NCLAT Upholds Corporate Liquidation Decision Despite Challenge to Financial Creditor Status"

In a significant ruling, the adjudicating authority has upheld the decision for the liquidation of a corporate debtor despite a challenge to the status of a financial creditor. The judgement, delivered by Justice Ashok Bhushan and Barun Mitra, reaffirms the importance of commercial wisdom in such matters.

The judgement, consisting of three parts, addresses a complex legal dispute involving the Insolvency and Bankruptcy Code (IBC), emphasizing the limited scope of judicial review available to the adjudicating authority. The case centered around the application of the IBC's provisions in relation to the initiation of Corporate Insolvency Resolution Process (CIRP) and subsequent liquidation.

The court highlighted the crucial role of the Committee of Creditors (CoC) in determining whether a corporate debtor should be revived or liquidated. The CoC's business decision-making authority was underscored, and the judgement emphasized that the Adjudicating Authority should refrain from evaluating the rationale behind the CoC's commercial decisions.

The ruling rejected a challenge to the financial creditor status of a party referred to as SHPL. The court held that the payments made by SHPL did not meet the criteria for 'Financial Debt' as defined under the IBC. The court pointed out that the payments were part of an agreement involving reciprocal rights and obligations for land development, and the claim did not fall under the purview of 'Financial Debt.'

Furthermore, the judgement addressed concerns about the timing of the liquidation decision. The court acknowledged the IBC's preference for resolution over liquidation but affirmed that liquidation can be initiated if the CoC, exercising its commercial wisdom, finds revival unfeasible.

The decision also clarified that the Adjudicating Authority's role in such matters is limited to reviewing the decision-making process and ensuring due process compliance. The court found that the CoC had appropriately followed procedures in reaching its decision and that the liquidation proposal was rightly placed before the Adjudicating Authority.

This landmark judgement reaffirms the significance of CoC decisions and commercial wisdom in corporate insolvency proceedings. It also clarifies the role of the Adjudicating Authority in reviewing such decisions, focusing on procedural adherence rather than interfering with the business decisions of the majority stakeholders.

 Date of Decision: 01-09-2023

Faridabad, Haryana vs Ms. Priyanka Chouhan

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