Navigating Insolvency Proceedings: Understanding CoC's Role and Section 65 of IBC in Corporate Liquidation

Deciphering Legal Judgments: A Comprehensive Analysis of Case Law

Reported as:

2024 (1) TMI 896 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI

The case, as documented in the judgment 2024 (1) TMI 896, provides a fascinating study of the complexities involved in insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). This case commentary delves into the various legal issues raised, the interpretation of IBC provisions, and the implications of the National Company Law Appellate Tribunal's (NCLAT) decision.

Factual Background

The appeal involves ACRE-81 Trust and other assenting members of the Committee of Creditors (CoC) of SARE Realty Projects Pvt. Ltd. (the Corporate Debtor), who voted to liquidate the Corporate Debtor. This decision was challenged by the Adjudicating Authority (National Company Law Tribunal, New Delhi), which issued a show cause notice under Section 65 of the IBC, questioning the appellants' intent and proposing the imposition of a penalty​​.

An operational creditor initially filed an application under Section 9 of the IBC against the Corporate Debtor, who neither filed a reply nor appeared during the proceedings, leading to an ex-parte decision. The Adjudicating Authority admitted this application, appointed an Interim Resolution Professional (IRP), and imposed a moratorium. The IRP discovered that the Corporate Debtor's office had been closed for over a year, and its directors had resigned. The secured financial creditors had initiated enforcement actions under the SARFAESI Act 2002​​.

Legal Issues and Analysis

1. Liquidation Decision by CoC

The CoC, after several meetings, proposed the liquidation of the Corporate Debtor, and eventually, 88.48% of the CoC members voted in favor of this. The IRP subsequently filed an application for liquidation​​.

2. Adjudicating Authority's Observations

The Adjudicating Authority observed that without publishing an Expression of Interest (EOI), the CoC couldn't assess if there were any prospective buyers, thus acting contrary to the IBC's scheme. The Authority suspected malicious intent in the application for liquidation and issued a show cause notice under Section 65 of the IBC​​.

3. Appellants' Arguments

The appellants argued that the Authority misread the provisions of Section 33(2) of the IBC, which allows the CoC to liquidate the Corporate Debtor at any time before the confirmation of a resolution plan. They cited the Sunil S. Kakkad case, which upheld the CoC's power to liquidate before confirming a resolution plan​​.

4. Section 65 Concerns

The appellants contested the invocation of Section 65, arguing that the proceedings were initiated for liquidation, not with malicious intent or for purposes other than liquidation. They relied on the Unigreen Global Pvt. Ltd. case, highlighting that the Adjudicating Authority did not provide a substantial reason to suspect malicious intent​​.

5. NCLAT's Decision

The NCLAT found that the CoC's decision met the criteria of Section 33(2) of the IBC. It held that the Adjudicating Authority erred in its approach by requiring the CoC to complete all steps for the resolution of the Corporate Debtor. The Tribunal reaffirmed the CoC's power to decide on liquidation before confirming a resolution plan, as established in the Sunil S. Kakkad case. It also observed that the issuance of notice under Section 65 was inappropriate as it applies only if the application is filed for purposes other than liquidation​​.

Conclusion

The NCLAT allowed the appeal, setting aside the impugned order of the Adjudicating Authority. This decision underscores the autonomy of the CoC in deciding the fate of a Corporate Debtor under the IBC and clarifies the applicability of Section 65 of the IBC in the context of liquidation proceedings​​.

Full Text:

2024 (1) TMI 896 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI