Section 33(1)(a) IBC | Liquidation Mandatory When Promoter Fails Settlement Commitments & CoC Cooperation : NCLAT Chennai

The National Company Law Appellate Tribunal (NCLAT), Chennai, has dismissed an appeal challenging the liquidation of a corporate debtor under Section 33(1)(a) of the Insolvency and Bankruptcy Code (IBC), 2016. The judgment underscores that liquidation is a justified legal consequence when resolution efforts fail due to the promoter's non-cooperation and repeated failure to honor settlement commitments, despite multiple extensions granted by the Committee of Creditors (CoC) and the adjudicating authority.

Background & Facts

The Dispute

The appellant, Mr. Srinivasa Rao Idulpulapati, was the erstwhile Chief Promoter and Managing Director of the corporate debtor, M/s. ISR Infra Pvt. Limited. The corporate debtor faced financial distress, leading to its account being declared a Non-Performing Asset (NPA) by the sole financial creditor, Indian Overseas Bank. An operational creditor, M/s. CMR Transport Contractors, initiated proceedings under Section 9 of the IBC, resulting in the admission of the corporate debtor into the Corporate Insolvency Resolution Process (CIRP).

Key Facts

• The appellant initially operated as a partnership firm in 2007, later converted into a private limited company in the real estate and infrastructure sector.
• The corporate debtor’s account with Indian Overseas Bank slipped into NPA due to business failures and mounting overdues.
• The appellant settled the dues of the operational creditor, M/s. CMR Transport Contractors, and the creditor filed Form FA (withdrawal application) with the Resolution Professional.
• Despite multiple attempts by the appellant to propose a One-Time Settlement (OTS) with the financial creditor, the bank insisted on full down payment, leading to the failure of settlement efforts under Section 12A of the IBC.
• The appellant made several OTS proposals, including:
  • Initial offers to settle the dues.
  • Revised offers, including a commitment to deposit Rs. 2.20 crores in addition to Rs. 80 lakhs already paid, with the balance to be settled in 2-3 months.
• The financial creditor declined the OTS proposals, and the appellant failed to honor his commitments despite repeated extensions.

Procedural History

• 12.06.2019: Corporate debtor admitted into CIRP (CP (IB) No. 382/9/HDB/2019) on the application of the operational creditor.
• September 2019: Committee of Creditors (CoC) constituted.
• 26.02.2020: CIRP extended by 60 days by the NCLT Amravati Bench.
• 07.03.2020: Further extension granted up to 05.05.2020.
• 15.07.2020: Last date for submission of Resolution Plan; no plan received. Appellant offered OTS to the financial creditor.
• 19.10.2020 & 20.10.2020: CoC conducted e-voting in the 7th CoC meeting, approving liquidation with 100% voting.
• 24.11.2020: NCLT reserved orders on the Resolution Professional’s application (IA No. 176/2019) seeking liquidation under Section 33(1)(a) IBC.
• Post-24.11.2020: Appellant filed recall applications (IA No. 30/2021) seeking time to settle dues, citing health reasons and Covid-induced conditions. Extensions were granted but not honored.
• 07.04.2021: Recall application (IA No. 30/2021) rejected by NCLT.
• 10.05.2021: NCLT passed impugned order directing liquidation of the corporate debtor.
• 2021: Appellant filed Company Appeal (AT) (CH) (Ins) No. 196/2021 before NCLAT Chennai.

Relief Sought

The appellant sought the setting aside of the NCLT’s order dated 10.05.2021, arguing that liquidation was premature and that the corporate debtor should have been given an opportunity to revive through settlement or resolution.

The Legal Issue

The central question before the NCLAT was whether the adjudicating authority was justified in ordering liquidation under Section 33(1)(a) of the IBC when:

1. The corporate debtor failed to receive any Resolution Plan within the stipulated timeline.
2. The promoter’s repeated commitments to settle dues under Section 12A were not honored despite multiple extensions.
3. The CoC, with 100% voting, approved the liquidation proposal.

