NCLAT overturns transaction audit order, rules Section 54 dissolution requires completed liquidation proceedings first

The NCLAT set aside the Adjudicating Authority's order directing a transaction audit for corporate debtor dissolution. The court held that dissolution under Section 54 of IBC cannot be invoked without completing liquidation proceedings first. Since CIRP concluded unsuccessfully with no resolution plan received and no liquidation order passed under Section 33(1), the proper remedy was for the Resolution Professional to inform the Registrar of Companies for striking off the company name, not seeking dissolution. The CoC's refusal to contribute to liquidation costs did not justify bypassing the statutory liquidation process before dissolution.

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Issues Involved:

1. Whether the application for dissolution of the Corporate Debtor (CD) without initiating liquidation was justified.
2. Whether the direction for conducting a transaction audit was appropriate.
3. The role and decision-making authority of the Committee of Creditors (CoC) in the dissolution process.
4. The applicability of Section 54 of the Insolvency and Bankruptcy Code (IBC) and Regulation 14 of the IBBI (Liquidation Process) Regulations, 2016.

Issue-wise Detailed Analysis:

1. Application for Dissolution Without Liquidation:

The primary issue was whether the application for dissolution of the Corporate Debtor without initiating the liquidation process was justified. The Resolution Professional (RP) filed an application for dissolution based on the CoC's decision, which resolved not to initiate liquidation due to the absence of assets and the unwillingness to bear liquidation costs. The Adjudicating Authority rejected the application, stating that under Section 54 of the IBC, dissolution can only occur after the assets of the CD have been completely liquidated. The Tribunal noted that the liquidation process had not been initiated, and thus, the application for dissolution was premature and not in accordance with the statutory scheme of the IBC.

2. Direction for Transaction Audit:

The Adjudicating Authority directed the RP to conduct a transaction audit from 01.04.2020 to the commencement date of the CIRP. However, the CoC had previously decided against conducting a transaction/forensic audit, deeming it unnecessary since the company had not been operational for several years. The Tribunal found the direction for a transaction audit unsustainable, as the CIRP had already ended, and no further investigation was warranted given the lack of assets and business activities. Consequently, the Tribunal set aside the order for a transaction audit.

3. Role and Decision-making Authority of the CoC:

The CoC, consisting solely of the Financial Creditor who initiated the CIRP, resolved to dissolve the CD instead of proceeding with liquidation. The CoC's decision was based on the lack of assets and the financial burden of liquidation. The Tribunal recognized the commercial wisdom of the CoC but highlighted that the statutory framework required liquidation before dissolution. The CoC's decision not to contribute to liquidation costs further complicated the process, as liquidation was not directed, and the CIRP period had ended.

4. Applicability of Section 54 of the IBC and Regulation 14:

Section 54 of the IBC outlines that dissolution can only occur after complete liquidation of the CD's assets. Regulation 14 of the IBBI (Liquidation Process) Regulations, 2016, allows for early dissolution if the realizable properties are insufficient to cover liquidation costs and no further investigation is required. The Tribunal noted that the Adjudicating Authority correctly interpreted these provisions, as no liquidation had been conducted or ordered. The Tribunal emphasized that dissolution under Section 54 was not applicable in the absence of liquidation proceedings.

Conclusion and Directions:

The Tribunal concluded that the application for dissolution was premature without initiating liquidation. It directed the RP to intimate the Registrar of Companies to strike off the company's name from the register, given the lack of assets and business activities. The Tribunal set aside the direction for a transaction audit and declared the CIRP proceedings closed, with no further steps required. Each party was directed to bear its own costs.

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