Company appeal dismissed as CIRP terminated from Second EOI stage due to debt recovery motive not genuine insolvency resolution

The NCLAT dismissed the company appeal challenging CIRP termination from Second EOI stage and RP replacement. The tribunal found the Financial Creditor's Section 7 application was filed for debt recovery rather than genuine insolvency resolution, noting an 18-year delay in invoking guarantee and that the Corporate Debtor had recovered from BIFR and become profitable. The NCLAT upheld the Adjudicating Authority's order terminating CIRP from Second EOI stage and replacing the RP, while clarifying that adverse observations against the RP were case-specific and should not affect the RP's integrity. The new RP was directed to complete CIRP within 90 days. A separate matter regarding preferential transactions was remitted back to the Adjudicating Authority for fresh consideration due to inadequate reasoning in the original order.

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Issues Involved:
1. Challenge to the order dated 07.10.2021 in IA No.51 of 2020.
2. Challenge to the order dated 08.04.2022 in IA No.27 of 2021.
3. Challenge to the order dated 08.04.2022 in IA No.43 of 2021.

Summary:

Issue 1: Challenge to the order dated 07.10.2021 in IA No.51 of 2020

The RP filed IA No.51 of 2020 alleging preferential, undervalued, and fraudulent transactions by the suspended Director of the Corporate Debtor. The Adjudicating Authority rejected the application, concluding that the transactions were undertaken in the ordinary course of business. The Appellate Tribunal found that the Adjudicating Authority's order lacked detailed reasoning and remitted the matter back to the Adjudicating Authority for fresh consideration.

Issue 2: Challenge to the order dated 08.04.2022 in IA No.27 of 2021

The Financial Creditor, SASF, filed an appeal against the order directing the RP to reverify the claim of Rs.16.12 Crores. The Appellate Tribunal upheld the Adjudicating Authority's order, noting that the RP had admitted an inflated claim and failed to correct it despite directions. The Tribunal emphasized that the erroneous admission of the claim had a significant impact on the CIRP, affecting the voting share and decision-making in the CoC.

Issue 3: Challenge to the order dated 08.04.2022 in IA No.43 of 2021

The appeals challenged the order terminating the CIRP from the stage of the second EOI and replacing the RP. The Appellate Tribunal upheld the Adjudicating Authority's decision, citing lack of transparency, conflict of interest, and non-compliance with the provisions of the IBC. The Tribunal found that the process was tainted from the stage of the second EOI and that the RP had not conducted the CIRP fairly. The Tribunal also noted that the inflated claim of the Financial Creditor had a detrimental effect on the CIRP.

Conclusion:

1. The order dated 07.10.2021 in IA No.51 of 2020 is set aside and remitted for fresh consideration.
2. The order dated 08.04.2022 in IA No.27 of 2021 is upheld.
3. The order dated 08.04.2022 in IA No.43 of 2021 is upheld, with the CIRP to be concluded within 90 days under the new RP. The adverse observations against Respondent No.5 are deleted, and the observations against the RP are not to be treated as adverse to the RP's integrity.

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