2017 (5) TMI 1537 - Tri - Companies Law

Corporate Insolvency Resolution Process - Held that - It could never have been the intention of the legislature to consider a matter as serious as placing the Company in the hands of a Resolution professional in a mechanical way without due application of mind of the Adjudicative Authority. Should this have been the case, then every corporate entity, who has no assets in hand and has incurred great liabilities be it acquisition of cars or assets acquired and to personal use of Directors, would resort to a simple way of filing such an application to escape any recovery proceeding or even civil imprisonment on being declared Insolvent. Taking a hyper technical view of the provisions would open the flood gates of people forming Companies, incurring expenses in the name of the company and then filing for Insolvency Resolution Process under the Code for enjoying a Moratorium. The object of the Code is not to provide for an escape route to a Company or its Directors who have incurred great debts and are unable to liquidate the liabilities after availing services and goods (stock in trade) from various suppliers, loans from banks, friends and family.

Summary

Issues Involved:
1. Petition under Section 10 of the Insolvency Bankruptcy Code, 2016
2. Financial position and debt of the Corporate Debtor
3. Compliance with requirements under the Bankruptcy Code
4. Appointment of Insolvency Resolution Professional
5. Adequacy of assets for resolution process
6. Justification for initiating the Resolution process
7. Evidence of unpaid claims and liabilities
8. Legislative intention behind insolvency resolution

Analysis:

1. The judgment pertains to a petition filed under Section 10 of the Insolvency Bankruptcy Code, 2016. The Corporate Debtor, a private limited company engaged in the business of fabrics and textiles, availed loans resulting in significant financial debt. The petition was filed by the Director authorized by the Board Resolution due to the company's inability to repay its debts.

2. The Corporate Debtor's financial position revealed accumulated losses exceeding &8377;1.52 Crores, with total receivables over &8377;1.2 Crores. The company's inability to meet financial obligations led to the decision to initiate the Corporate Insolvency Resolution, supported by the appointment of an Insolvency Resolution Professional.

3. Despite the Corporate Debtor's financial challenges, the Tribunal found that steps to mobilize recoverables were not taken, and no claims were made by creditors, leading to a conclusion that the company was not in default. The Tribunal emphasized the need for a recovery process before resorting to insolvency resolution.

4. The Tribunal highlighted the importance of assets in the resolution process, noting that the Corporate Debtor had limited assets, primarily a vehicle hypothecated to a bank. The Tribunal deemed it unnecessary to appoint an Insolvency Resolution Professional for asset liquidation that could be managed by the company's Directors.

5. The judgment questioned the justification for initiating the Resolution process, suggesting that the Directors' motives might be to escape liabilities rather than genuinely resolve the company's financial situation. The Tribunal emphasized the need for proper justification and evidence before resorting to insolvency resolution.

6. The Tribunal rejected the application for insolvency resolution, stating that the legislative intention behind the Code was not to provide an easy escape route for companies and Directors facing financial difficulties. The judgment emphasized the need for a thorough assessment before placing a company under the hands of a Resolution professional, to prevent misuse of the insolvency resolution process.

In conclusion, the Tribunal rejected the application for insolvency resolution, emphasizing the importance of proper justification, evidence of unpaid claims, and a genuine need for the resolution process to protect the interests of all stakeholders involved.