2024 (11) TMI 731 - AT - IBC

Liquidation of the Corporate Debtor as approved by the Committee of Creditors - whether the CoC with 100% vote share could have directly proceeded for liquidation of the Corporate Debtor without taking any steps for resolution of the Corporate Debtor? - whether in the given factual matrix there were good reasons for the CoC to initiate liquidation of the Corporate Debtor in the exercise of its commercial wisdom? - whether the Adjudicating Authority had failed to apply its mind in passing the impugned order approving the proposal of the CoC to initiate liquidation? HELD THAT - The power given to the CoC to take decision for liquidation is of a wide amplitude which can be exercised immediately after constitution of the CoC. In terms of the statutory construct of IBC, it is therefore not required for the CoC to complete all the steps relating to resolution of the Corporate Debtor prior to the liquidation of the Corporate Debtor and any interpretation to the contrary would clearly be antithetical to the spirit of Section 33(2) and Explanation appended to it wherein the legislature has consciously used the words any time for liquidation even before inviting resolution plans - the legislative fiat of Section 33(2) read with the explanation clause empowers the CoC for deciding to initiating liquidation even before inviting resolution plans. Whether there were good and cogent grounds noticed by the CoC to recommend liquidation or whether their reasoning was flawed and ex-facie arbitrary? - HELD THAT - It is found that the health of the Company was not favourable for revival. In such circumstances, the CoC had come to the conclusion that there were no positive signs for revival and that there were no good grounds to prolong the process of CIRP. This decision of the CoC was taken keeping in view the financial position of the Corporate Debtor and does not reflect any arbitrariness. It was also noticed by the CoC that the RP had furnished a long list of documents required to comply with the various formalities for conducting CIRP and in particular to prepare the IM. Though the RP had sent several communications to the suspended management of the Corporate Debtor for handing over the records including custody of assets, no reply had been received from the suspended management. However, the suspended management could only provide the Pan Card details only. It is pertinent to note that the suspended Director was under arrest and out on temporary bail during the 1st CoC meeting and hence the CoC committed no mistake in concluding that he would not be always available for giving the information for preparation of IM - the scenario was dim for coming up with a holistic and comprehensive IM sans which the issue of Form-G becomes a meaningless exercise. Accordingly, the second CoC meeting after due deliberations had decided not to publish Form- G. CoC s decision to liquidate cannot be looked upon as abrupt and hasty or arbitrary. The contention of the Appellant that the decision of the CoC to liquidate the Corporate Debtor as arbitrary therefore lacks merit. The only grounds on which a liquidation order passed under Section 33 can be challenged are on grounds of material irregularity or fraud as provided under Section 61(4) of the IBC. The commercial wisdom of the CoC in deciding whether an entity can be revived or the debtor can be restructured or the Corporate Debtor needs to be liquidated being a business decision of the CoC needs to be accorded primacy - It is a well settled proposition of law that the Adjudicating Authority has been bestowed with limited jurisdiction as specified in the IBC while dealing with matters relating to resolution and liquidation of the Corporate Debtor and cannot enter upon adjudicating into the merits of a decision taken by the CoC with requisite majority in its commercial wisdom to liquidate a corporate debtor. Thus, no infirmity is found in the order of the Adjudicating Authority approving the decision of the CoC to liquidate the Corporate Debtor - there are no good ground to interfere with the impugned order passed by the Adjudicating Authority at the instance of the Appellant - there is no merit in the appeal. The Appeal is dismissed.

Summary

Issues Involved:

1. Whether the Committee of Creditors (CoC) could directly proceed for liquidation of the Corporate Debtor without taking steps for its resolution.
2. Whether the Adjudicating Authority failed to apply its mind in approving the CoC's decision for liquidation.
3. Whether the CoC's decision to liquidate was arbitrary and subject to judicial review.

Detailed Analysis:

1. Direct Liquidation by CoC without Resolution Steps:

The core issue was whether the CoC, with 100% vote share, could directly proceed for liquidation without attempting to resolve the Corporate Debtor. The judgment examined Section 33(2) of the Insolvency and Bankruptcy Code (IBC), which allows the CoC to decide on liquidation "any time" during the Corporate Insolvency Resolution Process (CIRP) before the confirmation of a resolution plan. The tribunal highlighted that the legislative intent, as reinforced by the phrase "any time," empowers the CoC to initiate liquidation even before inviting resolution plans. Thus, the CoC's decision to liquidate without completing resolution steps was within its jurisdiction and not contrary to the IBC's statutory framework.

2. Application of Mind by Adjudicating Authority:

The tribunal considered whether the Adjudicating Authority had failed to apply its mind in approving the CoC's decision. The judgment noted that the CoC's decision was based on the Corporate Debtor not being a going concern for 5-7 years, lack of employees, and absence of necessary financial data. The CoC also observed that the Corporate Debtor's assets were under attachment by the Enforcement Directorate, and no resolution plans were received for its sister companies. The tribunal found that the Adjudicating Authority had duly considered these deliberations and confirmed that the CoC's decision conformed to Section 33(2) of the IBC. Therefore, the Adjudicating Authority did not err in approving the liquidation.

3. Arbitrariness and Judicial Review of CoC's Decision:

The appellant contended that the CoC's decision was arbitrary and should be subject to judicial review. The tribunal referred to precedents, including Swiss Ribbons Pvt. Ltd. v. UoI, which emphasized that the IBC's primary objective is the revival of the Corporate Debtor, with liquidation as a last resort. However, the tribunal found that the CoC's decision was not arbitrary, as it was based on a thorough evaluation of the Corporate Debtor's financial health and operational status. The tribunal reiterated that the CoC's decision, taken with 100% vote share, reflected its commercial wisdom and was not subject to judicial review unless there was evidence of material irregularity or fraud, as outlined in Section 61(4) of the IBC.

Conclusion:

The tribunal concluded that the CoC's decision to liquidate the Corporate Debtor was neither abrupt nor arbitrary, and the Adjudicating Authority had not committed any error in approving this decision. The appeal was dismissed, affirming the primacy of the CoC's commercial wisdom in deciding the fate of the Corporate Debtor. The judgment underscored that while the IBC aims to revive companies, the CoC's business decisions, taken with requisite majority, should be respected unless there are compelling grounds for judicial intervention.