Liquidation under IBC

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Liquidation

Dear Editor,

In the matter of SC Sekaran vs Amit Gupta & Ors, relying on the decisions of the Supreme Court in Swiss Ribbons Pvt Ltd & Anr v Union of India & Ors and Meghal Homes Pvt Ltd v Shree Niwas Girni KK Samiti & Ors, the National Company Law Appellate Tribunal (NCLAT) directed the liquidator to sell the assets of the corporate debtor under the terms of section 230 of the Companies Act, 2013, within 90 days. This decision started a trend in liquidation matters and similar orders have been made by the NCLAT in several other cases.

In the matter of Y Shivram Prasad v S Dhanapal & Ors, the NCLAT laid down the steps for the revival and continuance of a corporate debtor by protecting it from its management and from a death by liquidation.

This decision raised a few issues, such as whether a corporate debtor should be given another opportunity under section 230 after the liquidation order has been passed. If so, under what circumstances? Is the National Company Law Tribunal (NCLT) or the NCLAT the appropriate forum to decide if the liquidator should take steps after the liquidation order has been passed?

It is to be noted that the objective of the Insolvency and Bankruptcy Code, 2016, is the revival and continuation of the corporate debtor “in a timely manner”. It is the timely aspect of the code that separates it from the previous regimes.

The code, at various stages, provides options for the revival of a corporate debtor in a timely manner. The matter can be settled between the parties at three stages, as observed by the NCLAT in the matter of Y Shivram Prasad v S Dhanapal & Ors: 1) before admission of application under sections 7 or 9 or 10; 2) after a settlement is reached between the promoters or shareholders and the applicant, but before the constitution of a committee of creditors (CoC); 3) under section 12A, which allows the corporate debtor another chance to make good on the default and retain control over the firm even after the case is admitted to the NCLT.

The option of revival under section 230 may be used in specific cases, such as where the corporate debtor is viable but the liquidation was ordered because either no resolution plan was submitted or the deadline has lapsed, and as an exception to the general rule of liquidation as stipulated under section 33 of the code to supplement the objective of the code. In such cases, it is the duty of CoC to classify the corporate debtor as viable or not viable to take steps under section 230.

The Bankruptcy Law Reforms Committee (BLRC) delegated all the decision-making powers to the CoC rather than the adjudicating authority. The BLRC report stated that, “The committee believes that there is only one correct forum for evaluating such possibilities, and making a decision: a creditors committee, where all financial creditors have votes in proportion to the magnitude of debt that they hold. In the past, laws in India have brought arms of the government (legislature, executive and judiciary) into this question. This has been strictly avoided by the committee. The appropriate disposition of a defaulting firm is a business decision, and only the creditors should make it.”

From this it can be observed that the NCLT and the NCLAT are not the appropriate authorities to decide the fate of a corporate debtor.

The Supreme Court, in K Sashidhar v Oriental Bank of Commerce, held that the commercial wisdom of financial creditors is outside the purview of the adjudicating authority and it is not subject to judicial review. This, however, raises the issue of what constitutes a commercial decision. And whether the decision to liquidate a corporate debtor amounts to a commercial decision.

The order under section 230 shall only be used as an exception to the rule of liquidation. The liquidator should only take steps under section 230 if the corporate debtor or its business is viable and it is more suitable than selling the corporate debtor as a going concern. It should be done within a stipulated time frame failing which the corporate debtor should be liquidated.

The CoC is the appropriate forum to make the call on the most suitable path for maximizing the value of the assets of a corporate debtor. Therefore, the decision of agreeing to a compromise or adopting an arrangement under section 230 shall be based on the commercial wisdom of the CoC supported by reason. However, clarity is required on which decisions fall under the purview of commercial wisdom and which ones do not.

Kahnav Mahajan
Lawyer specializing in insolvency
New Delhi

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