Liquidation Is Last Resort, Broader Public Interest In Resolving Corporate Insolvency Should Be Taken Into Account: NCLT Kolkata

The National Company Law Tribunal Kolkata bench of Bidisha Banerjee (Judicial Member) and Balraj Joshi (Technical Member) has held that the liquidation of a corporate debtor should be a measure of last resort. It held that the Insolvency and Bankruptcy Code (IBC) acknowledges a broader public interest in resolving corporate insolvencies with its primary objective extending beyond the mere recovery of outstanding debts.

The bench held that the corporate debtor lacks substantial tangible assets that could generate significant recovery for creditors. Consequently, it held that proceeding with liquidation could undermine the IBC's core objective of maximizing asset value.

Brief Facts:

The matter pertained to a Corporate Debtor, Nandini Impex, which was admitted into the Corporate Insolvency Resolution Process (CIRP). An appeal against this admission was made to the NCLAT Delhi but it was disposed of. Following this, a public announcement was made and an invitation for Expression of Interest (EOI) was issued which was widely published.

Five applicants expressed their interest in the Corporate Debtor: Trenchless Engineering Services Private Limited, Lumino Industries Ltd, Mount Intra Finance Private Limited, Navneet Garg, and Mideast Pipeline Products. However, only Mideast Pipeline Products submitted a Resolution Plan, which was opened at the 6th meeting of the Committee of Creditors (CoC). The CoC, using its commercial judgment, found that the Resolution Plan did not meet the requirements under the Insolvency and Bankruptcy Code (IBC). The financial offer in the plan was deemed unacceptable and the CoC requested a re-evaluation and resubmission of the plan from Mideast. Additionally, the CoC decided to reissue Form-G to attract more interested resolution applicants.

A second Form G was issued. Mideast, in response to an email from the Resolution Professional (RP), argued that it should not be required to submit another EOI and maintained that its initial Resolution Plan remained valid. Despite this, the RP, in an email, clarified that the second Form G was issued by the CoC and encouraged Mideast to participate. At the 7th CoC meeting, attended by Maninder Singh, the sole proprietor of Mideast, the viability of the existing Resolution Plan was discussed. It was found lacking in terms of feasibility, fund infusion for running the unit, and acceptable financial offers. The operational creditors, except for staff, would receive nothing under the current plan which was also below the liquidation value. Mideast agreed to reassess and revise its business and financial plans.

Despite several correspondences, Mideast retained its initial Resolution Plan. The RP requested a revised plan by August 31, 2023. At the 9th CoC meeting, Mideast was again asked to reconsider its financial offer and agreed to submit a revised plan within a week. On September 11, 2023, Mideast proposed an additional 15% to its initial financial proposal but the RP required a revised plan incorporating these changes. Mideast requested an extension stating health issues and finally submitted a revised Resolution Plan.

At the 11th CoC meeting, Mideast's revised plan was put to vote. The sole proprietor of Mideast present during the meeting indicated that the latest offer was final. The CoC unanimously rejected the revised plan. In the 12th CoC meeting, the CoC noting the CIRP period was ending decided to liquidate the Corporate Debtor with unanimous approval and authorized the RP to file the necessary application.

On February 20, 2024, two months later, Mideast sent an email to the RP with the subject "Resolution Plan for Nandini Impex Pvt Ltd" but without any attachments. Subsequently, Mideast filed an application seeking directions for the RP to place its revised offer before the CoC and to consider this revised plan. Mideast stated that despite the reduced valuation of the Corporate Debtor over time, it was willing to improve its offer from Rs. 4.6 Crores to Rs. 5.5 Crores provided the Corporate and personal guarantees were assigned to them.

The RP contended that no email or offer was received on February 15 or February 20, 2024 and alleged Mideast made a false statement on oath and was liable for perjury. The RP opposed reconsideration and argued that the CIRP and liquidation process is time-bound and stakeholders must act diligently.

Observations by the NCLT:

The NCLT referred to Supreme Court's decision in Ebix Singapore Private Limited vs. Committee of Creditors of Educomp Solutions Limited & Anr. where the Supreme Court noted that any clause allowing a resolution applicant to withdraw or seek modification due to events like a 'Material Adverse Event' would undermine the credibility and predictability of the insolvency resolution process. Such conditionalities would conflict with the requirements of viability and implementability under the IBC, The Supreme Court reiterated that resolution plans must ensure a credible and time-bound process where it should avoid any form of endless speculation or unpredictability.

Further, the NCLT referred to the decision of Ahmedabad Bench in M2K Developers Pvt Ltd vs. Ramchand Choudhary RP of Anil Mega Food Park Pvt Ltd where it was held that conditional resolution plans could not be effectively implemented, as the proviso to Section 31(1) of the IBC did not permit approval of such plans. The NCLT held that conditional resolution plans do not align with the IBC's objective of providing a final, implementable plan.

The NCLT also took into account the Supreme Court's observation in `Kridhan Infrastructure Pvt. Ltd. (Now Known as Krish Steel & Trading Pvt. Ltd.) vs. `Venkatesan Sankaranarayan & Ors.' where it was held that liquidation should be the last resort. The Supreme Court emphasized the broader public interest in resolving corporate insolvencies, which extends beyond mere recovery of dues, focusing instead on the maximization of asset value.

Therefore, the NCLT held that the liquidation of Nandini Impex would likely not serve the best interests of the creditors or the broader objectives of the IBC. The NCLT directed the CoC to renegotiate with the Appellant regarding its revised offer while ensuring the removal of any conditions that might impede the resolution process.

Case Title: UCO Bank vs Nandini Impex Pvt Ltd.

Case Number: IA No. 795/(KB)/2024 in C.P. No. 1377/KB/2020

Date of Judgment: 16.07.2024

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