NCLT Kochi Says CoC Cannot Cripple Insolvency Process By Refusing To Fund Essential CIRP Costs

The National Company Law Tribunal (NCLT) at Kochi has ruled that the Committee of Creditors (CoC) cannot cripple the Corporate Insolvency Resolution Process (CIRP) by refusing to meet its essential costs.

It observed that the insolvency process cannot function if the Resolution Professional is deprived of the funds required to discharge statutory duties.

A bench of Judicial Member Vinay Goel and Technical Member Ravichandran Ramasamy observed:

“The Committee of Creditors, being the supreme decision-making body during the CIRP, cannot cripple the insolvency process by refusing to make arrangements for meeting the essential costs of the process. Any action or act of the CoC to deprive the Resolution Professional of such funds would render the entire process impossible, and the Resolution Professional would not be able to perform his duties.”

The tribunal was hearing an application filed by the Resolution Professional (RP) of Davani Silks Private Limited seeking directions to the CoC members to release the outstanding CIRP costs, including his professional fees.

The company was admitted into CIRP in May 2024. The CoC subsequently confirmed the applicant as the Resolution Professional and approved his remuneration at ₹2 lakh per month.

According to the RP, only ₹3 lakh was paid towards the CIRP expenses. He contended that although his remuneration had initially been approved, the CoC later insisted that his fees and other CIRP costs be paid only from the sale proceeds of the company's assets during liquidation.

The CoC opposed the application. It argued that the RP had accepted payment of his fees from the realisation of assets. It also submitted that he had voluntarily proposed reducing his remuneration in view of the company's financial condition.

Rejecting the contention, the tribunal observed that the CIRP Regulations treat the Resolution Professional's fee as part of the insolvency resolution process costs. It held that those costs may be met from the corporate debtor's funds, contributions by the applicant or CoC members, or interim finance.

The tribunal also observed that the insolvency process is intended to achieve resolution and value maximisation and cannot be treated as a debt recovery mechanism.

“The process for resolution under the IBC, 2016, cannot be equated with a recovery mechanism. The CoC and its members have been placed at a very high pedestal under the scheme of the IBC. The entire process is a creditor-driven mechanism, and the wisdom of the CoC has been given prime importance; the proportionate duties and obligations of the CoC are also strict in nature. It is the duty of the CoC to pump in funds in case interim finance is not adequate or available. The attempt to withdraw claims has no bearing on their liability to contribute towards the CIRP costs. If we allow such types of things, it would tarnish the entire scheme and objective of the IBC.”, the tribunal observed.

The tribunal observed that a Resolution Professional is a statutory functionary who acts for the benefit of all stakeholders and necessarily incurs expenditure in performing duties under the Code. It held that where the corporate debtor lacks sufficient funds and interim finance is unavailable, the responsibility to ensure continuation of the CIRP rests with the CoC.

It further noted that none of the CoC members had disputed the genuineness or admissibility of the CIRP expenses placed before them. The tribunal therefore held that they were liable to contribute towards those expenses in proportion to their respective voting shares.

On the question of remuneration, the tribunal took note of the RP's voluntary concession to restrict his fee to ₹1 lakh per month for the period from June to November 2024 and approved the reduced amount.

It also held that since no extension of the CIRP had been granted, the RP was not entitled to regular remuneration after expiry of the statutory period as a matter of right. However, considering that he continued to discharge duties connected with the proceedings until the liquidation order, the tribunal awarded him ₹10,000 per month for that period.

The tribunal also cautioned creditors against attempting to distance themselves from the insolvency process after initiating it.

“After commencement of CIRP, a creditor cannot simply walk out of the process or avoid its responsibilities by merely withdrawing its claim. Any withdrawal from the insolvency process can only be in accordance with the provisions of the Code and the procedure prescribed thereunder. If creditors are permitted to initiate CIRP and thereafter withdraw their claims or disassociate themselves from the process whenever recovery appears unlikely, the very objective of the Code would be defeated, and the insolvency mechanism would be reduced to a mere recovery tool.”, the tribunal observed.

The tribunal further observed that initiating CIRP for any purpose other than a bona fide insolvency resolution may attract action under Section 65 of the Code.

Partly allowing the application, the tribunal directed the CoC members to contribute towards the Resolution Professional's fees and all other admissible CIRP costs in accordance with their respective voting shares.

It also dismissed as infructuous the RP's separate application seeking a declaration that the CIRP had been fraudulently initiated, observing that the company had already been ordered into liquidation.

For Applicant: Advocate Sankar P Panicker

For Respondents: Krishnan Unni, PCS