NCLT Not Mere Counter Signatory, Can Reject CoC-Approved Resolution Plan Where CIRP Found 'Suspect': NCLAT

The National Company Law Appellate Tribunal (NCLAT) on Tuesday has held that an Adjudicating Authority is not bound to approve a resolution plan, even if it is approved by the Committee of Creditors, where the insolvency process itself raises concerns about its integrity.

A bench of Judicial Member Justice N Seshasayee and Technical Member Arun Baroka observed,

“An Adjudicating Authority is not a mere counter signatory to the CoC to lend its approval to a resolution plan, but a sentinel on the qui vive to uphold the spirit and objectives of the IBC," 

"Beyond the visible statutory compliance, if there exist any tangible facts which on a logical analysis indicate that there may exist a case for statutory fraud or misuse of the Code which mars the integrity of the insolvency process, then an Adjudicating Authority has every right to probe the same,” it added.

The ruling came while dismissing appeals filed by the Resolution Professional, the Committee of Creditors and the Successful Resolution Applicant against the rejection of a Rs. 7.75 crore resolution plan for Zep Infratech Ltd.

The corporate debtor was admitted into CIRP on account of a corporate guarantee. The Committee of Creditors had approved the resolution plan, which was remanded once by the Adjudicating Authority and thereafter approved again.

However, the Adjudicating Authority rejected the plan and ordered liquidation, holding that the process suffered from serious deficiencies.

Before the appellate tribunal, the appellants contended that the Adjudicating Authority had exceeded its jurisdiction under Section 31 of the Insolvency and Bankruptcy Code. It was argued that once the requirements under Section 30(2) are satisfied, the Adjudicating Authority is bound to approve the plan and cannot question the commercial wisdom of the Committee of Creditors.

The tribunal examined the material relied upon by the Adjudicating Authority and noted concerns regarding a “systematic reduction in value of the tangible assets of the CD for three consecutive financial years,” the “disappearance of substantial liability of about ₹440 crores,” and the “failure of the RP to hold an audit” and place relevant facts before the Committee of Creditors.

It further observed that without a proper audit covering the look back period, it would not be possible to ascertain whether there were any preferential, undervalued or fraudulent transactions, and that this affected the reliability of the Information Memorandum.

The tribunal also recorded that the Adjudicating Authority had found the very initiation of the CIRP to be “suspect” and had raised concerns that the process appeared to be aimed at acquiring the assets of the corporate debtor rather than resolving insolvency.

On the scope of judicial review, the tribunal reiterated that while the commercial wisdom of the Committee of Creditors is central to the insolvency framework, it does not prevent the Adjudicating Authority from examining whether the process itself is vitiated by lack of transparency or misuse of the Code.

Agreeing with the Adjudicating Authority, the tribunal held that the issues identified went to the root of the insolvency process and affected the credibility of the Information Memorandum and the resolution plan.

Accordingly, the tribunal dismissed all three appeals.