Sole Decision of Related Parties Financial Creditors Could Be Fatal for Existence of Corporate Debtor: NCLAT quashes Liquidation Proceedings

Financial Creditors - Corporate Debtor - NCLAT - Liquidation Proceedings - Taxscan

The National Company Law Appellate Tribunal (NCLAT), Delhi Bench while quashing the Liquidation Proceedings ruled that the sole decision of related parties Financial Creditors could be fatal for the existence of the corporate debtor and cannot be sustained.

The Corporate Debtor was admitted into the Corporate Insolvency Resolution Process (CIRP), and Respondent, INCAB Industries Ltd. was appointed as Interim Resolution Professional (IRP) of the Corporate Debtor.

Under the invitation of claims by the IRP, the Appellants namely Bhagwati Singh, Jayanta Banerjee and thousands of other employees who were employed with the Corporate Debtor submitted their claim, along with other Operational Creditors and Financial Creditors.

Subsequently, after forming the Committee of Creditors (COC), 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 Corporate Debtor employee’s into an abyss with an uncertain future.

The Committee of Creditors (CoC) also consist of ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’, both were managed and owned by one of the Directors of the Corporate Debtor, Mr Ramesh Ghamandiram Gowani, resigned from the management of the Corporate Debtor after the initiation of the Corporate Insolvency Resolution Process.

The Learned Counsel for the Appellant contends that the legal status of the Financial Creditors, namely, ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’, having a majority voting rights in the ‘COC’, is questionable due to an existing dispute concerning the assignment of debt.

The Appellant contends that no corporate debtor’s debt could have been assigned in favour of ‘Kamla Mills Ltd’. The loan was initially granted by Asset Reconstruction Company (India) Ltd. However, in 2006, the loan was assigned in favour of Kamla Mills Ltd given to section 5 of the SARFAESI Act 2002, which provides that “notwithstanding anything contained in any other law for

The coram headed by the Chairperson Justice A.I.S. Cheema and Technical Member V. P. Singh opinion 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. Therefore, the Constitution of the creditors’ committee is a nullity in the eye of law that vitiates the entire CIRP. Liquidation is like a death knell for the corporate entity/corporate person. Liquidation based on the resolution of the CoC, which consists of related party Financial Creditors having 77.20 % vote share, is a matter of grave concern.

The Tribunal said 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.

“We have also noticed that the role of IRP/RP/liquidator was not impartial in the conduct of the corporate insolvency resolution process; therefore, we think it proper to change the Resolution Professional. The above discussions show that the Resolution Professional failed to discharge duties and responsibilities cast on the Resolution Professional under the IBC and Regulations’ provisions. ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’ are related parties that were made part of this CoC and were in a commanding position to rush through the decision to liquidate the Corporate Debtor,” the NCLAT said.

The Tribunal order that the new IRP/ Resolution Professional will collate all the claims submitted by Creditors before the earlier IRP/ Resolution Professional and, depending on the claims admitted from CoC excluding ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’ and proceed further with the CIRP.

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