NCLAT Chennai Restores CIRP Of Jeppiaar Cements, Says Fairness Must Prevail In Insolvency Resolution
The Chennai National Company Law Appellate Tribunal (NCLAT) has set aside the liquidation order dated 26 August 2022 against Jeppiaar Cements Pvt. Ltd., while observing that where multiple options exist to resolve a corporate debtor's insolvency, fairness should prevail, including settlement under Section 12A of the Insolvency and Bankruptcy Code (IBC), which permits the withdrawal of the CIRP upon a successful settlement with creditors.
A Bench of Judicial Member Justice N. Seshasayee and Technical Member Jatindranath Swain restored the Corporate Insolvency Resolution Process (CIRP) and directed the Resolution Professional (RP) to explore withdrawal of the proceedings. It held:
“The broad statement therefore be made: Where there are more options than one to end an insolvency condition of the corporate debtor, then fairness involved in choosing an option should be allowed to prevail. This would imply that the insolvency resolution process cannot enjoy greater prominence than the end result it aims to achieve”
Jeppiaar Cements had stood as a corporate guarantor for loans availed by Jeppiaar Power Corporation Ltd. from Indian Bank. Following defaults, Indian Bank initiated insolvency proceedings under Section 7 of the IBC, which allows a financial creditor to initiate CIRP against a corporate debtor, and the CIRP commenced in October 2019.
The Committee of Creditors (CoC) comprised Indian Bank with a 96.65% voting share and HDFC Bank with a 3.35% voting share.
The CIRP period was extended due to disruptions caused by COVID 19, with the outer limit calculated to end on 11 September 2022. Meanwhile, Indian Bank sanctioned a One Time Settlement (OTS) in March 2022, allowing the directors and guarantors to repay the dues. The appellants initially made only partial payment.
Despite this, the RP filed an application under Section 33(1) seeking liquidation, allegedly acting on advice from the Registry, even though the CoC had not voted for liquidation. Indian Bank later extended the deadline granted to the personal guarantors for complying with the OTS.
On 26 August 2022, the National Company Law Tribunal (NCLT) ordered liquidation.
Thereafter, Indian Bank allowed the personal guarantors of the corporate debtor to fulfil their entire OTS commitment and acknowledged the same by issuing a No Objection Certificate (NOC). The Bank subsequently filed an application under Section 12A seeking withdrawal of the CIRP, but the NCLT dismissed it.
The suspended directors challenged the liquidation order, arguing that the CoC had not approved liquidation with the requisite 66% voting share and that the order violated Section 33(2) of the IBC. They also contended that OTS payments were being made and were subsequently fully complied with, satisfying the financial creditors.
The liquidator defended the order, contending that once the CIRP timelines expired, liquidation became inevitable under Section 33(1). It was also argued that operational creditors remained unpaid and that withdrawal under Section 12A was unavailable after liquidation had been ordered. Indian Bank however, supported the appellants, though the Liquidator pointed out that the bank's own vacillation during the CoC meetings had heavily contributed to the situation.
The Bench held that the RP erred by filing the application under Section 33(1) without CoC approval and by acting on the Registry's advice instead of exercising his independent judgment. It held that the RP should have sought an extension. It observed:
“To borrow the metaphor of the pre-eminent Chagla J, a resolution professional is not required to trim his sails the way the Registry instructs. Where he is convinced on the right course action but finds resistance from the Registry, then he should require the Registry to place the matter before the tribunal.”
It noted that even if the RP intended to act on the Registry's advice, he should have convened a CoC meeting to deliberate on the issue. It held:
“A resolution professional is central to the resolution process, but suddenly he appeared to have reacted in panic when he should have asserted his role and persisted with his move to approach the Adjudicating Authority for a general direction that he initially proposed to obtain. A good start ended abruptly inappropriately.”
The Tribunal also held that the 330 day outer limit for CIRP is directory and not mandatory. It observed that the RP should have waited until 11 September 2022 before invoking Section 33(1), particularly since settlement was in progress.
Further, it observed that in a conventional resolution process, the object is to realise the maximum value of the corporate debtor's assets through either a resolution plan under Section 31 or liquidation under Section 33 for payment to creditors. The Bench held:
“It may hide like the hidden side of the moon, yet it unquestionably exists. Unfortunately, the excessive spotlight on Sec.31 has blurred the functional utility of Sec.12A as a tool of insolvency resolution. When the exit route through Sec12A has the efficacy to conclude an insolvency condition, it will be uncharitable to underestimate this non-violent provision as a legislative charity when it ought to be respected as a statutory opportunity to resolve an insolvency-condition.”
The Bench also noted that besides the promoters of the corporate debtor, operational creditors would have greater value for their debt through withdrawal of CIRP by way of settlement.
Accordingly, the NCLAT set aside the liquidation order dated 26 August 2022, restored the CIRP and directed the Resolution Professional to explore withdrawal of the proceedings under Section 12A.
For Appellants: Advocates T.K. Bhaskar and Ravi Rajagopalan
For Respondents: Advocates Abhishek Anand, Karan Kohli & Aanya Gupta for R1 & R2; Senior Advocate Jayesh B Dolia, Senior and N. Varsha for R3