CIRP Cannot be Continued When Entire Debt Amount has Been Re-Paid: NCLAT [Read Order]

The New Delhi bench of the National Company Law Appellate Tribunal (NCLAT) held that when the admitted dues have been repaid by the debtor there is no point in continuing the Corporate Insolvency Resolution Process.

The corporate debtor, M/s Rajasthan Land Holdings Ltd. (RLHL), was formerly a fully owned subsidiary of M/s Road Infrastructure Development Company of Rajasthan, a joint venture between the Rajasthani government and IL&FS Transportation Networks Ltd. (ITNL). The Operational Creditor, M/s Rajputana Constructions Pvt. Ltd., filed a Section 9 complaint alleging unpaid operational dues of ₹23.97 lakhs, which resulted to RLHL's admission into the Corporate Insolvency Resolution Process in September 2019.

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The Committee of Creditors (CoC), which consisted of just three operational creditors, was subsequently established by the Resolution Professional (RP) in October 2019. All three had admitted debts totaling ₹26.76 lakhs. In March 2020, the CoC raised the RP's monthly charge from the initial fixed amount of ₹1 lakh to ₹2 lakh.

The NCLT, however, set a monthly fee maximum of ₹1 lakh in November 2021. In the meantime, ITNL filed a substantial ₹181 crore claim as a financial creditor. But because ITNL was categorized by the RP as a "related party," it was not eligible to join the CoC. ITNL filed an interlocutory application to contest this. Consequently, RLHL's insolvency proceedings were halted by NCLT, Jaipur.

The RP also submitted an interlocutory application in July 2021, claiming that ITNL had engaged in fraudulent transactions. The NCLT urged the parties to reach a peaceful resolution later in 2022. After that, ITNL proposed to withdraw CIRP in exchange for paying all operating creditors 100% of the outstanding balance. Rajputana Constructions Pvt. Ltd., which owned more than 89% of the CoC share, objected to the settlement in spite of this offer of full repayment. RP consequently turned down ITNL's offer.

After noticing the CoC's dishonest behavior, the NCLT issued an order in 2023 ending the CIRP. After seeing that RP had continued to use CIRP when it was unnecessary, the order further lowered the RP's monthly expenses to Rs 50,000.

In two different appeals filed with the NCLAT in Delhi, Rajputana Constructions Pvt. Ltd. and the RP contested this ruling. The order was contested by Rajputana Constructions Pvt. Ltd. on the grounds that the Corporate Debtor's CIRP had been improperly terminated. However, RP is requesting that the order on RP's performance and behavior be amended to remove the alleged unwarranted statements and to lower their costs.

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On the basis of an uncontested operational debt of ₹23.97 lakhs, it was argued that its Section 9 application was legitimate. The Corporate Debtor never made a repayment offer or even disputed the claim, even though they had given advance notice. They claimed that ITNL was the primary cause of the CIRP process's delay. ITNL submitted a claim for ₹181.34 crores following CIRP admission; the RP acknowledged this as financial debt but left it out of the CoC because ITNL was a related party. For more than three years, CIRP was halted by ITNL's application contesting this classification.

According to the RP, he reported suspected fraudulent activities involving ITNL in a separate application, acting with diligence. Throughout the visit, she made sure the Corporate Debtor remained a going business. Additionally, the CoC authorized the increase in RP's fee from ₹1 lakh to ₹2 lakhs, and the NCLT's decrease to ₹50,000/month was punitive and damaged her image.

The two member bench of Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) observed the conduct of the CoC was dominant as RCPL which held a voting share of 89.54% had persistently opposed the settlement proposal without giving any credible or transparent reasons.

The tribunal also discovered anomalies in the RP's behavior. It was seen that, in spite of having filed an application to have this time frame removed from the calculation of the CIRP timetable, the RP had been charging professional fees during the time that CIRP was suspended, which was from August 5, 2020, to March 16, 2021.

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The tribunal determined that during the time that CIRP was legitimately suspended, the RP was not entitled to fees. Furthermore, despite the fact that there were only seven CoC sessions and no noteworthy advancements, the RP's compensation was raised from Rs. 1 lakh to Rs. 2 lakhs in the fourth meeting. The admitted debt was virtually tripled by the overall CIRP expenses, which had increased to almost Rs. 73 lakhs.

The NCLT's order to lower the RP's salary to Rs. 50,000 per month was affirmed by the tribunal. The panel upheld the termination of CIRP because the Corporate Debtor had paid off the full admitted debt of the CoC, leaving only the exorbitant CIRP fee as an outstanding matter. It concluded that there was no longer any justification for pursuing the insolvency process, and doing so would go against the code's goal of ensuring a timely settlement and the rebirth of functioning businesses rather than their demise.

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