Whether it is mandatory to take steps for RESOLUTION, such as preparation of Information Memorandum, Issuance of Expression of Interest, etc. BEFORE taking a decision for LIQUIDATION of the Corporate Debtor? NCLAT Answered
ORDER
The Hon’ble National Company Law Appellate Tribunal (NCLAT) has, by way of its order dated August 10th 2020, in the matter of Sunil S. Kakkad (Promoter and Shareholder) vs Atrium Infocom Private Limited Through: Sunil Kumar Aggarwal Liquidator & Ors. in Company Appeal (AT) (Insolvency) No. 194 of 2020 inter-alia held that that there is no illegality in the decision of CoC in liquidating the Corporate Debtor before taking any steps for inviting Expression of Interest for submission of Resolution Plan.
FACTS OF THE CASE
1. The Learned Adjudicating Authority by its order dated 10th July 2019 triggered Corporate Insolvency Resolution Process (CIRP) against Atrium Infocom Private Limited (Corporate Debtor). During its CIRP, the Interim Resolution Professional (IRP) after receiving the claims, formed the Committee of Creditors (CoC).
2. In the 2nd meeting, the CoC resolved to defer the publishing of Expression of Interest (EOI) till the next CoC meeting. After that, in the 3rd CoC meeting dated 21st September 2019, the CoC passed the Resolution that Corporate Debtor Company is not working for the last five years and there is no possibility/hope of Resolution Plan, therefore with 100% vote share decided to liquidate the Corporate Debtor.
3. Based on the unanimous decision of the CoC, the RP applied for the liquidation of Corporate Debtor which was allowed by the impugned order of the Adjudicating Authority dated 05th December 2019 which has been challenged in this appeal by the Appellant.
4. Just to summarize, below is the series of events with dates:
a) CIRP Commencement: 10.07.2019
b) One of the prospective Resolution Applicants showed its willingness to submit EOI: 09.09.2019 (within 62 days of the CIRP commencement)
c) Third CoC Meeting for approving Liquidation: 21.09.2019 (within 74 days of the CIRP commencement)
d) NCLT approved Liquidation: 05.12.2019 (within 149 days of the CIRP commencement)
SUBMISSIONS BY THE APPELLANT
1. The Adjudicating Authority has failed to acknowledge the fact that the Respondent No.2/IRP Mr Manish Kumar Bhagat was unable to perform any of the necessary steps under the CIR Process, i.e. to prepare Information Memorandum, evaluation matrix, evaluation of assets etc. which are significant towards achieving the objective of the Code.
2. Despite that, one of the prospective Resolution Applicants in a meeting dated 09th September 2019 showed its willingness to submit EOI; the Adjudicating Authority failed to adhere to the timeline as prescribed under the Code to conduct CIRP to afford a chance for Resolution of the Corporate Debtor, somewhat intentionally delayed the required process to push the Corporate Debtor into liquidation; the Adjudicating Authority has failed to appreciate that I&B Code is not a forum for recovery proceeding, and Resolution is the prime objective of the Code when there are viable prospects of revival of a Corporate Debtor; the Adjudicating Authority erred in passing the impugned order of liquidation under Section 33 of the Code ex-parte without affording a chance to the Appellant herein to put facts.
3. The Adjudicating Authority failed to appreciate that liquidation is not a general rule but is as an exception as a part of the Code.
4. The liquidation fetches corporate death to the Corporate Debtor while I&B Code, 2016 strongly propagates Resolution qua CIRP in order to take the Corporate Debtor out of the financial woes.
SUBMISSIONS BY THE RESPONDENTS
5. The Adjudicating Authority has passed the impugned order under Sections 33(1), 33(2) and 33(3) of the I&B Code, 2016 based on the Resolution passed by the CoC with 100% vote share to liquidate the Corporate Debtor.
6. The Respondents has placed reliance on the judgment of the Appellate Tribunal in case of Global Business Corporation Vs. Punjab National Bank 2020 (117) Taxman.com162 (NCLAT) dated 23rd January 2020 wherein it is held:
“In their commercial wisdom, COC have decided not to accept the Resolution Plan with conditions contained therein. Even though the suspended Board of Directors has a right to attend the meeting and may offer any suggestion but they cannot force their decision on their terms to Committee of Creditors especially when the suspended Board of Directors has no right to vote on the Resolution Plan. We also note that Committee of Creditors has rejected the resolution plan with 100% voting”
‘Verbatim copy’
7. It is further contended that the commercial decisions of the Committee of Creditors are non-justiciable; therefore, they cannot be assailed in this Appeal.
ISSUE FOR CONSIDERATION
Can the Resolution Professional, with the approval of CoC with 66% vote share, directly proceed for the liquidation of Corporate Debtor Company without taking any steps for Resolution of the Corporate Debtor?
DELIBERATION ON THE ISSUE
1. Relevant extract of Section 33(2) of the I&B Code is given below;
(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 per cent. 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.
2. The explanation to sub-section (2) of Section 33 of the I&B Code, which is added by the amendment in the I&B Code w.e.f 16th August 2019, specifically provides 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.”
3. Admittedly, in this case, only 3 meetings of Committee of Creditors took place, and without making any endeavour for inviting Expression of Interest, the CoC unanimously resolved to liquidate the Corporate Debtor.
4. Based on the Resolution passed by CoC with 100% vote share, the IRP filed the Application under Section 33(2) of the I&B Code for liquidation of the Corporate Debtor. The Adjudicating Authority has allowed the Application filed by IRP and passed an order of liquidation of the Corporate Debtor based on the Resolution passed by the CoC with 100% vote share.
5. It is pertinent to mention that explanation to sub-section (2) of Section 33 of the I&B Code, 2016 depicts that the CoC is fully empowered to order for liquidation at any stage of the CIRP, but before the confirmation of the Resolution Plan.
6. It is germane to mention that CIRP of the Corporate Debtor was initiated on 10th July 2019 and during CIRP, the CoC unanimously, with 100% vote share took the commercial decision to liquidate the Corporate Debtor, which is non-justiciable as per the law laid down by Hon‟ble the Supreme Court of India in case of K. Sashidhar v. Indian Overseas Bank, (2019).
CONCLUSION
Thus the Hon’ble NCLAT held that it is clear that the decision of CoC to liquidate the Corporate Debtor without taking any steps for Resolution of the Corporate Debtor is covered under explanation to sub-clause (2) of Section 33 of the I&B Code and the same being decision on commercial wisdom, is non-justiciable given the law laid by Hon‟ble Supreme Court of India in case of K. Sashidhar (supra) and there is no illegality in the decision of CoC in liquidating the Corporate Debtor before taking any steps for inviting Expression of Interest for submission of Resolution Plan.
COMMENTS BY AUTHOR
The author understands that in one of the submissions, the Appellant submitted that there was one of the Prospective Resolution Applicants in a meeting dated 09th September 2019 who showed its willingness to submit EOI. This point has not been specifically responded in this order as this submission raise a question that “What if any Prospective Resolution Applicant is willing to resolve/revive the Corporate Debtor, but the CoC in its commercial wisdom can decide to Liquidate it” which the author believes that it goes against the preamble of IBC which states:
PREAMBLE OF IBC
An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.
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Date: August 12, 2020
About the Author: The author (CS Lovkesh Batra) is Company Secretary by profession and works in the area of Insolvency & Bankruptcy Law.
About the Co-Author: The co-author, Ms. Sneha Solanki is pursuing Law from the University of Petroleum and Energy Studies, Dehradun.
Disclaimer: The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The authors and IBC Law Reporter does not take responsibility of the same and this document cannot used to be quoted before any authority under any law.
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