Non-Cooperation by Management: NCLT Upholds 92.53% CoC Vote for Liquidation u/s 33(2) After Failed CIRP [Read Order]

The National Company Law Tribunal (NCLT), New Delhi Bench, ordered the liquidation of SN Cinema Advertising Pvt. Ltd. under Section 33(2) of the Insolvency and Bankruptcy Code, 2016, rejecting the suspended directors’ objections that liquidation was premature and that the company’s MSME status entitled them to revive operations.

The Corporate Insolvency Resolution Process (CIRP) of M/s SN Cinema Advertising Pvt. Ltd. was initiated on 3 January 2023 upon admission of a Section 7 petition filed by M/s Loveni Marketing & Advertising Pvt. Ltd. (now M/s Viraj Technology India Ltd.), a financial creditor. Mr. Parveen Kumar Jain was appointed as the Interim Resolution Professional (IRP) and later confirmed as the Resolution Professional (RP) by order dated 26 September 2023.

Following the commencement of CIRP, the RP issued public announcements in Financial Express and JanSatta inviting claims. The Committee of Creditors (CoC) was constituted on 24 January 2023 with Viraj Technology India Ltd. as the sole financial creditor, holding 100% voting rights. Despite multiple requests, the suspended board of directors (SBD) failed to hand over the books of accounts, documents, and physical possession of assets.

Master the Latest Amendments in Income Tax Act Click here

The RP convened several meetings with the SBD and filed applications under Section 19(2) and Section 18(1)(f) seeking directions for cooperation and possession of assets, both of which were allowed later by the NCLT.

During the CIRP, the SBD preferred an appeal before the NCLAT, which was initially stayed to allow a possible settlement, but was dismissed on 26 April 2023, vacating the interim order. The RP informed the CoC that the SBD continued to withhold documents despite repeated requests.

In the 3rd CoC meeting held on 26 August 2023, the CoC deferred the decision to issue Form G for inviting expressions of interest, as the RP could not proceed without full records and physical control of assets. On 11 October 2023, in its 4th CoC meeting, with 92.53% votes, the CoC resolved to liquidate the corporate debtor, observing that the company had ceased operations and further CIRP continuation would be futile.

Accordingly, the RP filed the present application under Section 33(2) read with Section 33(1)(b) of the IBC seeking orders for liquidation and appointment of liquidator, as well as exclusion of 53 days from the CIRP period .

The RP submitted that despite repeated opportunities, the suspended directors did not provide requisite cooperation, which crippled the CIRP. The RP had filed multiple interlocutory applications for possession of assets and documents, indicating his bona fide efforts.

Get a Handbook on TDS Including TCS as Amended up to Finance Act 2024, Click Here

He contended that the CoC’s decision to liquidate was taken after due deliberation, as further continuation of CIRP without information or operations would only add unnecessary costs. He emphasized that the commercial wisdom of the CoC is binding on the adjudicating authority and relied on Vallal RCK v. Siva Industries, Arun Kumar Jagatramka v. Jindal Steel and Power Ltd., and K. Sashidhar v. Indian Overseas Bank.

He further clarified that a separate exclusion application was not filed, but the relief was sought within the liquidation plea for efficiency. The RP also prayed to be appointed as the liquidator, as approved by the CoC.

The SBD opposed the liquidation, alleging that the RP and Viraj Technology India Ltd., the sole CoC member, had colluded to misuse the IBC as a debt recovery tool. They contended that the liquidation application was premature, contrary to the revival objective of the Code, and filed with mala fide intent.

The SBD (Suspended Board of Directors) claimed that the company was a registered MSME with viable revival potential, and as promoters, they were entitled to submit a resolution plan under Section 240A of the Code. They alleged the RP had not published Form G or invited expressions of interest, thereby denying them and third parties, including Kisan Experience Centre (which had shown interest), the chance to submit resolution plans.

They argued that the CIRP period expired on 09.09.2023, and the 4th CoC meeting held on 11.10.2023 was beyond the statutory limit without prior extension, rendering the liquidation decision invalid.

The SBD also questioned the excessive CIRP costs (₹11.51 lakh), asserting that ₹8 lakh was claimed as professional fees despite negligible progress. They maintained that the RP’s conduct lacked transparency, and that liquidation was driven by the CoC’s recovery motives, contrary to Supreme Court rulings in K.N. Raja Kumar v. V. Nagarajan and M.K. Rajagopalan v. Dr. Periasamy Palani Gounder emphasising revival as the Code’s primary object.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The NCLT found that the CIRP was repeatedly hindered by the SBD’s non-cooperation despite several requests and judicial directions under Section 19(2). The RP had to seek adjudication merely to obtain basic records and control over assets, leading to delays and cost escalation.

The tribunal held that although the RP should have filed a separate exclusion application, combining it within the liquidation plea was a procedural lapse, not affecting maintainability.

It was observed that the CoC, comprising the sole financial creditor, had deliberated upon the circumstances in its 4th meeting and decided that further continuation of CIRP would be futile, as no resolution plan or repayment proposal was received even after repeated opportunities. The CoC’s decision to liquidate was thus a legitimate exercise of its commercial wisdom.

The Bench noted that no cogent evidence was produced by the SBD to prove collusion or mala fide conduct by the RP or creditor. The tribunal rejected the contention that MSME status or alleged revival potential could override the CoC’s commercial assessment, particularly when the management had themselves obstructed the process.

Thetwo member bench of Dr Sanjeev Ranjan (Technical Member) and Bachu Venkat Balaram Das (Judicial Member) referred to precedents in K. Sashidhar, Vallal RCK, and K.N. Raja Kumar, reiterating that CoC’s decisions are not subject to judicial review unless tainted by illegality or fraud. It further noted that the CIRP had already extended beyond permissible limits, and continuation served no purpose given the cessation of business operations and unavailability of records.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates