By Richa Saraf (firstname.lastname@example.org)
Insolvency and Bankruptcy Code was framed with the object to provide opportunity for revival to an insolvent company, however, since the rising number of liquidation cases, as against resolution, is a cause of worry.
“After more than a year of the Insolvency and Bankruptcy Code proceedings, there have been more liquidation cases than resolution of the non-performing assets accounts. According to a data from the Insolvency and Bankruptcy Board of India, in the National Company Law Tribunal, around 78 companies got liquidation orders since February 2017.”- quoted in an article in Business Standard.
“An analysis of companies that have completed the Corporate Insolvency Resolution Process (CIRP) till December reveals that liquidation orders were passed for as many as 30 companies. This is three times the number of 10 cases for which resolution was approved at the culmination of the CIRP, as per latest data available with the Insolvency and Bankruptcy Board of India. – quoted in an article in Indian Express.
In the midst of all this, National Company Law Appellate Tribunal in the case of V. Navaneetha Krishnan v. Central Bank of India, Coimbatore directed for reversibility of liquidation order. The Tribunal held-
“In view of Section 12A even during the liquidation period if any person, not barred under Section 29A, satisfy the demand of COC then such person may move before the Adjudicating Authority by giving offer which may be considered by the COC, and if by 90% voting share of the COC, accept the offer and decide for withdrawal of the application under Section 7 of IBC, the order of liquidation passed by the Adjudicating Authority will not come in the way of Adjudicating Authority to pass appropriate order.”
Can a company in liquidation be restored to good standing on application by the creditors or liquidator who has a change of heart regarding the company’s liquidation? If the wishes of the creditors are loud and clear it will be unfair to put a company into liquidation.
An order for liquidation is considered to have attained finality once made. However, it will not be correct to say that the liquidation proceedings means end of the company, since the company may still continue to carry on its business and be sold on going concern basis. It is only when the affairs of the company have been completely wound up, dissolving the company, it can be said that it is not be possible to seek its revival.
This article deliberates on the stage at which an application of revival or suspension of liquidation proceedings can be made, and the circumstances which can render suspension of liquidation proceedings, if at all.
Object of Insolvency Law:
It is relevant to refer to the Report of The Expert Committee on Company Law, wherein it is stipulated that the Insolvency law should strike a balance between rehabilitation and liquidation. It should provide an opportunity for genuine effort to explore restructuring/ rehabilitation of potentially viable businesses with consensus of stake holders reasonably arrived at. Where revival/ rehabilitation is demonstrated as not being feasible, winding up is resorted to. However, where circumstances justify, the process should allow for easy conversion of proceedings from one procedure to another. This will provide opportunity to businesses in liquidation to turnaround wherever possible.
The intent being very clear that even if the company is in liquidation, the company may still be resolved. It will be perhaps wise to remember one of the underlying principles of the law of insolvency, and to consider the impact of liquidation vis-à-vis resolution.
The Report further discusses that if creditors approach for winding up, opportunity should be given to debtor to file a scheme if such an opportunity is sought. The process should enable consultation of scheme with the creditors and converting the liquidation proceedings into restructuring proceedings, if the Tribunal is of the opinion that there are fair chances that the company may revive.
The object of the Code is to provide for revival of financially distressed companies, in a manner that balances the rights and interests of all stakeholders. Not only this, the Code was carefully drafted to avoid a regime that would allow defaulting corporate debtor to use resolution proceedings to defraud or frustrate their creditors. This is also apparent if one considers, amongst other things, that the committee of creditors drives the entire corporate insolvency resolution process.
From the above, it is apparent that the legislators’ intent was clearly not to restrict resolution to only those cases where final liquidation order is awaited, and thus, resolution even if possible during liquidation, should be given a chance, considering the likely benefit of a going concern, and better recovery for creditors. Where, it is evident that resolution proceedings will yield a better return for shareholders and creditors and jobs will be retained, there could be no reason to deny such an opportunity, merely on the ground that the company is already in liquidation. More so, when along with several associated social benefits, permission for resolution will serve the very purpose envisaged by the Code.
