NCLAT Rescues SARE Realty Projects from Liquidation, Stresses Buyer Exploration

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

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Error in NCLT's Approach

The appellate tribunal observed an error in the approach of the NCLT in deciding the liquidation of a corporate debtor (CD). The lenders must complete all the steps regarding resolution before proceeding with liquidation.

CoC's Jurisdiction for Liquidation

The NCLAT clarified that the Committee of Creditors (CoC) has the jurisdiction to pass an order for the liquidation of the CD, with the approval of not less than 66% of the voting share. However, this should occur before the confirmation of the resolution plan.

NCLT's Show Cause Notice

Earlier, the New Delhi Bench of NCLT had issued a show cause notice to the lenders on March 16, 2023, asking why a penalty under Section 65 of the Insolvency & Bankruptcy Code (IBC) should not be imposed on them. The NCLT had expressed a prima facie opinion that the application for liquidation of SARE Realty Projects was filed with malicious intent, warranting the issuance of a show cause notice to the assenting CoC members who voted in favor of liquidation without exploring resolution possibilities.

Lenders' Challenge

Four of the lenders challenged the NCLT order before the NCLAT.

Section 65 of IBC

Section 65 of the IBC deals with fraudulent or malicious initiation of insolvency resolution processes or liquidation proceedings and provides for a fine of up to Rs 1 crore.

NCLAT's Rejection of NCLT Order

The NCLAT rejected the NCLT order, stating that there was no dispute that the CoC had decided to liquidate SARE Realty Projects after holding five meetings and with a voting share of 88.48%. The appellate tribunal referred to a previous identical matter, Sunil S Kakkad, where it had affirmed that with the approval of the CoC with a 66% vote share, the CD could proceed directly for liquidation without taking any steps for resolution. This decision was also affirmed by the Supreme Court.

Lack of Prima Facie Evidence

The NCLAT further noted that the NCLT had not provided any reason for forming an opinion, much less prima facie, that there was malicious intent on the part of the applicant/resolution professional (RP) with the connivance of assenting CoC members to whom the show cause notice was issued.

Inapplicability of Section 65

The NCLAT clarified that the provision of Section 65 does not apply in this case because it would only apply if the application were filed for a purpose other than liquidation.

Background of SARE Realty Projects

Insolvency proceedings against SARE Realty Projects were initiated on March 5, 2021. The company had been closed for more than a year, and all its directors had resigned before the commencement of the Corporate Insolvency Resolution Process (CIRP). The last audited financial statements filed with the Registrar of Companies were for the year ending March 31, 2017.