Arguments Presented

For the Appellant

• The appellant contended that the liquidation order was premature and unjustified, as efforts to settle dues with the financial creditor were ongoing.
• He argued that the NCLT failed to consider his bona fide efforts to revive the corporate debtor, including multiple OTS proposals.
• The appellant submitted that the financial creditor’s insistence on full down payment, rather than engaging in settlement discussions, was unreasonable.
• He claimed that the corporate debtor’s revival as a going concern was jeopardized due to the abrupt closure of the CIRP process.

For the Respondent (Resolution Professional)

• The Resolution Professional argued that the liquidation order was justified as no Resolution Plan was received within the extended CIRP timeline.
• The appellant failed to honor his OTS commitments despite multiple extensions granted by the CoC and the NCLT.
• The conduct of the appellant did not inspire confidence, as he repeatedly sought extensions but failed to comply with his own proposals.
• The CoC, with 100% voting, approved the liquidation proposal, reflecting the creditors’ collective wisdom and the futility of further resolution efforts.

The Court's Analysis

The NCLAT examined the factual and legal matrix surrounding the liquidation order, emphasizing the following key principles:

1. Primacy of CoC’s Decision: The tribunal noted that the CoC, with 100% voting, approved the liquidation proposal. Under the IBC, the CoC’s commercial wisdom is paramount, and courts/tribunals are generally reluctant to interfere with its decisions unless they are perverse or contrary to law.

   "The wisdom of the CoC, which was carried with 100% voting in favor of issuing a direction for liquidation, calls for no interference."

2. Failure of Resolution Efforts: The tribunal observed that despite multiple opportunities, the appellant failed to submit a viable Resolution Plan or honor his OTS commitments. The CIRP timeline was extended repeatedly at the appellant’s request, but no concrete resolution emerged.

   "The attempt to revive the CD during CIRP period failed, and the wisdom of the CoC... calls for no interference."

3. Non-Cooperation and Dereliction of Duty: The NCLT had recorded that the appellant’s conduct, including non-cooperation with the Resolution Professional and repeated failure to honor commitments, justified the liquidation order. The NCLAT upheld this finding, holding that the appellant’s dereliction of duty left no option but liquidation.

   "The Appellant has to blame himself for his own dereliction and conduct, when despite of various opportunities having been granted, he has failed to act in a bonafide manner."

4. Legal Consequence of Failed CIRP: The tribunal reiterated that liquidation under Section 33(1)(a) IBC is a legal consequence when resolution efforts fail. The provisions of the IBC are designed to ensure timely resolution or liquidation, and the appellant’s failure to comply with the process justified the impugned order.

The Verdict

The NCLAT dismissed the appeal, upholding the NCLT’s order dated 10.05.2021 directing the liquidation of the corporate debtor. The tribunal held that:

• The liquidation order was in consonance with Section 33(1)(a) of the IBC and did not suffer from any legal infirmity.
• The appellant’s repeated failure to honor settlement commitments and non-cooperation with the CoC justified the liquidation.
• The appeal lacked merit, and all pending interlocutory applications were closed.

What This Means For Similar Cases

Liquidation Is the Last Resort, But Justified When Resolution Fails

This judgment reinforces that liquidation under Section 33(1)(a) IBC is not a punitive measure but a legal consequence when resolution efforts fail. Practitioners must note:

• The CoC’s commercial wisdom is sacrosanct, and tribunals will not interfere unless the decision is perverse or contrary to law.
• Repeated failure to honor settlement commitments or submit a viable Resolution Plan within the stipulated timeline will likely result in liquidation.

Promoters Must Act in Good Faith During CIRP

The judgment underscores the importance of promoters acting in good faith during the CIRP:

• Non-cooperation with the Resolution Professional or failure to honor commitments can lead to liquidation, as seen in this case.
• Promoters cannot rely on vague assurances or repeated extensions without concrete action. Courts/tribunals will scrutinize the promoter’s conduct to determine whether liquidation is justified.

Section 12A Withdrawal Is Not Guaranteed

The case highlights that Section 12A of the IBC, which allows for withdrawal of CIRP proceedings upon settlement, is not an automatic right:

• The financial creditor’s consent is crucial, and insistence on full payment (as in this case) can derail settlement efforts.
• Promoters must ensure that settlement proposals are realistic and backed by concrete action to avoid liquidation.