2021 (3) TMI 117 - AT - Insolvency and Bankruptcy

Tribunal Overturns Interim Funding Order in Liquidation Case, Emphasizes CoC's Autonomy

The Tribunal found that the Corporate Debtor was not a going concern and was non-operational, leading to the approval of liquidation by the Committee of ... Corporate Debtor, going concern or not - Validity of directions issued by the NCLT - Respondents sought direction to Committee of Creditors of the Corporate Debtor Company, namely EMCO Limited, to provide interim funds to the Resolution Professional to run during the CIRP period - seeking to provide funds to meet the expenditure already incurred - seeking further direction to CoC to submit the compliance report at the time of next hearing - HELD THAT:- It is an admitted fact that the CIRP proceedings began on 16.08.2019 and the Resolution Professional was confirmed on 14.10.2019. In the Reply filed by the RP to the MA all facts with respect to the salaries of 51 employees were placed on record till 31.08.2019. It is stated in the Reply that any salary dues prior to the commencement of CIRP process will be considered by the Resolution Applicant, whose Resolution Plan, if any, shall be approved by the CoC Members. It is also an admitted fact that the said employees have also filed a Claim with the RP. Keeping in view that the Application under Section 7 or Section 9 is not a ‘Suit’ or a ‘Money Claim’ and having regard to the fact that the Resolution Professional has filed a detailed Affidavit that the Corporate Debtor is not a ‘going concern and is non-operational’, this Tribunal is of the considered opinion that the Learned Adjudicating Authority ought to have taken this aspect into consideration and heard the CoC before issuing the directions. On going through Section 28(1)(a), Section 28(3) and Section 28(4), it is clear that the Resolution Professional can raise Interim Finance only subject to approval of the Committee of Creditors by a vote of 66 % under Section 28. In the instant case it is an admitted fact that the CoC have not approved the raising of any interim funds. The contention of the Learned Counsel appearing for the first Respondent that Section 20(2)(c) is to be relied upon which refers to ‘Management of Operation of Corporate Debtor as a going concern’ is untenable as the said Section refers to duties of Interim Resolution Professional. Section 25(2)(c) is relevant to the instant case as it deals with ‘Duties of Resolution Professional’ with respect to raising Interim Finance subject to the approval of Committee of Creditors under Section 28. Section 28 refers to whether the approval of Committee of Creditors is required for raising ‘Interim Finance’. It is reiterated by the Resolution Professional that the Corporate Debtor is not a going concern - Further Section 30(2)(a) of the Code specifies that if a Resolution Plan is approved then the same would provide for the payment of Insolvency Resolution Professional Process cost in a manner specified by the Board in priority by the repayment of other debts of the Corporate Debtor and if such a Plan is not approved and if companies go into liquidation under Section 33(1) of the Code, then the distribution of assets under Section 53(1) would arise. The direction given by the Adjudicating Authority in MA 4002/2019 are contrary to the provisions of IBC and are hereby set aside. Appeal allowed. Issues Involved:1. Whether the Corporate Debtor was a going concern.2. Whether the Adjudicating Authority was justified in directing the Committee of Creditors (CoC) to raise interim funds and provide them to the Resolution Professional (RP) to run the CIRP period and meet the expenditure incurred till December 2019.Issue-wise Detailed Analysis:1. Whether the Corporate Debtor was a going concern:The Tribunal observed that the Corporate Debtor was not a going concern and was non-operational. This was substantiated by the RP’s affidavit, which stated that the Corporate Debtor was under severe financial distress and non-operational. The RP retained only a few employees at reduced salaries to continue the CIRP, which was approved by the CoC. The Tribunal noted that the CoC had voted for liquidation and an application seeking liquidation was pending. The contention that the company was a going concern was found unsustainable based on the RP’s visits to the plant and the operational updates provided during the CoC meetings.2. Whether the Adjudicating Authority was justified in directing the CoC to raise interim funds and provide them to the RP:The Tribunal held that the directions issued by the Adjudicating Authority were contrary to the provisions of the Insolvency and Bankruptcy Code (IBC). As per Section 28(3) of the IBC, approval of the CoC by a vote of 66% is required to raise any interim funds. The CoC had not granted such approval, making the decision of the CoC non-justiciable. The Tribunal emphasized that the commercial or business decision of the CoC is non-justiciable, as established by the Supreme Court in the case of 'K. Sashidhar v. Indian Overseas Bank'. The Tribunal found that the Adjudicating Authority had passed the impugned order without hearing the CoC and without considering that the Corporate Debtor was not a going concern.Conclusion:The Tribunal set aside the directions given by the Adjudicating Authority in MA 4002/2019, stating that they were contrary to the provisions of the IBC. The appeal was allowed, and no costs were ordered. The Tribunal reiterated that the commercial decisions of the CoC, including the decision not to raise interim funds, are non-justiciable and cannot be directed by the Adjudicating Authority.