NCLAT Set Asides Show Cause Notice Against Lenders Over Liquidation Of Company Without Bids

NCLAT overturns NCLT's show cause notice to lenders for liquidation of SARE Realty Projects without seeking buyers, citing procedural errors and emphasizing resolution steps. The decision reflects adherence to IBC guidelines and reinforces the CoC's role in liquidation decisions.
NCLAT Set Asides Show Cause Notice Against Lenders Over Liquidation Of Company Without Bids

The National Company Law Appellate Tribunal (NCLAT) on Wednesday set aside an order of the NCLT, which had issued a show cause notice for recommending liquidation of realty firm SARE Realty Projects, without exploring the possibility of finding a buyer.

The appellate tribunal said there is an "error in the approach" of the National Company Law Tribunal (NCLT) for taking a decision regarding the liquidation of a corporate debtor (CD) and the lenders have to complete all the steps regarding resolution.

"The CoC has the jurisdiction to pass the order of liquidation of the CD, approving it by not less than 66 per cent of the voting share, but it should be before the confirmation of the resolution plan," said NCLAT.

Earlier, the New Delhi Bench of NCLT had on March 16, 2023 issued a show cause notice to the lenders asking why penalty stipulated under Section 65 of the Insolvency & Bankruptcy Code should not be imposed on them.

NCLT had said that "it was prima facie of the opinion that the application for liquidation" of SARE Realty Projects has been filed with "malicious intent" and therefore, it was found as a fit case for issuance of show cause notice to the assenting CoC members jointly, who voted in favour of the liquidation without even exploring the possibility of resolution of the debt-ridden firm.

This was challenged by four of its lenders before the NCLAT.

The Section 65 of IBC deals with fraudulent or malicious initiation of insolvency resolution process or liquidation proceeding and has a provision of fine up to Rs 1 crore.

Rejecting the NCLT order, the appellate tribunal said there is no dispute that the CoC took a decision for liquidation of SARE Realty Projects after holding five meetings and by voting share of 88.48 per cent.

NCLAT in a previous identical matter of Sunil S Kakkad had affirmed that with the approval of the CoC with 66 per cent vote share, directly proceed for the liquidation of CD without taking any steps for resolution of the CD. This was affirmed by the Supreme Court also.

It further said NCLT "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".

NCLAT further said "the provision of Section 65 has no application because it would apply if the application is filed for the purpose other than liquidation."

Insolvency was initiated on March 5, 2021 against SARE Realty Projects.

It was closed for more than one year, all the directors of the Corporate Debtor had resigned before the commencement of the CIRP, last audited financial statements of the Corporate Debtor filed with the ROC were for the year ending March 31, 2017.

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