Financial Creditor Who Initiated CIRP Must Bear Costs When Proceedings Are Set Aside: NCLT Chandigarh

The National Company Law Tribunal (NCLT) at Chandigarh has held that in the present case, where a corporate insolvency process was set aside and the parties settled their dispute, the costs incurred during the process must be borne by the financial creditor that initiated it.

A coram of Judicial Member Khetrabasi Biswal and Technical Member Shishir Agarwal said, “It can be seen that once the admission of CIRP itself is set aside and the dispute is settled between the initiating Financial creditor and the CD, the liability to bear CIRP costs must follow the party who invoked and pursued the insolvency proceedings, particularly when the CIRP process did not culminate in resolution or liquidation and a settlement was reached between them."

The tribunal was hearing a plea by the resolution professional of White Water Hospitality Pvt Ltd seeking payment of unpaid insolvency process costs of about Rs 30.91 lakh, including professional fees.

The insolvency proceedings had been initiated in November 2019 by V.I.R. Foods Ltd. after alleging default. The case was admitted, and a committee of creditors was formed, which approved the fees of the interim resolution professional and later the resolution professional.

The admission order was later set aside by the appellate tribunal, which found the initiation of the insolvency process to be patently illegal. The matter then reached the Supreme Court, where the corporate debtor agreed to settle the dues of the initiating creditor, and the court sent back the limited issue of payment of insolvency costs to the Tribunal.

Before the tribunal, the other members of the committee of creditors argued that the corporate debtor should bear the costs since it had admitted its liability and settled the dues. The corporate debtor opposed this, stating that it could not be made to pay for a process that had been found to be wrongly initiated and that the initiating creditor should bear the costs.

Rejecting these submissions, the tribunal said the work carried out during the insolvency process cannot go unpaid merely because the proceedings were later set aside.

It observed, “The RP renders services during the process of CIRP and the work undertaken during the subsistence of the CIRP cannot be rendered unpaid merely because the proceedings were subsequently set aside. CIRP costs, including RP fees, are accorded priority and must be discharged for the period during which the process remained in force"

The bench added that other creditors could not be burdened with these costs, noting, “Their participation was incidental to the statutory process that followed admission. Therefore, once the admission order stands set aside and the matter has been resolved between the initiating Financial Creditor and the Corporate Debtor, the liability to bear the outstanding CIRP costs, including the approved fees of the IRP/RP and other expenses, must rest upon the Applicant who set the insolvency process in motion, and the same cannot be thrust upon the other CoC members merely by virtue of their participation in the process pursuant to the now set aside CIRP."

Addressing the argument against the corporate debtor, the tribunal said, “Since the very initiation of CIRP was declared illegal by the NCLAT vide order dated 17.08.2023, the Corporate Debtor cannot be held liable for any CIRP costs arising from that vitiated process."

The tribunal ultimately directed V.I.R. Foods Ltd to pay about Rs 30.91 lakh to the resolution professional towards the outstanding insolvency process costs.