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Liquidation must be the last resort

Published: Nov 06, 2020

By Prashanth Shivadass & Pooja Rao

IN a recent interim order of the Supreme Court, it has been stressed once again that 'liquidation must be the last resort for a company to adopt'. We are referring to the order of the apex court of India in Kridhan Infrastructure Pvt. Ltd. & Another v. Venkatesan Sankaranayanan & Another.

Briefly, Corporate Insolvency Proceedings ('CIP')was initiated against the corporate debtor i.e., Tecpro Systems Limited and an approved resolution plan was submitted by the Committee of Creditors ('CoC') to the National Company Law Tribunal ('NCLT') on 30th April 2018. A revised resolution plan was submitted by Kridhan Infrastructure Private Limited ('Kridhan'). The same was approved around May 2019. The Interim Resolution Professional ('IRP'), in the meanwhile, moved the NCLT alleging that Kridhan miserably failed to infuse equity funds as per terms of the resolution plan. Kridhan had also not taken control of the management even after the passage of 8 months from the date of approval of the resolution plan and, therefore, there has been a non-compliance and non-implementation of the resolution plan.

The NCLT among others, observed as under:

(1) Kridhan failed to adhere to any of the terms of the timelines even after a period of 8 months since approval of the resolution plan. This has threatened the going concern status of the corporate debtor severely;

(2) Taking cues from the National Company Law Appellate Tribunal's ('NCLAT') order dated March 8, 2019 in Yavar Dhala v. JM Financial Asset Reconstruction Company Ltd. & Ors. , the NCLT observed that on the failure of the resolution applicant to implement the terms of the resolution plan, liquidation must follow;

(3) A performance guarantee of INR 5 Crore was furnished by Kridhan for effective implementation of the resolution plan. In the event there is a failure on the part of the resolution applicant in implementing the terms of the resolution plan, the performance guarantee must be forfeited. Therefore, the performance guarantee furnished by Kridhan stood forfeited;

(4) The Company Application was partly allowed and the Corporate Debtor was ordered to be liquidated.

Kridhan thereafter moved the NCLAT against the aforementioned NCLT order on the following grounds:

(a) That Kridhan had duly complied with the conditions to be followed by them as per order dated May 15, 2019, but the direction in the said order of the vesting of the ownership, control and management of the affairs of the 'Corporate Debtor' was never complied with by the IRP thereby depriving Kridhan Infrastructure from vesting its control and management upon the 'Corporate Debtor' for its implementation of the 'Resolution Plan'.

(b)  That Kridhan was not given an opportunity of being heard and project its grievances before the NCLT.

(c) That Kridhan is very much interested to implement the 'Resolution Plan' and immediately take all steps necessary to implement the said 'Resolution Plan' after an order for reversal of liquidation. Further, Kridhan agreed for a forfeiture of a sum of INR 1 Crores (held in escrow) in addition to the already forfeited amount of INR 5 Crore in case Kridhan fails to deposit a sum of INR 50 Crore within a period of three (3) months from the date of reversal of the liquidation order.

(d)  Lastly, preference must be given to a 'Resolution' over a 'Liquidation' and 'Liquidation' can only be seen as a last resort.

The NCLAT after hearing all parties concerned, held as under:

"86. Be that as it may, in the light of foregoing detailed discussions, this Tribunal, taking note of the entire conspectus of the attendant facts and circumstances of the instant case in an encircling manner and also keeping in mind of the plea taken on behalf of the liquidator that the 'Resolution Applicant(s)' cash flow mentioned in the failed 'Resolution Plan' is squarely dependent upon the 'sale of assets' and hence it is 'subjective in character', this Tribunal, bearing in mind that the 1st Appellant / 'Resolution Applicant' is only said to be holding 12% equity in 'Kridhan Infra Limited' etc. and added further in view of the specific plea taken by the Liquidator that the 'Resolution Applicant' through its subsidiaries had defaulted to Union Bank of India, Hongkong Branch to an extent of INR 750 crores approx. and hence, ineligible u/s 29A of the 'I&B' Code (although the same has been denied by the Appellant(s) and as on 31.03.2020 the 'Resolution Applicant' had reported a turnover of 21.17 crores and suffered a loss of Rs. 12.11 crores and thereby the financial position of it is not in a favourable circumstance to implement the 'Resolution Plan', this tribunal comes to an inevitable, irresistible and inescapable conclusion that an opportunity to revive the 'Corporate Debtor' as per terms of 'Resolution Plan' is not to be provided to the Appellant(s)/ 'Resolution Applicant' to prevent an aberration of justice and also to better preserve the 'economic value of assets' because of the reason that the instant case is not an exceptional or extraordinary one to invoke the ingredients of Rule 11 of 'NCLAT' Rules, besides the provisions of 'I&B' Code cannot be diluted in any manner whatsoever. (Based on the attendant facts and circumstances of the instant case which float on the surface). Also that, it cannot be said by any stretch of imagination that no adequate opportunity was granted to the 'Resolution Applicant' before the 'Adjudicating Authority' to bring equity infusion. As a matter of fact, the 'Resolution Applicant' even after eight months of the approval of 'Resolution Plan' had not followed the timelines for equity infusion and this was rightly observed by the Adjudicating Authority in the impugned order. Furthermore, even on merits, the impugned order passed by the Adjudicating Authority is free from any Legal flaw, especially in the absence of any fraud or material irregularity in the 'Liquidation Order' passed by the 'Adjudicating Authority'. Resultantly, the Appeal fails."

The NCLAT, however, allowed the amount of INR 15 Crore deposited by Kridhan (in escrow) to taken back. Aggrieved by the order passed by the NCLAT, Kridhan approached the Supreme Court.

