NCLAT: Obligation of AA to direct of liquidation shall only rise if decision of COC is in accordance with IBC

NCLAT: Obligation of AA to direct of liquidation shall only rise if decision of COC is in accordance with IBC

The National Company Law Appellate Tribunal (in short NCLAT), Principal Bench in the matter of Hero Fincorp Ltd vs. M/s. Hema Automotive Private Ltd observed that the Adjudicating Authority's (in short AA) obligation to direct for liquidation shall arise only when the Committee of Creditor's (in short CoC) decision to liquidate is in accordance with Insolvency Bankruptcy Code, 2016 (in short IBC).

In the present case the appellant- Hero Fincorp Ltd had extended financial facilities to the Corporate Debtor/ respondent- M/s. Hema Automotive Private Ltd. in the year 2018-2019. The Corporate Debtor committed default in repayment of the loan facilities. The appellant filed a petition under Section 7 of the IBC seeking initiation of Corporate Insolvency Resolution Process (in short CIRP) against the respondent. The Financial Creditor/ appellant-initiated proceedings under Section 13(4) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short SARFAESI Act) by taking possession of the secured assets.

An order dated 8 July, 2022 was passed by Adjudicating Authority commencing the CIRP against the Corporate Debtor.

The CoC comprised of the Financial Creditor as the sole member. On 7 October, 2022 the Resolution Professional (in short RP) published Form-G and the last date for receipt of Expression of Interest (in short EOI) was 24 October, 2022. Before the period could expire, the CoC passed a resolution on 19 October, 2022 for liquidation of the Corporate Debtor. However, the AA vide an order dated 23 November, 2022 rejected the application for liquidation and directed the CoC to reconsider its decision. The Adjudicating Authority observed that before the period for inviting Expression of Interest could expire, the CoC resolved to liquidate the Corporate Debtor.

The learned Counsel for the Appellant challenging the order contended that it was mandatory for AA to pass an order of liquidation in view of the provision of Section 33(2) of the IBC which states Initiation of Liquidation, the AA had committed an error in not allowing Application filed by the RP.

The division bench comprising of Justice Ashok Bhushan (Chairperson) and Ms. Shreesha Merla (Technical Member), while adjudicating the appeal observed that the Explanation to Section 33(2) of IBC clarifies that CoC can decide to liquidate the Corporate Debtor any time after its constitution under Section 21(1), but must be before–

(i) the confirmation of the Resolution Plan; and

(ii) at any time before the preparation of Information Memorandum.

The Bench was of the view that the CoC had failed to consider the Explanation attached to Section 33(2) of IBC before deciding to liquidate the Corporate Debtor.

Regulation 36A provides for 'Invitation for Expression of Interest'. In the present case the Tribunal noted that the invitation for Expression of Interest was issued with the approval of CoC on 7 October, 2022. As per the statutory Scheme contained in Regulation, the Information Memorandum must be prepared and circulated to the Members of the Committee of Creditors prior to issuance of Form-G.

The Tribunal observed, Form-G having been issued after preparation of the Information Memorandum and the last date fixed by the CoC being 24 October, 2022 for receiving Expression of Interest, the bench was satisfied that the AA did not commit any error in rejecting for liquidation and asking the CoC to reconsider its decision.

The Tribunal relied on the NCLAT judgment passed in the case of Sreedhar Tripathy vs. Gujarat State Financial Corporation and Ors., wherein it was held that judicial review of CoC's decision is not precluded and it depends on facts of each case.

The Tribunal concluded that the legislature in Section 33(1) and Section 33(2) has used the expression "shall". However, the AA's obligation to direct for liquidation shall rise only when decision of the CoC is in accordance with IBC. The Appeal was dismissed.