SC: Every Attempt Has To Be First Made To Revive The Concern And Make It A Going Concern

Case title

K.N. Rajakumar Vs. V. Nagarajan

Key Takeaways

• This case was heard by the Bench of Justice L Nageswara Rao, Justice BR Gavai and Justice BV Nagarathna
• The CIRP proceedings can be withdrawn if the application is made by the applicant with 90% voting of the COC.
• The liquidation of the corporate debtor is the last resort.

Background of the case

• The appellant in this case was an ex-employee of M/s Aruna Hotels. Ltd (the corporate debtor). He challenged the resolution passed by the 8th Committee of Creditors permitting withdrawal of the Corporate Insolvency Resolution Process in favour of the corporate debtors. The order was passed by the National Company Law Tribunal (also referred to as NCLT) and the proceedings were closed.
• The corporate debtor had started various businesses but as for now only owns a hotel in Chennai which was shut down for more than 7 years.
• D. Ramjee joined the corporate debtor as a junior assistant. He was facing a problem in receiving salary. The corporate debtor requested him to do the work so he continued doing the work for a salary which was less than what he deserved.
• After D. Ramjee got retired, a new management came which totally disowned itself from clearing the arrears of the previous management.
• Ramjee issued demand notice under section 271(1)(a) of the Companies Act read with Section 8(1) of Insolvency and Bankruptcy Code (IBC) to pay the salary dues with interest.
• As the corporate debtor failed to comply with the notice served by Ramjee, he filed an appeal under Section 9 of IBC before the NCLT. The application was admitted by NCLT and Corporate Insolvency Resolution Process (CIRP) was initiated against the corporate debtor. Interim RP was appointed and a moratorium was declared.
• The corporate debtor filed an appeal before National Company Law Appellate Tribunal (NCLAT) against the order passed by NCLT. The appeal was allowed and the order passed by the NCLT was set aside. The corporate debtor agreed to the arrears to three employees including D. Ramjee.
• As agreed to, the corporate debtor made payment to D. Ramjee.
• The former director of the corporate debtor filed an appeal in NCLAT which got dismissed and the Committee of Creditors (COC) in their 8th meeting withdrew the CIRP proceedings against the corporate debtor.
• The appellant filed an appeal in NCLT which allowed the CIRP proceedings to be dismissed and the Resolution Professional was ordered to hand over the management to the corporate debtor.
• The application of D. Ramjee seeking dismissal of the resolution passed in the 8th meeting of COC was also dismissed by the NCLT.

Court’s findings

• Referring to Section 12A of IBC, the court observed that the adjudicating authority should withdraw the application made under section 7,9 or section 10 made by the applicant with approval of 90% voting of the committee of creditors (COC).
• The court dismissed the ex- employee’s appeal challenging the order passed by the NCLT.
• Citing the NCLT order the court observed that the corporate debtor had already resolved the issue with former financial creditors who agreed to withdraw the CIRP proceedings and as the proceedings were withdrawn, the corporate debtor was a going concern.
• The court observed that the principal object of the IBC is to revive the corporate debtor and to make it a going concern. Every attempt first to be made to revive the corporate debtor and liquidation should be the last resort.
• The court concluded by stating that D. Ramjee’s issue was held rightly and was resolved after ensuring the necessary compliances.

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Questions
1) Did the COC perform its functions properly?
2) What are your views on the revival of the corporate debtor?