Precedents in India and Abroad:
Resolution definitely overrides liquidation proceedings to give effect to the principle that it is resolution is more viable than liquidation. Considering the facts and circumstances of the case, and in exercise of its inherent powers under Rule 9 of the Companies (Court) Rules, 1959, the courts have on several occasions allowed revival of a company even after winding up order was passed.
In the case of NGEF Ltd., since attempts to revive the company by clearing the debts had failed, as per the suggestions of Board for Industrial & Financial Reconstruction, the Karnataka High Court had on 3rd August, 2004 ordered the winding up of the company. However, on 22nd June, 2017, the court recalled its 13-year-old order. While the minority shareholder claimed that there was no provision in law for recalling a wind-up order and there was no scheme placed by the state for revival; the court very clearly held that though there is no specific provision in the Companies Act for recalling of a wind-up order, the law does not restrict the court from it either, if the circumstances requiring such recall are established by any of the applicants, be it the Official Liquidator, or a creditor, or a contributory or a shareholder. The court also went on to state that revival of a company does not necessarily mean revival and restoring of the usual manufacturing or business activity. It is a broader term including therein, the best utilisation of the assets. It is only the live and operating companies or business, which contribute to the economic welfare of the country and not the process of winding up of companies, which achieves this objective of larger public good.
Also, in Sudarsan Chits (I) Ltd v. O. Sukumaran Pillai 1984 AIR 1579, 1985 SCR (1) 511, the Apex Court observed that it is well settled that a winding up order once made can be revoked or recalled.
Again, Section 706(a) of US Bankruptcy Code bestows upon the debtor one-time absolute right of conversion of a liquidation case to a reorganization or individual repayment plan case. If the case has already once been converted as such, then the debtor cannot exercise the right. The policy of the provision is that the debtor should always be given the opportunity to repay his debts, and a waiver of the right to convert a case is unenforceable. Section 706(b) permits the court, on request of a party in interest and after notice and a hearing, to convert the case to one under reorganisation at any time. The decision whether to convert is left on the sound discretion of the court, based on what will most inure to the benefit of all parties in interest.
In re Wallace, 191 B.R. 925, 927 (Bankr. M.D.Fla. 1995), the bankruptcy court has taken due cognizance to the fact that conversion of a bankruptcy case to one under reorganisation would be a futile, where there exits circumstance that will cause reconversion to bankruptcy.
On similar lines, it can be said that the Tribunal should have valid justification for drawing the line between pre and post liquidation in circumstances where the prospects of success of resolution exists.
Application for reversal:
The liquidator may on his own motion or on behest of the majority of creditors avoid the dissolution of a company. The liquidation order once pronounced shall attain finality, save where in the opinion of the Tribunal, in the interest of justice, resolution should be resorted to, or if there are newly discovered assets to be distributed or claims to be made by the company, which was not previously known or which could not have been previously made.
NCLT will require cogent and compelling reasons to reverse its liquidation order. The company going through the mechanics of liquidation, will not be able to simply change course and seek to reverse liquidation order. NCLT should also consider the following, before passing any such order:
- Whether revival would be in the interest of justice?
- Whether there exists any alternative? i.e. if the difficulty can be resolved without passing reversal order, then such alternative method should be preferred.
In particular, “exercising the discretion against restoration should be the exception and not the rule”. The onus would be on applicant to satisfy that the circumstances warrant restoration, and to address to the Tribunal’s satisfaction the potential prejudice that could befall in case the application is not admitted. In case the submissions are not satisfactory, the application will be dismissed.
The initiative taken by NCLAT order is indeed commendable, however, there are certain aspects which the Tribunal has failed to pay heed to:
- The present case is not a one which falls under the ambit of Section 12A of IBC, instead it will be a fit case for exercise of inherent powers of the Tribunal, under Rule 11 of the NCLT Rules.
- During liquidation, the committee of creditors cease to exist and hence, there is no question of approval by 90% voting share of committee members; it seems like the majority approval of creditors is what the Tribunal was intending at.
- Reversal of liquidation order should not be restricted to only those cases where resolution applicants are eligible under Section 29A; the Tribunal may also consider an application wherein scheme of compromise and arrangement is being proposed by the company.