NCLT Must Assess Prospects Of Recovering Arbitral Claim Before Ordering Liquidation: NCLAT

The NCLAT has set aside a liquidation order against a road infrastructure company, holding that the NCLT failed to assess the recovery prospects of an arbitral claim before ordering liquidation, relying instead on the fact that the claim could also be pursued during liquidation.

The company is Supreme Best Value Kolhapur (Shiroli) Sangli Tollways Pvt Ltd.

A bench of Justice Mohammad Faiz Alam Khan and Technical Member Naresh Salecha allowed an appeal filed by Phoenix ARC Limited, finding that the NCLT had not given cogent reasons for rejecting the creditors' unanimous decision to revive the insolvency process.

The company's principal asset is an arbitral award of approximately ₹318.94 crore against the Maharashtra Public Works Department (PWD), including ₹3 crore in litigation costs. Interest accrues at 12.5% a year from September 20, 2016, until payment.

The award is under challenge before the Bombay High Court, while execution proceedings are also pending.

Settlement discussions with the PWD under the government's Vivad Se Vishwas Scheme had considered approximately ₹363.60 crore, but no final settlement had been reached. The NCLAT also noted that the liquidator's preliminary report valued the company's total assets at approximately ₹390.48 crore, including the arbitral claim or receivable valued at around ₹386.69 crore, against liabilities of approximately ₹913.82 crore.

The NCLT had reasoned that the company could pursue the arbitral award even during liquidation and that restoring the corporate insolvency resolution process (CIRP) would serve no independent purpose. The NCLAT held that the NCLT should have compared the likely value, timelines and costs of pursuing the claim through resolution and liquidation.

“What we hold is that a bare, undifferentiated statement that a monetary claim can proceed in liquidation also, without any comparative assessment of realisable value, timelines, cost, and the market response cannot, without more, constitute a sufficient reason to override a unanimous, statutorily compliant CoC decision. We do not consider that Parliament, in enacting Section 33(1A) with retrospective application to pending CIRPs by way of the Explanation, intended the provision to be so readily rendered nugatory,” the bench observed.

The NCLT had also expressed concern that creditors could monetise the company's carried-forward tax losses of approximately ₹397 crore, accumulated over four years, potentially at the cost of the government exchequer.

Phoenix ARC submitted that a major part of these losses arose from interest payable on debt raised to construct the road asset and from depreciation. It argued that these amounts would be treated in accordance with applicable accounting and tax laws, and that their existence alone did not establish that reviving the CIRP would harm government revenue.

The NCLAT found that the concern had not been raised by any party or in the application seeking restoration. Nor had it been put to the resolution professional or the committee of creditors (CoC) for an explanation before the NCLT relied on it. The NCLT had not identified how the losses could be monetised or explained how this would affect the government exchequer.

The bench said the question of whether, and to what extent, an incoming resolution applicant could set off or carry forward the losses was a matter of substantive tax law for the tax authorities. It also found no specific finding that the CoC or resolution professional had engaged in fraud or abused the resolution process.

“We are of considered view that a conjectural apprehension of this nature, unaccompanied by any supporting material, reasoning, or opportunity to the affected party to respond, is an insufficient basis on which to override a unanimous, commercial decision of the CoC, taken pursuant to a specific statutory mechanism enacted for precisely such situations,” the bench observed.

The CoC had unanimously rejected liquidation on July 2, 2026, and sought up to 120 additional days to revive the CIRP under Section 33(1A) of the Insolvency and Bankruptcy Code.

Four resolution plans had earlier been rejected after negotiations. A fresh invitation for expressions of interest attracted seven applicants, five of whom submitted earnest money deposits. SMS Limited subsequently submitted an eighth expression of interest with an earnest money deposit of ₹1 crore.

The NCLAT said the fresh market interest supported the CoC's assessment that another resolution attempt could yield a better outcome. It clarified, however, that restoration is not automatic and that the NCLT retains discretion to order liquidation where the facts justify it.

The bench held that the liquidation order could not stand because it overrode the CoC's unanimous decision without cogent reasons.

“Impugned Order cannot be sustained which it overrides a unanimous, CoC decision without any cogent reasons and merely on a consideration that the monetisation of unabsorbed losses which was unpleaded, unexplained, and insufficiently supported on the record, could perhaps be misutilised.”, it ruled.

The NCLAT set aside the liquidation order and directed the parties to appear before the NCLT on October 26, 2026.