational creditors generally do not participate in CoC voting, they may be unable to influence the decision to withdraw CIRP even where their claims remain outstanding. This creates a participation concern: the collective decision to terminate insolvency proceedings may be taken without securing the agreement of every creditor affected by that decision. The proceedings concerning Syska LED Lights Pvt. Ltd. illustrate this tension. During consideration of a Section 12A withdrawal application, operational creditors including Dixon Technologies (India) Ltd. and Qdigi Services Ltd. filed intervention petitions opposing withdrawal, demonstrating that a negotiated exit may face objections from creditors outside the immediate settlement arrangement.
A third concern is the absence of a comprehensive statutory framework governing enforcement of settlements underlying Section 12A withdrawals. Difficulties may arise where a settlement forming the basis of withdrawal is subsequently breached. Although parties have sought revival of insolvency proceedings before the NCLT, the Code does not provide a comprehensive and automatic enforcement mechanism specifically governing such settlements. The IBBI Expert Committee recognised this concern and recommended an express statutory basis for enforcing mediated settlement agreements.
Critical Analysis: Effective, Evolutionary and Reform
As of December 2024, 8,175 cases of all CIRPs that had been successfully admitted, 1130 cases had been successfully withdrawn under the Section 12A. In addition to explicit withdrawals, IBBI data reveals that some 16,000 out of 20,000 cases filed were withdrawn before admission under the Section 12A exit, which implies that the existence of the Section 12A exit has produced the very deterrence effect that pre-institution ADR mechanisms are intended to create.
The Supreme Court's decision in Brilliant Alloys Pvt. Ltd. v. S. Rajagopal offers historical support for a settlement-oriented interpretation of Section 12A. Under the earlier statutory framework, the Court treated the restriction in Regulation 30A concerning withdrawal after issuance of an expression of interest as directory rather than mandatory. This reasoning cannot, however, be applied without qualification after the 2026 amendment, which expressly prohibits withdrawal once the first invitation for submission of a resolution plan has been issued. The decision reflects a judicial preference, under the earlier legal framework, for permitting commercially negotiated settlements where procedural restrictions did not impose an absolute statutory bar.
While Brilliant Alloys illustrates the settlement-oriented approach under the earlier regime, the Supreme Court's decision in GLAS Trust Company LLC v. BYJU Raveendran & Ors. establishes the importance of following the collective withdrawal procedure after CIRP admission. Following the admission of CIRP against Think & Learn Pvt. Ltd. on an application filed by the Board of Control for Cricket in India (‘BCCI’), a settlement was reached between the initiating creditor and the promoter concerned. The NCLAT permitted withdrawal of proceedings on the basis of that settlement, but GLAS Trust Company LLC challenged the order before the Supreme Court, contending that the statutory withdrawal procedure had not been followed.
First, the Supreme Court held that Section 12A, read with the applicable procedural rules, prescribed an exhaustive mechanism for withdrawing an admitted insolvency application, which could not be bypassed through the NCLAT's inherent powers. Second, the Court reiterated that when a CIRP is admitted, the proceeding becomes a proceeding in rem. An out-of-CoC bilateral settlement cannot be used to legally terminate collective proceedings. GLAS Trust therefore reaffirmed the importance of statutory safeguards governing collective withdrawal, particularly the requirement that a bilateral settlement cannot, by itself, terminate proceedings affecting other creditors. The demands of settlement must be legally valid, collective, and negotiated, rather than bilateral and unilateral.
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 significantly alters the statutory settlement framework. Section 8 of the Amendment Act substitutes Section 12A and confines withdrawal to the period after constitution of the CoC but before the first invitation for submission of a resolution plan. Withdrawal must be sought through the resolution professional, supported by 90% of the CoC's voting share, and ordinarily decided by the NCLT within 30 days, with written reasons required for delay. These changes increase procedural certainty and preserve the collective nature of insolvency proceedings, but they also reduce flexibility for early and late-stage settlements. Importantly, the amendment does not address the principal participatory concerns identified in this article: the 90% voting requirement remains, operational creditors are not granted an independent vote on withdrawal, and no dedicated mediation process or comprehensive settlement-enforcement framework is established under Section 12A. The reform therefore strengthens procedural regulation without fully developing the provision's potential as a consensual dispute-resolution mechanism. The Act also provides for a Creditor-Initiated Insolvency Resolution Process through a new Chapter IV-A, but the provision introducing that Chapter was not brought into force by the 26 May 2026 commencement notification. It should therefore be distinguished from a currently operational ADR mechanism. The NCLAT's decision in Vijaybhai Dhanjibhai Detroja v. Vidres India Ceramics Pvt. Ltd. further illustrates the post-amendment insistence upon following the statutory procedure even where parties have negotiated a bilateral settlement.
The remaining lacuna is the lack of a formal mediation tier before the CoC vote. As of now, Section 12A obliges parties to reach the CoC with a substantially formed settlement offer and request a binary approval vote, which is more of a referendum than a facilitated negotiation. Although the IBBI Expert Committee recommended a voluntary, self-contained insolvency mediation framework in January 2024, the 2026 amendment does not itself establish the dedicated mediation procedure contemplated by that recommendation. Until such a framework is in place, Section 12A will still encourage settlement without giving institutional support to the process, which is also a critical constraint in its reconceptualisation as a mature ADR mechanism.
Conclusion
Section 12A of the IBC has developed out of a limited procedure exit point, into a device that carries out distinctly ADR-like roles on a large scale. The Supreme Court's decision in GLAS Trust clarified that post-admission withdrawals must comply with the statutory framework rather than rely on an independent bilateral settlement. The subsequent 2026 amendment further restructures that framework by prescribing a narrower withdrawal window and a specific decision-making timeline.
The decision to redefine the concept of Section 12A as an ADR mechanism is not simply an academic one. Viewing Section 12A through the lens of negotiated dispute resolution highlights four continuing concerns: the high creditor-approval threshold, the limited participation of operational creditors, uncertainty concerning settlement enforcement, and the absence of a dedicated pre-vote mediation procedure. These concerns reveal limitations in the institutional framework for consensual insolvency settlements and cannot be addressed solely through the procedural rules governing withdrawal. The Mediation Act, 2023 offers useful legislative models in Section 19, which addresses mediated settlement agreements, Section 27, which provides for their enforcement, and Section 28, which specifies grounds for challenge. These provisions could inform a dedicated insolvency-specific settlement framework, subject to necessary safeguards for collective creditor interests; importantly, Sections 19, 27 and 28 were not among the provisions commenced by the notification of 9 October 2023. A targeted amendment to the IBC could expressly recognise voluntary, facilitated insolvency mediation before the CoC's withdrawal vote, provide for NCLT confirmation and enforcement of resulting settlements, and establish safeguards allowing affected creditors to raise objections without displacing the statutory requirements of Section 12A. An insolvency-specific framework for negotiated settlements would supplement the existing IBC regime by addressing gaps in facilitated negotiation, creditor participation and enforcement of settlement outcomes. Section 12A is therefore best understood as a statutory withdrawal mechanism with important features of negotiated dispute resolution, but one that requires further institutional support before it can operate as a comprehensive insolvency-specific settlement framework.