IBC Transparency Mandate | Resolution Plan Rejection Upheld for Unexplained Asset Depletion and Inadequate Disclosure : NCLAT

The National Company Law Appellate Tribunal has delivered a landmark ruling affirming that the commercial wisdom of the Committee of Creditors cannot override fundamental transparency requirements under the Insolvency and Bankruptcy Code. Where the Information Memorandum is materially incomplete and asset depletion goes unexplained, the Adjudicating Authority is not only empowered but duty-bound to reject a resolution plan - even if approved unanimously by creditors.

Background & Facts

The Dispute

M/s Zep Infratech Limited (CD), a micro, small and medium enterprise (MSME), was subjected to a Corporate Insolvency Resolution Process (CIRP) after its financial creditor, Raj Radhe Finance Ltd., initiated proceedings under Section 7 of the IBC. The CD had provided a corporate guarantee to M/s Shree Ram Cottex Industries Pvt. Ltd., the principal borrower, which defaulted on its loan. The Adjudicating Authority admitted the petition on 31.07.2023, appointing an Interim Resolution Professional (IRP). The CIRP proceeded with a two-member Committee of Creditors (CoC), comprising the petitioning creditor (9.5% voting share) and Rajendra M. Thakkar (Ravasia) & Sons Pvt. Ltd. (90.5% voting share), alongside operational creditors with aggregate claims exceeding ₹251 crores, primarily from the Income Tax Department.

Key Facts

• The CD’s assets included four immovable properties in Delhi, Goa, Ahmedabad, and Amreli, with combined fair value estimated between ₹920.22 crores and ₹921.23 crores.
• The CD’s balance sheet as of 31.03.2021 showed property, plant and equipment (PPE) valued at ₹15.06 crores, which dropped to ₹8.29 crores by 31.03.2022 and further to ₹3.76 crores by 31.03.2023.
• Intangible assets of ₹8.77 lakhs and inventories worth ₹2.92 crores disappeared entirely between 2021 and 2022.
• Cash and bank balances fell from ₹3.14 crores to ₹14.21 lakhs, and short-term borrowings of ₹443.35 crores vanished from the books without explanation.
• Other current assets surged by ₹21.60 crores in FY 2021-22, attributed to a slump sale, but no documentation was provided.
• The CD had unsecured loans outstanding to related parties: Starline Leasing (₹8.40 crores), Kolon Investment (₹7.80 crores), Opel Securities (₹7.80 crores), and Gabriel Ventures (₹2.30 crores).
• The Income Tax Department’s claim of ₹251.79 crores (AY 2021-22) was admitted but allocated only ₹50 lakhs (0.20%) in the resolution plan.
• The Resolution Applicant (SRA), M/s Deepvir Enterprise and M/s Kanha Ventures, had a combined net worth of ₹16.94 crores and submitted a plan value of ₹7.75 crores.
• The SRA deposited ₹25 lakhs as EMD and ₹1.68 crores as performance guarantee.
• The Information Memorandum failed to disclose the Ahmedabad property as a distinct asset, referring to it only as part of Gujarat, and omitted details of related-party transactions.
• No forensic audit or PUFE proceedings were initiated despite significant balance sheet erosion during the look-back period (31.07.2021 to 31.07.2023).

Procedural History

• 10.03.2023: Petition under Section 7 filed by Raj Radhe Finance Ltd.
• 31.07.2023: NCLT Ahmedabad admitted the petition and appointed IRP.
• 31.08.2023: First CoC meeting; IRP reported only reviewing raw tally statements.
• 05.12.2023, 12.12.2023, 23.12.2023: CoC held three meetings to deliberate on resolution plans.
• 07.05.2024: Modified resolution plan submitted by SRA with plan value of ₹7.75 crores; unanimously approved by CoC.
• 30.04.2024: Adjudicating Authority initially rejected plan and remanded to CoC.
• 16.01.2024 to 24.04.2024: Multiple affidavits filed by RP and SRA addressing valuation and financial capacity.
• 23.06.2025: Adjudicating Authority passed impugned order rejecting plan, citing lack of transparency, unexplained asset depletion, non-initiation of PUFE, and inadequate disclosure.
• 21.04.2026: NCLAT delivered judgment on three appeals (C.A. 1061, 1043, and 946 of 2025).

The Parties' Positions

Appellants (RP, CoC, SRA): Argued that the Adjudicating Authority overstepped its statutory role under Section 31 IBC by second-guessing commercial wisdom. They contended that no stakeholder objected to the plan, valuation was accepted by CoC, and the SRA demonstrated financial capacity through EMD and performance guarantee. Reliance was placed on Sashidhar v. Indian Overseas Bank, Essar Steel, and Maharashtra Seamless to assert that judicial review must be confined to procedural compliance.

Respondent (Adjudicating Authority): Maintained that the resolution process was marred by systemic opacity: unexplained asset write-offs, failure to conduct forensic audit, omission of key liabilities, and non-disclosure of related-party transactions. The Adjudicating Authority argued that the plan was a disguised asset-stripping exercise, exploiting Section 32A’s clean slate provision to evade ₹251 crores in tax liabilities.

Relief Sought

The appellants sought quashing of the Adjudicating Authority’s order dated 23.06.2025, reinstatement of the CoC-approved resolution plan, and direction to approve the plan under Section 31 IBC. The liquidator sought confirmation of liquidation.

The Legal Issue

Can the Adjudicating Authority reject a resolution plan approved by the Committee of Creditors on the grounds of incomplete disclosure, unexplained asset depletion, and absence of forensic audit - even in the absence of formal objections from creditors - when such omissions undermine the transparency and integrity of the CIRP?

