2024 (1) TMI 896 - AT - Insolvency and Bankruptcy

CoC members' Section 65 penalty overturned for liquidation vote before exploring resolution plans

ACRE - 81 Trust Through its trustee Assets Care & Reconstruction Enterprise Ltd. & Ors. Versus Pawan Kumar Goyal Interim Resolution Professional of SARE Realty Projects Private Ltd. & Ors.

The NCLAT Principal Bench overturned an Adjudicating Authority's penalty order under Section 65 of the Insolvency and Bankruptcy Code, 2016 against ... Penalty u/s 65 of the Insolvency and Bankruptcy Code, 2016 on assenting CoC members - assenting CoC members jointly voted in favour of the liquidation of the CD without even exploring the possibility of resolution of the Corporate Debtor - HELD THAT:- There is no dispute that the CoC took a decision for liquidation of the CD after holding five meetings and by voting share of 88.48 per cent which meets the criteria laid down in Section 33(2) of the Code. There is an error in the approach of the Adjudicating Authority that for the purpose of taking a decision regarding the liquidation of the CD, the CoC has to complete all the steps regarding resolution of the CD because it would be against the spirit of Section 33(2) and explanation appended to it wherein the legislature has used the word any time twice i.e., firstly, in Section 33(2) and secondly, in the explanation of Section 33(2) of the Code that the CoC has the jurisdiction to pass the order of liquidation of the CD, approving it by not less than sixty six per cent of the voting share, but it should be before the confirmation of the resolution plan. In the case of Sunil S. Kakkad [2020 (8) TMI 392 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI], this Court has categorically framed a question as to whether the RP, with the approval of the CoC with sixty six per cent vote share, directly proceed for the liquidation of CD without taking any steps for resolution of the CD. In the said case, there were three meetings of CoC in which without making endeavour for inviting EOI, the CoC unanimously resolved to liquidate the CD and that issue came for adjudication before this Court in which while referring to Section 33(2) and the explanation appended thereto it has been ordered that the CoC has the power to liquidate the CD before confirmation of the resolution plan. The Adjudicating Authority has not given any reason for forming an opinion much less prima facie that it was a case of malicious intent on the part of the Applicant/RP with the connivance of assenting members of CoC to whom the show cause notice was given and finally the provision of Section 65 has no application because it would apply if the application is filed for the purpose other than liquidation. The impugned order does not deserve to survive and hence, the present appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Committee of Creditors (CoC), with the requisite voting share, may validly decide liquidation of the corporate debtor at any time after its constitution and before confirmation of a resolution plan under Section 33(2) and its Explanation, without completing steps for inviting expressions of interest or publishing Form G. 2. Whether issuance of a show cause notice under Section 65 of the Code against assenting CoC members (and the Resolution Professional) was justified where the CoC resolved to liquidate the corporate debtor and whether the Adjudicating Authority recorded any prima facie opinion of malicious intent as required by Section 65. 3. Whether the Adjudicating Authority erred in treating the absence of publication of Form G/EOI as legally precluding the CoC from forming the opinion that no prospective resolution applicants existed and thereby impugning the legitimacy of the CoC's liquidation decision. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Power of CoC to decide liquidation under Section 33(2) and its Explanation Legal framework: Section 33(2) permits the Resolution Professional, at any time during CIRP but before confirmation of a resolution plan, to intimate the Adjudicating Authority of a CoC decision (approved by not less than 66% voting share) to liquidate. The Explanation appended to Section 33(2) clarifies that the CoC may take the decision to liquidate any time after its constitution and before confirmation of a resolution plan, including at any time before preparation of the information memorandum. Precedent treatment: The Tribunal's prior decision in Sunil S. Kakkad (affirmed by the Supreme Court) held that the CoC can order liquidation before undertaking steps to invite EOIs or otherwise pursue resolution, consistent with Section 33(2) and its Explanation. The Adjudicating Authority relied on Swiss Ribbons but that decision predates the amendment reflected in the present statutory text and is therefore distinguished on that basis. Interpretation and reasoning: The Court treated the text of Section 33(2) and the Explanation as deliberate legislative recognition of the CoC's power to decide liquidation at any time prior to confirmation of a resolution plan. The repeated use of 'any time' in both the subsection and the Explanation was read purposively to confer jurisdiction on the CoC to opt for liquidation even before preparatory resolution steps (e.g., information memorandum, EOI) are taken. The Court found the Adjudicating Authority's approach - requiring completion of resolution steps before a liquidation decision - to be contrary to this statutory language and legislative