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  • Divyam Desai

Enigma of Explanation to Section 33(2): Unleashing the Unchecked Power of CoC, A Threat to the Object of IBC

[Divyam is a student at Jindal Global Law School.]

The Insolvency and Bankruptcy Code 2016 (IBC) is a special legislation drafted by the legislature to deal with the sick companies efficiently. The scheme of the code as also laid down by the apex court in the country in a catena of decisions is that the primary focus of the law is to ensure revival and continuation of the business of corporate debtor. However, problem arises if no endeavour is made to revive the corporate debtor which is directly dragged into liquidation which prima facie becomes a conduct against the objective of IBC.

Section 33 of the IBC, which deals with liquidation of a company, is the subject matter of analysis in this article. A bare perusal of the said provision shows that there are 3 possible events in which a company can be liquidated: (a) if no resolution plan received; (b) if the resolution plan is rejected by the adjudicating authority, i.e., National Company Law Tribunal (NCLT); or (c) when at least 66% of the committee of creditors (CoC) desires initiation of liquidation prior to the approval of the resolution plan.

The issue arises after the insertion of an explanation to Section 33(2), which reads as follows:

Explanation.-- For the purposes of this sub-section, it is hereby declared that the committee of creditors may take the decision to liquidate the corporate debtor, any time after its constitution under sub-section (1) of section 21 and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.

The above amendment allows the CoC to initiate liquidation of the corporate debtor at any time immediately after its constitution (which means even before inviting an expression of interest or resolution plan for the purpose of revival of the company). Now, the CoC can proceed with the liquidation without inviting expressions of interest from prospective resolution applicants, which means absence of Form G, which in turn is an intrinsic part of the IBC and the first step for revival. In several cases, this amendment has caused prejudice to corporate debtors. Courts have consistently taken the view that the decision of CoC cannot be interfered with and should be approved by the adjudicating authority as courts does not possess any technical knowledge of the business. Almost in every judgement, court has given primacy to the opinion of the CoC by passing a routine order without looking at the peculiar facts and circumstances of the cases where the CoC has potentially misused the power accorded to them. While passing a routine order of liquidation, courts have merely relied on the judgment of the apex court in the case of K Sashidhar v. Indian Overseas Bank (K Sashidhar case). The interpretation of this judgement has been done incorrectly by courts and can be attributed to the selective reading of the judgement. The relevant paragraph of the judgment reads as under:

"There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and the feasibility of the proposed resolution plan. They act on the basis of a thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject matter expressed by them after due deliberations…That is made non-justiciable.”

The above judgement is not followed in letter and spirit by courts today. It clearly points out that the commercial wisdom of the CoC can be upheld only if the creditors have reached a conclusion after thorough examination and due deliberation of the resolution plans.

The trend followed by courts today is that once the CoC has decided to initiate liquidation under Section 33(2), no courts have to date decided against their decision of liquidation by solely relying on the ground of the commercial wisdom. Not a single judgement in the country has allowed appeal under Section 61(4) of the IBC against the order of liquidation passed at a very preliminary stage. The grounds for entertaining an appeal under Section 61(4) against the order of liquidation are fraud and material irregularity in the conduct of corporate insolvency resolution process (CIRP). This piece will focus on how either of these two aspects are present in certain judgements, showcasing that the judgements are against the scheme of the IBC and the view of the apex court in K Sashidhar case.  

In the pretext of commercial wisdom, CoC has, on a few occasions, given generic reasons for liquidating the company without inviting proposals of resolution plans. Generally, the rationale given while resorting to a premature liquidation is that the company is not functional and is not carrying out business for the last few years and that there are higher chances of assets getting depleted or machinery and other assets being in a dilapidated condition. The erstwhile directors of the companies should be taken in confidence to prove the bona fides of the CoC’s decision if they wish to exercise the power of premature liquidation.

In the case of Sunil S Kakkad v Atrium Inforcom Private Limited and Another, only two banks were creditors. They were aware that their debts would be easily recovered if the company is prematurely liquidated under the explanation to Section 33(2). They did not want to undergo the process of revival, where the procedure is longer. Therefore, it can be arguably said that there was a fraudulent intention on the part of creditor banks when they escaped the rigours of the CIRP because it was easy and faster for them to pass a resolution for liquidation. Non-publication of Form G (expression of interest from prospective investors) was prejudicial and arbitrary for the company, especially when the resolution professional was getting a number of requests from prospective investors. Therefore, with utmost respect to the Supreme Court of India and the National Company Law Appellate Tribunal, it can be said that there was apparent irregularity and fraud in the conduct of CoC by misusing the powers under explanation to Section 33(2) of the IBC on the pretext of commercial wisdom.

In the case of M/s Five Ess Precision Components Private Limited v. M/s Hema Automotive Private Limited, the corporate debtor was forced to liquidate the business by the sole financial creditor who formed the CoC. In CoC, since only financial creditors have the power of voting, the sole financial creditor of the corporate debtor, i.e., Hero Fincorp Limited dragged it to liquidation under this contested section and explanation of the IBC. It is notable that despite there being an order from the NCLT to reconsider the option of liquidation and to invite Form G before deciding to liquidate, the CoC still gave an overriding effect to that order and pressed for liquidation, which was allowed by NCLT solely by relying on the commercial wisdom of the CoC. 

In the case of Sreedhar Tripathy v. Gujarat State Financial Corporation and Others, the CoC, without inviting the expression of interest and subsequently without considering resolution plans, decided to initiate liquidation solely on the ground that the business of the corporate debtor was shut for a few years. The most erroneous part of the above judgement is that the appellate tribunal did not even make an endeavour to deal with the arguments of the appellant, who was against the liquidation and had argued that the conduct of the CoC was against the scheme of the IBC. The learned judge said that the CoC has wide powers, and their decision is not subject to judicial review. Even if fraud and material irregularity in the process of CIRP is pointed, courts are not inclined to interfere, and therefore, the remedy of appeal under Section 61(4) of the IBC is rendered impractical and without any purpose.

In the case of Bank of India v. Agnipa Energo (Private) Limited, the financial creditor, who was the sole member of the CoC, appeared in person and prayed for initiation of liquidation. The corporate debtor was an MSME, and therefore, under the IBC, the erstwhile suspended directors were allowed to offer resolution plans for their revival. In this case, the sole financial creditor tried to misuse the power of commercial wisdom by pressing for liquidation despite the fact that the erstwhile directors were offering a resolution plan worth more than 20 times of the liquidation value.

In the case of Air Travel Enterprises India Limited v. Lukose Joseph, the corporate debtor pointed out that the CoC, without even doing a valuation of the business, proceeded with its liquidation. Form G was also not initiated. Therefore, the argument of commercial wisdom was erroneously allowed. 

The apex court has, on repeated occasions, taken a view that the primary focus of the IBC is the revival and continuation of the corporate debtor by protecting it from liquidation. The problem lies in not calling for resolution plans at all. Inviting resolution plans and, after analyzing the same, approaching liquidation would, in the author’s view, amount to commercial wisdom. If the misuse of commercial wisdom is not prevented, IBC would become a fast-track debt recovery mechanism for financial creditors with the presence of unfettered powers under the above-cited provisions.

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