The Supreme Court admitted the appeal and heard the contentions made by the both the parties and took note of the arrangement they had made as part of the restructure plan. Thereafter, the Apex Court passed an interim order stating, "Liquidation has to be the last resort". The NCLAT has a duty to uphold the objective of the Insolvency and Bankruptcy Code, 2016 ('IBC') which is to resolve corporate insolvencies and not liquidate all the entities. Also, as much as it is the responsibility of the NCLT and the NCLAT to uphold the objective of IBC, the Corporate Debtor and the Resolution Professional also hold equal responsibility.

We have seen time and again that the Courts in India have observed that for the best interests of a company, liquidation as a measure must be the last resort. The revival of a company is crucial and must be sustained. Even before the IBC, under the erstwhile Companies Act, 1956, Courts have held that the revival of a Company is of paramount importance and it must be catered to first.

For instance, the Supreme Court in Meghal Homes (P.) Ltd. v. Shree Niwas Girni K.K. Samiti AIR (2007) SC 3079, considered the question on re-starting the business pursuant to a scheme of revival, despite the Company Court ordering that the business be wound up.The Supreme Court,among others, observed as under -

(a)  Once an order of liquidation had been passed on an application under Section 433 of the Companies Act, the winding up has to be either stayed altogether or for a limited time, on such terms and conditions as the court thinks fit in terms of Section 466 of the Act. If no such stay is granted, the proceedings must go on and the court has to finally pass an order under Section 481 of the Act dissolving the Company.

(b)   In other words, when affairs of the Company had been completely wound up or the court finds that the Official Liquidator cannot proceed with winding up of the Company for want of funds or for any other reason, the court can make an order dissolving the Company from the date of the order. This puts an end to the winding up process.

(c)  Winding up is dealt with in Part VII of the Companies Act and Sections 433 to 483 occur in Chapter II of that Part. Part VI deals with management and administration of a Company and Chapter V thereof deals with Arbitrations, Compromises, Arrangements and Reconstructions. In that Chapter occurs Sections 390 to 396A of the Act with which we are concerned. While defining a Company for the purpose of Sections 391 and 393, Section 390 clarifies that Company means any Company liable to be wound up under the Companies Act. In this case, the Company was ordered to be wound up on 25.7.1984. Therefore, when the Scheme was originally presented on 3.10.1994, it was at a time when the winding up order was already in existence. The argument that Section 391 would not apply to a Company, which has already been ordered to be wound up cannot be accepted in view of the language of Section 391(1) of the Act, which speaks of a Company which is being wound up. If we substitute the definition in Section 390(a) of the Act, this would mean a Company liable to be wound up and which is being wound up. It also does not appear to be necessary to restrict the scope of that provision considering the purpose for which it is enacted, namely, the revival of a company including a Company that is liable to be wound up or is being wound up and normally, the attempt must be to ensure that rather than dissolving a company it is allowed to revive. Moreover, Section 391(1)(b) gives a right to the liquidator in the case of a company which is being wound up, to propose a compromise or arrangement with credit or sand members indicating that the provision would apply even in a case where an order of winding up has been made and a liquidate or had been appointed.

(d) The question in this case really is whether the compromise put forward under Section391 of the Companies Act could be accepted by the company court without reference to the fact that it is a Company in liquidation and without considering whether the compromise proposed as intending to take the Company out of liquidation,contemplates the revival of the company and whether it puts forward a proposal for revival and whether such aproposal also satisfies the element of public interest and commercial morality, the elements required to be satisfied for the court to stop the winding up proceeding in terms of Section 466 of the Act. To this end, the Supreme Court considered a plethora of decisions and held as under:

(i) There was no incongruity in looking into aspects of public interest, commercial morality and the bonafide intention to revive a Company while considering whether a compromise or arrangement put forward in terms of Section 391 of the Companies Act should be accepted or not. Further, there is no conflict in applying both the provisions and in harmoniously construing them and in finding that while the court will not sit in appeal over the commercial wisdom of the shareholders of a company, it will certainly consider whether there is a genuine attempt to revive the company that has gone into liquidation and whether such revival is in public interest and conforms to commercial morality.

(ii) That the company court was bound to consider whether the liquidation was liable to be stayed for a period or permanently while adverting to the question whether the scheme is one for revival of the company or that part of the business of the company which it is permissible to revive under the relevant laws or whether it is a ruse to dispose of the assets of the company by a private arrangement. If it comes to the latter conclusion, then it is the duty of the court in which the properties are vested on liquidation, to dispose of the properties, realize the assets and distribute the same in accordance with law.

We see a similar ground of assessment being taken by Courts, including the Supreme Court even after the implementation of IBC. In November 2019, the Supreme Court in the case of Arcerolmittal (India) Pvt. Ltd. V. Satish Kumar Gupta, highlighted the objective of IBC and held that it is a balancing act between timely completion of the corporate insolvency resolution process rather than pushing the corporate debtor into liquidation. The apex court went on to hold that the NCLT or the NCLAT must not fix a time limit within which the insolvency resolution process will take place. T he corporate debtor consists of several employees and workmen whose daily bread is dependent on the outcome of the corporate insolvency resolution process, therefore, if there is a resolution applicant who can continue to run the corporate debtor as a going concern, every effort must be made to try and see that this is made possible.

Therefore, the current interim order of the Supreme Court is yet another clarification ruling that even in an insolvency proceeding, liquidation of a Company must always be the last resort and revival of such going concern of the Company is the primary objective of the Code.

[The authors are Founder and Associate respectively with Shivadass & Shivadass (Law Chambers) and the views expressed are strictly personal.]

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