intent. Ratio vs. Obiter: Ratio - CoC empowered under Section 33(2) and its Explanation to decide liquidation at any time after constitution and prior to confirmation of a resolution plan, without the necessity of completing resolution-stage steps. Conclusions: The CoC's decision to liquidate, taken after five meetings and with 88.48% voting share, satisfied the statutory requirement of Section 33(2); the Adjudicating Authority erred in holding that resolution-stage steps were preconditions to a valid liquidation decision. Issue 2 - Validity of issuance of show cause notice under Section 65 Legal framework: Section 65 penalizes persons who initiate CIRP, or otherwise act, fraudulently or with malicious intent for purposes other than resolution or liquidation under the Code; the provision requires an opinion being formed that a prima facie case of malicious intent or fraud exists before initiating penal proceedings. Precedent treatment: Authorities referenced (including Unigreen Global and jurisprudence noted) establish that an Adjudicating Authority must record reasons for forming a prima facie opinion of malicious intent/fraud before issuing a show cause under Section 65; mere ipse dixit without reasoned prima facie findings is inadequate. The Tribunal's earlier holding in Sunil S. Kakkad was also considered in relation to whether invoking Section 65 is appropriate where liquidation is the chosen objective. Interpretation and reasoning: The Court held that Section 65 is inapplicable where the proceedings were initiated and pursued for the purpose of liquidation, as opposed to being instituted for some collateral or malicious purpose. Further, the Adjudicating Authority did not articulate the factual or inferential basis constituting a prima facie opinion of malicious intent or fraud against the assenting CoC members or the Applicant/RP. The Court also noted that invocation of Section 65 requires application of mind and recorded reasoning; its absence renders the issuance of the show cause notice infirm. Procedural protection was underscored by the fact that this Tribunal had stayed issuance of the notice pending appeal, leaving the appellants without an operative notice to respond to at the relevant time. Ratio vs. Obiter: Ratio - Show cause under Section 65 cannot be validly issued absent a reasoned, recorded prima facie opinion that the relevant actors acted fraudulently or with malicious intent for a purpose other than resolution/liquidation. Obiter - Observations on the interplay between procedural stays and the practical ability to reply were ancillary. Conclusions: The issuance of the Section 65 show cause notice was unjustified because (a) the Adjudicating Authority failed to record reasons constituting a prima facie finding of malicious intent/fraud, and (b) Section 65 does not apply where the application and subsequent CoC decision were directed to liquidation (a permissible statutory outcome). Accordingly, the show cause notice was improperly issued. Issue 3 - Effect of absence of Form G/EOI and the Adjudicating Authority's reliance on non-publication Legal framework: The Code prescribes steps for inviting claims and for the resolution process, including publication requirements (e.g., Form G) to seek prospective resolution applicants; however, Section 33(2) and its Explanation allow CoC to decide liquidation at any time before confirmation of a resolution plan. Precedent treatment: The Adjudicating Authority treated absence of Form G as depriving the CoC of the factual basis to conclude absence of prospective resolution applicants; the Tribunal examined this position in light of statutory text and precedent (Sunil S. Kakkad), distinguishing reliance on pre-amendment authorities where statutory language differed. Interpretation and reasoning: The Court found that while publication of Form G and EOIs is a mechanism to discover resolution applicants, the statutory grant of power to the CoC under Section 33(2) is not expressly conditioned upon completion of such steps. Consequently, the Adjudicating Authority's conclusion that without Form G there was no mechanism to discover prospective applicants - and therefore the CoC could not have validly concluded none existed - was legally unsustainable. The Court treated the Adjudicating Authority's insistence on completing resolution-stage steps as an impermissible gloss on the plain statutory scheme. Ratio vs. Obiter: Ratio - Absence of Form G/EOI does not per se invalidate a CoC's lawful decision to liquidate under Section 33(2) and its Explanation. Obiter - Practical considerations relating to fairness to corporate debtors and the policy aim of giving corporate debtors a fair chance were discussed but did not alter the statutory outcome. Conclusions: The Adjudicating Authority erred in treating non-publication of Form G/EOI as legally preclusive of a CoC liquidation decision; such non-publication does not automatically render a CoC decision ultravires where the statutory preconditions of Section 33(2) are met. Overall Disposition The impugned order issuing a Section 65 show cause notice and impugning the CoC's liquidation decision was set aside. The CoC's decision to liquidate, having met the 66% voting-share threshold and taken before confirmation of any resolution plan, was consistent with Section 33(2) and its Explanation; the issuance of a Section 65 notice lacked the requisite prima facie, reasoned finding of malicious intent and was therefore unjustified.