Liquidation Before Resolution?

[Richa Sarafis a Legal Advisor at Vinod Kothari Consultants Pvt. Ltd.]

Historically, it has taken an unduly long period of time to wind up or liquidate a company in India as compared to other countries. Such lengthy time-frames are detrimental to the interest of all stakeholders. The process ought to be time-bound, aimed at maximizing the chances of preserving value for the stakeholders as well as the economy as a whole.

AReport of the Expert Committee on Company Lawon “Restructuring and Liquidation” noted that the insolvency law should strike a balance between rehabilitation and liquidation. It should provide an opportunity for genuine effort to explore restructuring and rehabilitation of potentially viable businesses after the stakeholders have reasonably arrived at a consensus. Where it is demonstrated that revival or rehabilitation is not feasible, winding up should be resorted to. Where circumstances justify, the process should allow for easy conversion of proceedings from one procedure to another. The principle is also noted as one of the essential features in thereport of the Bankruptcy Law Reforms Committee, on which the design of bankruptcy and insolvency resolution was based.

Although the Companies Act, 2013 stipulated for creditors’ voluntary winding up, the provision has since been omitted. Hence, the only option now remaining with the creditors is to move an application before the National Company Law Tribunal (“NCLT”) under the provisions of the Insolvency and Bankruptcy Code, 2016 (the “Code”). Liquidation procedures cannot be initiated by creditors as a first resort in the event of a payment default. The Code prescribes that a financial or operational creditor can initiate the corporate insolvency resolution process (“CIRP”) in case of failure by the corporate debtor to pay at least Rs. 1,00,000 and only in the case of failure to work out a resolution plan will the corporate debtor be liquidated. The general goalis: “Law should provide a reasonable opportunity for rehabilitation of a business before a decision is taken to liquidate it so that it can be restored to productivity and become competitive”. Furthermore, the intention of the Code is that resolution should first be attempted and, if the resolution fails, then liquidation should be attempted.

In this context, once the application for initiation of the CIRP is admitted by the NCLT, the process commences, the interim resolution professional forms a committee of creditors and the first meeting of the committee of creditors is held within 30 days’ time.

The following events may lead to liquidation trigger:

– the committee of creditors cannot agree on a workable resolution plan within 180 days (which can be extended once by 90 days);

– the committee of creditors decides to liquidate the company;

– the NCLT rejects the resolution plan; or

– the corporate debtor or resolution applicant contravenes the requisite conditions pertaining to the resolution plan.

However, an important question that crops up is whether the creditors can decide to liquidate the company in the very first meeting. Section 33 of the Code stipulates in clear terms that where the resolution professional any time during the CIRP, but before confirmation of a resolution plan, informs the NCLT regarding the decision of the committee of creditors to put a company into liquidation by the requisite majority, a company may become the subject matter of such process. On a reading of Section 33(2) of the Code, one can infer that the answer is in affirmative. Such an outcome has been confirmed by the NCLT in several cases (as discussed below).

Commenting on the high incidence of liquidation proceedings, M.S. Sahoo, the chairman of the Insolvency and Bankruptcy Board of India, stated:

Many of the 450-odd companies where insolvency proceedings have been admitted by the NCLT have been struggling for survival for years, much before the [the Code] was implemented late last year. Therefore, these are almost ‘dead’ cases where chances of insolvency resolution are very remote, and liquidation is the only natural outcome.

Going by the number of cases moving towards resolution, it appears unlikely that most of the companies will be able to achieve the resolution plan in the 180 days or the extended period of 270 days. After that the mandate of is to liquidate the company and that is what is going to happen. However, in case of highly stressed businesses, liquidations may be a valid commercial outcome to realise the assets and minimize the loss to be incurred by the stakeholders.

InVIP Finvest Consultancy Private Limited v. Bhupen Electronics, the committee of creditors was constrained to decide that it is prudent for the company to go for liquidation, as the company had not been operational for decades and had no employee on its payroll. In the instant case, the only valuable asset remaining with the company was its fixed assets i.e. land and building, and the committee of creditors did not firm up any resolution plan nor did it receive any from others. Another interesting case was Chivas Trading Private Limited v. Abhayam Trading Limited, wherein the corporate debtor was liquidated as there was lack of business opportunity, and the creditors felt there was no point in infusing good money to recover bad money, especially when the company had no business prospects. Again, in the case of Best Deal TV Pvt. Ltd., the committee of creditors recommended liquidation since the business activities were already closed down and all employees had left the corporate debtor. In one casewhere a liquidation order was passed by the NCLT, Mumbai, the ex-chairman of the corporate debtor Esskay Motors Pvt. Ltd. contended that the resolution professional did not invite bids from interested parties. However, the committee of creditors noted that inviting bids would only prolong the process of resolution and will not yield any result as the corporate debtor was not a going concern.

To conclude, it is somewhat paradoxical that although the creditors cannot initiate the winding up proceedings against a company, they have the power to place a company in liquidation by their decision during corporate insolvency resolution process. That begs the questions whether it would be prudent to give them a right to initiate winding up to begin with.

Richa Saraf

 

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