Expunction of adverse observations in corporate insolvency proceedings for lack of evidence; exclusion from CoC requires prior hearing.

Expunction of adverse judicial observations was ordered where the adjudicating authority made findings about initiation of investigation and group company status without supporting material; those observations were removed as there was no evidence on record. The tribunal found that identification of certain entities as group companies of a finance company was unsupported by financial records and that adverse directions excluding entities from the Committee of Creditors were made without factual basis; exclusion of any CoC member requires adequate opportunity to be heard, and the impugned observations were expunged accordingly.

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Issues: (i) Whether the Appellate Tribunal should expunge observations recorded in paragraphs 25 and 28 of the impugned NCLT order which held that certain IL&FS-related companies were group companies of IL&FS Financial Services Ltd. and therefore could not be members of the Committee of Creditors due to alleged initiation of Enforcement Directorate proceedings.

Analysis: The issue requires examination of whether the impugned observations were supported by material on the record and whether appropriate procedure (including opportunity to be heard) was followed before recording a finding that a member must be excluded from the Committee of Creditors. Relevant legal framework includes section 30(6) and section 30(4) of the Insolvency and Bankruptcy Code, 2016 concerning approval of resolution plans and voting thresholds, the effect of an Enforcement Directorate money-laundering investigation on a creditor's membership of the CoC, and the necessity of evidential basis for adverse findings. The analysis considers (a) whether material on record established that the companies were group companies of the financial services entity alleged to be under ED investigation, (b) whether any ECIR or ED proceeding specifically against the companies was placed before the adjudicating authority, and (c) the procedural requirement that exclusion of a CoC member is a serious step necessitating opportunity of hearing and evidential support. Documentary material (including an annual report showing the organisational structure) demonstrated that the companies were subsidiaries of a different IL&FS holding structure and that no ED investigation material against those companies was on record; no supporting evidence was produced by the party relying on ED proceedings; and the adjudicating authority did not record reasons or consider the reply and documents filed by the affected companies before making the adverse observations.

Conclusion: The observations in paragraphs 25 and 28 of the impugned order are expunged for lack of evidence and for failure to afford appropriate opportunity and reasoned consideration before recording findings that would exclude members from the Committee of Creditors.

Final Conclusion: The appellate outcome removes the adverse observations from the impugned order and preserves that exclusion of any CoC member requires factual material and a fair opportunity to be heard; the appellate relief expunges the specific paragraphs complained of and closes pending incidental applications.

Ratio Decidendi: Absent admissible material demonstrating that a creditor is subject to enforcement proceedings, and without affording a fair opportunity to contest exclusion, adverse observations leading to removal from the Committee of Creditors cannot be sustained and must be expunged.

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