AA Obliged To Direct For Liquidation Only If COC’S Decision To Liquidate Is In Accordance With IBC: NCLAT Delhi

Background Facts

In 2018-2019, Hero Fincorp Limited (“Financial Creditor/Appellant”) extended financial facilities to M/s Hema Automotive Pvt. Ltd. (“Corporate Debtor”) and the latter defaulted in repayments. The Financial Creditor filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. On 08.07.2022 the Adjudicating Authority initiated CIRP against the Corporate Debtor.

The Committee of Creditors (“CoC”) comprised of the Financial Creditor as the sole member. On 07.10.2022 the Resolution Professional published Form-G and the last date for receipt of Expression of Interest (“EOI”) was 24.10.2022. Before the period could expire, the CoC passed a resolution on 19.10.2022 for liquidation of the Corporate Debtor. However, the Adjudicating Authority vide an order dated 23.11.2022 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.

“Such approach is not in the spirit of IB Code as Insolvency Resolution is the focus of the act. Only in the event of failure of insolvency resolution the steps for liquidation have to be taken. The sole Member of CoC has not adopted a judicious approach of exploring the possibility of resolution. Since he has recommended the liquidation even before the time period for seeking EOI had elapsed which is 24.10.2022.”

The Financial Creditor filed an appeal before NCLAT, challenging the order dated 23.11.2022.

Contention Of Appellant

The Financial Creditor argued that in view of Section 33(2) of IBC, it is mandatory for Adjudicating Authority to pass an order of liquidation. Hence, the application has been erroneously denied.

NCLAT Verdict

The Bench observed that 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 before – (i) the confirmation of the Resolution Plan; and (ii) at any time before the preparation of Information Memorandum. The Bench opined that CoC failed to take into consideration the Explanation to Section 33(2) before deciding to liquidate the Corporate Debtor.

The legislature in Section 33(1) and Section 33(2) has used the expression “shall”. However, the Adjudicating Authority’s obligation to direct for liquidation shall rise only when decision of the CoC is in accordance with IBC. Reliance was placed on the NCLAT judgment in Sreedhar Tripathy vs. Gujarat State Financial Corporation and Ors., Company Appeal (AT) (Insolvency) No.1062 of 2022, wherein it has been held that judicial review of CoC’s decision is not precluded and it depends on facts of each case.

The Bench observed that Form-G was issued after preparation of the Information Memorandum and the last date for receiving Expression of Interest was 24.10.2022. Thus the Adjudicating Authority had rightly rejected the application for liquidation. The Appeal was dismissed.

Case Title: Hero Fincorp Limited v M/s Hema Automotive Private Limited

Case No.: Company Appeal (AT) (Insolvency) No.1540 of 2022

Counsel For Appellants: Mr. Sanjeev Singh, Ms. Taniya Bansal, Ms. Ridhi Pahuja, Ms. Pallavi Aggarwal, Advocates

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