NCLAT Sets Aside Liquidator Appointment After NCLT Overlooked CoC's Recommendation

The National Company Law Appellate Tribunal (NCLAT) at Delhi has ruled that an adjudicating authority cannot appoint a liquidator without considering the Committee of Creditors' (CoC) unanimous recommendation.

It set aside an NCLT order that independently appointed an insolvency professional from an IBBI panel instead of considering the CoC's choice.

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Members Arun Baroka and Indevar Pandey observed that Section 34(1) of the Insolvency and Bankruptcy Code makes the resolution professional's continuation as liquidator the default position. It ruled:

"Section 34(1) of the Code makes the resolution professional's continuation as Liquidator the default position, displaceable only on the grounds set out in Section 34(4). Whether or not those grounds applied to the Appellant, the CoC's own recommendation of a named Liquidator, arrived at unanimously and reaffirmed twice, was material that the Adjudicating Authority was required to consider before appointing someone else. An order that appoints a Liquidator without any reference to the CoC's recommendation cannot be said to have applied its mind to that recommendation at all."

The case arose from the insolvency of Macro Dairy Ventures Pvt. Ltd. Punjab National Bank, the sole financial creditor, resolved to liquidate the company and unanimously recommended insolvency professional Rajesh Mehru as the liquidator. The CoC later reaffirmed that decision.

The Chandigarh bench of the NCLT, however, appointed another insolvency professional from the IBBI panel, relying on an IBBI communication dated July 18, 2023. Mehru's rectification application was dismissed, leading to the present appeal.

Before the appellate tribunal, Mehru argued that the NCLT overlooked the CoC's unanimous recommendation and instead made an independent appointment. He also contended that the IBBI communication did not apply to him because he had never served as the interim resolution professional or resolution professional.

Since he had never held either position, he argued that it did not apply to his case. He further submitted that objections regarding his Authorization for Assignment (AFA) were never part of the NCLT's reasoning.

The appellate tribunal found that the NCLT had neither recorded nor considered the CoC's recommendation before appointing the liquidator. It also observed that Section 34(4) permits replacement of a resolution professional as liquidator only in limited situations. Referring to its earlier decisions, the bench ruled that the provision cannot be converted into a blanket prohibition through a general communication.

The bench further held that the July 18, 2023, communication was factually inapplicable because Mehru had never served as the interim resolution professional or the resolution professional.

"A communication aimed at preventing the outgoing resolution professional from becoming Liquidator, whatever its general validity, could have no application to a professional who held no such prior office. The Adjudicating Authority's reliance on it was therefore misconceived on the facts before it, quite apart from the question of the communication's general validity." the tribunal ruled.

Allowing the appeal, the tribunal directed that Mehru be appointed as liquidator after verification of his current AFA. It also directed the outgoing liquidator to hand over charge within two weeks thereafter.

The tribunal further directed that he be compensated for the work already performed. It clarified that all lawful steps already taken during the liquidation process would continue to remain valid.