2021 (11) TMI 904 - Tri - Insolvency and Bankruptcy

Dissolution of Corporate Debtor - Regulation 22(2) of IBBI (Insolvency Resolution Process of Corporate Persons) Regulations 2016 - HELD THAT - This Bench is of the view that the prayer made by the IRP for dissolution of the Corporate Debtor cannot be accepted since the Liquidation is a pre-requisite to the Dissolution and in the present case, no order of Liquidation has been passed due to absence of any such proposal and non-functioning of the CoC. Even if the ETO Bahadurgarh has withdrawn its claim, the CoC could have functioned with the Sole Member/Operational Creditor, at whose instance the CIRP was initiated. However, in the present case we notice that even the Sole Member/Operational Creditor of the CoC has been shirking from the responsibility and not pursuing the CIR Process of the Corporate Debtor - As per the Code, if any person as defined under Section 3(23) of IBC initiates the Insolvency Resolution Process fraudulently or with malicious intent for any purpose other than for the resolution of the insolvency, or liquidation, such an act is punishable under Section 65(1) of IBC 2016. Hence, before taking any action under Section 65(1) IBC 2016, we think it proper to issue a show cause notice, under Rule 59 of the National Company Law Tribunal Rules 2016, on the Operational Creditor M/s. Om Logistics Ltd. through its Directors as to why the penalty as stipulated under Section 65(1) of IBC, 2016 shall not be imposed on it. Ld. Registrar NCLT is directed to issue the show cause notice under Section 65(1) of IBC 2016 read with Rule 59 of the National Company Law Tribunal Rules, 2016 on M/s. Om Logistics Ltd. through its Directors giving them fifteen days' time to explain and submit in writing as to why the penalty as stipulated under Section 65(1) of IBC, 2016 shall not be imposed on them. When the Applicant is unable to carry forward the CIR process for want of cooperation/participation from the sole member of CoC, it is deemed appropriate to terminate the CIR process of the Corporate Debtor - by exercising the jurisdiction under Section 60(5) of IBC 2016 along with inherent power under Rule 11 of the NCLT Rules, 2016, the CIR process of the Corporate Debtor is terminated with immediate effect and release the Corporate Debtor from the rigors of the CIRP and moratorium. Application allowed.

Summary

Issues involved:
1. Application for dissolution of Corporate Debtor under Section 60(5) of IBC, 2016.
2. Failure of CoC to function effectively.
3. Withdrawal of claim by ETO Bahadurgarh.
4. Lack of cooperation from Operational Creditor.
5. Termination of CIR process due to non-cooperation.

Analysis:
1. The Applicant, an IRP, filed an application seeking dissolution of the Corporate Debtor under Section 60(5) of IBC, 2016. The Applicant highlighted the absence of assets, non-filing of financial returns, and lack of business operations by the Corporate Debtor as grounds for dissolution. However, the Tribunal noted that dissolution requires a prior liquidation order, which was not present in this case due to the non-functioning of the CoC and absence of any proposal for liquidation.

2. The CoC faced issues with effective functioning as key members, including the Operational Creditor and ETO Bahadurgarh, did not actively participate in meetings or decision-making processes. Despite attempts to convene meetings, lack of attendance and non-voting led to a stalemate, hindering the progress of the CIR process.

3. ETO Bahadurgarh withdrew its claim during the proceedings, impacting the composition and decision-making within the CoC. This withdrawal further complicated the resolution process and highlighted the challenges faced in maintaining a functional CoC with active participation from all stakeholders.

4. The Operational Creditor, M/s. Om Logistics Ltd., was found to have initiated the CIR process with malicious intent for recovery rather than insolvency resolution, contravening the objectives of IBC 2016. The Tribunal decided to issue a show cause notice under Section 65(1) of IBC 2016 to the Operational Creditor for potential penalties, emphasizing the seriousness of initiating insolvency proceedings in good faith.

5. Due to the lack of cooperation from the CoC members, especially the Operational Creditor, and the inability to progress the CIR process effectively, the Tribunal exercised its jurisdiction under Section 60(5) of IBC 2016 and Rule 11 of NCLT Rules, 2016 to terminate the CIR process of the Corporate Debtor. This decision released the Corporate Debtor from the moratorium and allowed it to function through its own board, signaling the end of the insolvency resolution proceedings.

This detailed analysis of the judgment provides insights into the challenges faced in insolvency proceedings, the importance of active participation from stakeholders, and the consequences of initiating insolvency processes with improper motives.