NCLAT: Liquidation Proceedings Quashed On The Ground That Sole Decision Of Related Parties Financial Creditors Could Be Fatal For The Existence Of The Corporate Debtor

"An order for liquidation of corporate debtor based on the sole decision of related parties Financial Creditors could be fatal for the existence of the corporate debtor, cannot be sustained. It is also pertinent to mention that when the Constitution of the Committee of Creditors itself is found to be tainted, then the decision of that COC cannot be validated on the pretext of exercise of commercial wisdom."

The NCLT, Kolkata had initiated liquidation proceedings against the Corporate Debtor i.e. INCAB Industries Limited and the resolution was adopted on 5th December 2019 to liquidate the Corporate Debtor, thereby sabotaging the chances of revival of the Corporate Debtor and pushing the employees of the Corporate Debtor into an abyss with an uncertain future.

It was contended by the Appellants that the Committee of Creditors consisted of Kamla Mills Private Limited and Fasqua Investment Private Limited, both were managed and owned by one of the Directors of the Corporate Debtor i.e. Mr Ramesh Ghamandiram Gowani, who had resigned from the management of the Corporate Debtor after the initiation of the Corporate Insolvency Resolution Process. The decision to liquidate the Corporate Debtor was taken with a majority of the entire Committee of Creditors and the said resolution was passed with an overwhelming majority of 90.83%.

Sections 5(24)(a) and 5(24)(f) of the Insolvency Bankruptcy Code, 2016 were addressed by the Bench while dealing with the issue with regards to the term related party. It also addressed Section 21 of the Code which deals with the Committee of Creditors wherein its proviso provides a bar refraining any right of representation, participation or voting in a meeting of the committee of creditors by a financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or subsection (6-A) or sub-section (5) of Section 24, if it is a related party of the corporate debtor.

The Principal Bench while dealing with the above stated provisions made certain observations while applying it to the present case by stating that Mr Ramesh Ghamanndiram Gowani had a substantial shareholding of 99.74% in Financial Creditor Kamla Mills Private Limited and that he is also the Director and Shareholder of the Financial Creditor Fasqua Investment Private Limited. It was also found on record that Mr Ramesh Ghamanndiram Gowani, who was in the proposed AGM dated 3rd March, 2018 seeking the reappointment, resigned from the Corporate Debtor's Board with effect from 20th November 2019, i.e. much after initiation of the Corporate Insolvency Process against the Corporate Debtor-INCAB Industries Limited. It connected this factual scenario with Section 5(24)(f) of the Code which clearly defines the related party in relation to Corporate Debtor that includes anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor

It further observed that Mr Ramesh Ghamanndiram Gowani would not be excluded from the first proviso to Section 21 (2) of the Code due to his resignation from the Board of Directors of the Corporate Debtor-INCAB Industries Limited after the initiation of the Corporate Insolvency Process. It was concluded that the financial creditors Fasqua Investment Private Limited & Kamla Mills Ltd are the related party of the Corporate Debtor i.e. INCAB Industries Ltd in terms of Section 5 (24)(f) of Insolvency and Bankruptcy Code, 2016 and according to the terms of Ist proviso of Sec 21(2) of I & B Code; they are not entitled to represent, participate and vote in the CoC of the Corporate Debtor-INCAB Industries Ltd.

The matter was found to be of grave concern since the liquidation was based on the resolution of the CoC, which consists of related party Financial Creditors having 77.20 % vote share. The Bench opined that the Constitution of the Committee of Creditors violates the proviso to Section 21(2) of the I & B Code, 2016 read with 12(3) of CIRP Regulations and its Constitution is a nullity in the eye of law that vitiates the entire CIRP.

Ruling of the Tribunal:

The statutory provisions of the Code were analysed and it was found that the conduct of the Resolution Professional/Interim Resolution Professional was against such provisions of the Code and directed to appoint another IRP/ Resolution Professional in place of the Respondent. It confirmed that without verification and admission of a claim, the IRP cannot assign the voting share to a creditor, and without that, there cannot be a meeting of the Committee of Creditors.

The Principal Bench allowed these appeals by concluding that the corporate insolvency process in the instant case is totally in disregard of the provisions of the Code and Regulations thereunder. It found the formation of the Committee of Creditors in the instant case is a nullity in the eyes of the law and that the illegally constituted committee of creditors took the decisions at every stage of CIRP. Therefore, the entire corporate insolvency resolution process of the Corporate Debtor was found to be vitiated and the order of liquidation passed by the NCLT was set aside.