NCLAT: The obligation of the adjudicating authority to direct for liquidation shall rise only when decision of the Committee of Creditors is in accordance with the Insolvency and Bankruptcy Code, 2016 February 27, 2023
Published in: Between The Lines
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The National Company Law Appellate Tribunal (“NCLAT”), in the case of Hero Fincorp Limited v. M/s. Hema Automotive Private Limited [Company Appeal (AT) (Insolvency) No. 1540 of 2022], held that the obligation of the adjudicating authority to direct for liquidation shall arise only when decision of the Committee of Creditors (“CoC”) is in accordance with the Insolvency and Bankruptcy Code, 2016 (“IBC”).
Hero Fincorp Limited (“Appellant”) extended financial facilities to the corporate debtor in the year 2018-19. The corporate debtor committed default in repayment of the loan facilities. The financial creditor initiated proceedings under Section 13 (Enforcement of security interest) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by taking possession of the secured assets. An order dated July 8, 2022 was passed by the adjudicating authority commencing the Corporate Insolvency Resolution Process (“CIRP”) against the corporate debtor.
The CoC was constituted with the Appellant as the sole member of the CoC. On October 7, 2022, in accordance with the approval of the CoC, the Resolution Professional (“RP”) published Form-G, wherein the last date for receipt of Expression of Interest (“EOI”) was October 24, 2022.
The RP convened the CoC meeting on October 19, 2022 with sole agenda pertaining to eligibility criteria vis-à-vis extension of time seeking EOI by revising Form-G. In the meeting, CoC passed the resolution for liquidation of the corporate debtor. In pursuance of the said resolution, the RP filed an application in M/s. Five Ess Precision Components Private Limited v. M/s. Hema Automotive Private Limited [IA No. 5586 of 2022] (“Application”) praying for an order of the liquidation.
The adjudicating authority heard and dismissed the Application on November 23, 2022 and directed the CoC to reconsider the Application (“Impugned Order”). It made the following directions to the CoC:
Para 3 of the present application says that as per the public announcement dated 28.07.2022 the last date for submission of claims by Creditors was 09.08.2022. It also transpires that M/s. Hero Fincorp Ltd. (in NBFC) is the sole Member of the CoC. It transpires that on 07.10.2022 in accordance with the approval of the CoC, RP has published “Form G” wherein the last date of receipt of Expression of Interest (“EOI”) was 24.10.2022. However, prior to the said date the sole Member of the CoC resolved and directed the RP to move an application for liquidation of the Corporate Debtor.
Such approach is not in the spirit of IB Code as Insolvency Resolution is the focus of the act. Only in the event of failure of insolvency resolution the steps for liquidation have to be taken. The sole Member of CoC has not adopted a judicious approach of exploring the possibility of resolution. Since he has recommended the liquidation even before the time period for seeking EOI had elapsed which is 24.10.2022. Therefore, CoC is directed to reconsider the present application. CoC is also directed to release RP fee and expenses incurred by RP till date on priority basis. The prayer at “(i)”, “(iii)” & “(iv)” are denied.”
The present appeal has been filed against the Impugned Order (“Appeal”).
Whether the adjudicating authority was obligated to direct for liquidation of the corporate debtor, considering the provisions of Section 33(2) (Initiation of liquidation) of the IBC.
Contentions raised by the Appellant:
The Appellant contended that it was mandatory for the adjudicating authority to pass an order of liquidation in view of the provision of Section 33(2) of the IBC and that the adjudicating authority committed error in not allowing the Application filed by the RP. The Appellant relied on the judgment of the NCLAT in Sreedhar Tripathy v. Gujarat State Financial Corporation and Others [Company Appeal (AT) (Insolvency) No. 1062 of 2022] (“Sreedhar Tripathy”).
The Appellant also submitted that the decision taken by the CoC for liquidation was in the commercial wisdom of the CoC, which ought not to have been interfered by the adjudicating authority. The Appellant relied on the judgment of the Hon’ble Supreme Court in Vidarbha Industries Power Limited v. Axis Bank Limited [(2022) 8 SCC 352] (“Vidarbha Industries”).
Observations of the NCLAT
It is pertinent to note Section 33(2) of the IBC as under:
“… (2) Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors approved by not less than sixty-six percent of the voting share to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).
Explanation– For the purposes of this sub-section, it is hereby declared that the committee of creditors may take the decision to liquidate the corporate debtor, any time after its constitution under sub-section (1) of section 21 and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum. …”
The NCLAT observed that the explanation to Section 33(2) of the IBC contains a legislative declaration empowering the CoC to take a decision to liquidate the corporate debtor any time after its constitution and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum. The provisions contained in the explanation has to be given meaning and effect.
The NCLAT, while considering the contentions of the Appellant, observed that in the case of Sreedhar Tripathy, CoC had passed a resolution for liquidation. However, in the said case, the corporate debtor was not a going concern since the last 19 years. Hence, the adjudicating authority had passed the order allowing for liquidation basis the below observation:
“[…] The CoC in the Legislative Scheme has been empowered to take decision to liquidate the Corporate Debtor, any time after its constitution and before confirmation of the resolution plan. The power given to the CoC to take decision for liquidation is very wide power which can be exercised immediately after constitution of the CoC. The reasons which has been given in Agenda Item 1, it is made clear by the CoC that the Corporate Debtor is not functioning for last 19 years and all machinery has become scrap, even the building is in dilapidated condition and the CIRP will involve huge costs. We are not convinced with the submission of learned counsel for the Appellant that the CoC’s decision is an arbitrary decision. CoC is empowered to take decision under the statutory scheme and when in the present case the decision of the CoC for liquidation has been approved by the Adjudicating Authority, we see not good ground to interfere at the instance of the Appellant. However, we make it clear that the decision taken by the CoC was in the facts of the present case and it cannot be said that whenever decision is taken for liquidation the same is not open to judicial review by the Adjudicating Authority and this Appellate Tribunal. It depends on the facts of the each case as to whether the decision to liquidate the Corporate Debtor is in accordance with the I&B Code or not. With these observations, the Appeal is dismissed.”
Further, the NCLAT observed in the case of Vidarbha Industries that,
“… 77. On the other hand, in the case of an application by a financial creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the adjudicating authority might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the corporate debtor. The adjudicating authority may in its discretion not admit the application of a financial creditor.”
The NCLAT further noted that though Section 33(2) of the IBC uses the word ‘shall’, judicial review of the decision of the CoC in a particular case is not precluded and it depends on facts of each case. This was clearly held in the case of Sreedhar Tripathy.
Decision of the NCLAT
In view of the aforesaid observations and precedents, the NCLAT was of the opinion that the adjudicating authority did not commit any error in rejecting liquidation of the corporate debtor and asking the CoC to reconsider its decision. Accordingly, the Appeal was dismissed.
The NCLAT engaged in a detailed analysis of the provisions of Section 33(2) of the IBC, particularly with regard to the role of adjudicating authority in the liquidation process.
Not only does the ruling uphold the spirit of the IBC by ensuring fair and just resolution of the corporate debtor, it also ensures that corporate debtors are not simply sent for liquidation without following the due process laid down in the IBC for their resolution. The NCLAT’s decision strengthens the role of adjudicating authorities in such cases under the IBC and will serve as a precedent for similar cases in the future.
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