Arguments Presented

For the Appellant/Petitioner

The appellants contended that the Adjudicating Authority’s role under Section 31 IBC is strictly supervisory and confined to verifying procedural compliance under Sections 30(2) and 61(3). They relied on Sashidhar v. Indian Overseas Bank and Essar Steel to assert that commercial wisdom of the CoC is non-justiciable. They argued that valuation discrepancies are within the CoC’s domain, and the absence of objections from creditors or statutory authorities precludes judicial suspicion. The RP emphasized that Form G disclosed the Ahmedabad property as part of Gujarat, and public notices were issued via email, courier, and publication. The SRA highlighted its net worth of ₹16.94 crores and demonstrated financial capacity through EMD and performance guarantee deposits.

For the Respondent/State

The Adjudicating Authority argued that the resolution process was fundamentally flawed. The Information Memorandum concealed material facts: disappearance of ₹440 crores in liabilities, unexplained asset write-downs, and non-disclosure of related-party loans. The failure to initiate a forensic audit or PUFE proceedings during the look-back period rendered the plan suspect. The allocation of ₹50 lakhs to the Income Tax Department’s ₹251.79 crore claim, while paying 46.44% to two financial creditors, indicated discriminatory treatment. The Authority relied on M.K. Rajagopalan v. SBI to assert that commercial wisdom requires full disclosure and cannot be invoked where information is incomplete or misleading.

The Court's Analysis

The NCLAT undertook a rigorous examination of the statutory framework under the IBC, distinguishing between procedural compliance and substantive integrity. The Court acknowledged the primacy of the CoC’s commercial wisdom but emphasized that such wisdom is valid only when grounded in complete, accurate, and transparent information.

"Commercial wisdom of CoC means a considered decision taken by CoC with reference to the commercial interests and the interest of revival of the corporate debtor and maximisation of value of its assets. This wisdom is not a matter of rhetoric but is denoting a well-considered decision by the protagonist of CIRP i.e. CoC."

The Court held that the Adjudicating Authority was not merely entitled but obligated to scrutinize the Information Memorandum when its contents raised red flags. The systematic erosion of assets - ₹15.06 crores to ₹3.76 crores in two years - without explanation, coupled with the disappearance of ₹440 crores in liabilities, constituted a material irregularity. The absence of a forensic audit during the look-back period (31.07.2021 - 31.07.2023) meant the CoC could not have made an informed decision.

The Court rejected the appellants’ argument that lack of creditor objections validated the process. It held that silence does not equate to consent, particularly when statutory obligations under Regulation 6A and the duty of full disclosure under the IBC’s spirit are breached. The omission of the Ahmedabad property’s true nature and the failure to disclose related-party loans to BVM Finance and Healwell International further undermined the credibility of the process.

The Court also emphasized that Section 32A’s clean slate provision cannot be weaponized to extinguish statutory dues without justification. The allocation of ₹50 lakhs to the Income Tax Department’s ₹251.79 crore claim, while paying substantial recoveries to two financial creditors, indicated a plan designed to shield assets rather than revive the corporate debtor.

The Court concluded that the resolution process, while formally compliant, was substantively defective. The Adjudicating Authority’s suspicion was not speculative but logically derived from the financial data on record. The Court affirmed that the IBC’s objective is not merely to resolve insolvency but to do so with integrity, transparency, and fairness.

The Verdict

The appeals were dismissed. The NCLAT confirmed the Adjudicating Authority’s order dated 23.06.2025 rejecting the resolution plan and directed the liquidation of M/s Zep Infratech Limited. The Court further directed the Insolvency and Bankruptcy Board of India (IBBI) to investigate the conduct of the Resolution Professional for potential professional misconduct and systemic lapses in the CIRP process.

What This Means For Similar Cases

Transparency Is Non-Negotiable

• Practitioners must ensure that the Information Memorandum discloses all material assets, liabilities, and transactions - including related-party dealings and asset write-downs - without omission or obfuscation.
• Failure to disclose unexplained asset depletion during the look-back period may trigger judicial rejection, even if creditors approve the plan.

Forensic Audit Is Not Optional in High-Risk Cases

• Where a corporate debtor shows significant balance sheet erosion over consecutive years, the RP must initiate a forensic audit and present findings to the CoC.
• Absence of such audit, especially when liabilities vanish without explanation, renders the resolution plan vulnerable to rejection.

Statutory Dues Cannot Be Disregarded as Token Payments

• Allocation of nominal amounts to statutory creditors (e.g., Income Tax, EPFO) while paying substantial recoveries to financial creditors may be viewed as discriminatory and indicative of asset-stripping.
• The Adjudicating Authority may infer ulterior motives if the plan disproportionately benefits secured or financial creditors at the expense of statutory dues.

Commercial Wisdom Requires Substance, Not Just Form

• The CoC’s approval is not a rubber stamp. Courts will examine whether the CoC had access to complete, accurate, and audited financial data before voting.
• A plan approved on incomplete information cannot be protected under the doctrine of commercial wisdom.

Silence of Creditors Does Not Validate Fraud

• The absence of objections from creditors or statutory authorities does not cure fundamental defects in disclosure.
• The Adjudicating Authority has an independent duty to uphold the integrity of the CIRP, even in the absence of formal challenges.

Role of the Resolution Professional Is Under Scrutiny

• RPs must proactively identify and disclose irregularities, not wait for creditor complaints.
• Failure to initiate PUFE proceedings where balance sheet anomalies exist may constitute professional negligence.
• IBBI may initiate disciplinary proceedings against RPs whose conduct undermines the CIRP’s credibility.