Commercial wisdom of the liquidator upheld by the Supreme Court

Posted On - 14 September, 2022 • By - Souvik Ganguly

Under the Insolvency and Bankruptcy Code, 2016 (Code), if a corporate debtor is unable to pay its debts, then insolvency resolution proceedings (CIRP) may be initiated against the corporate debtor and attempts are made to revive the corporate debtor by inviting resolution plans. If the revival process fails, the corporate debtor must be liquidated. The Code provides for a ‘resolution professional’ during the CIRP who works towards reviving and restructuring the corporate debtor, and on the failure of the same, the liquidator takes control of the corporate debtor, sells the assets of the corporate debtor, distributes the proceeds and makes an application for dissolution of the corporate debtor. The liquidator has some special powers that are different from those of the resolution professional.

In the recent judgment of in R.K. Industries (Unit-II) LLP v. HR Commercials Pvt. Ltd. (R.K. Industries judgment), the Supreme Court has clarified that the commercial wisdom of the liquidator regarding the mode of sale of the assets of the corporate debtor is subject to limited judicial review by the insolvency courts.

Brief facts

As the CIRP of ABG Shipyard Limited (ABG Shipyard) did not yield in any successful resolution plan, a liquidation order was passed by the National Company Law Tribunal (NCLT). After failure of auctions conducted by the liquidator, it was decided by the liquidator in consultation with the stakeholder’s consultation committee (SCC) that one of the assets of ABG Shipyard be sold in private sale by way of a two-step Swiss challenge process. R.K. Industries (Unit-II) LLP (R.K. Industries) emerged as the anchor bidder in the first stage of the process.

However, before the sale could be completed, Welspun Steel Resources Pvt. Ltd. (Welspun Steel) offered to buy the all the assets of ABG Shipyard. The liquidator along with the SCC were of the view that a composite sale of the assets would be better to maximise the value of assets of ABG Shipyard. The liquidator made an application to the NCLT seeking approval for the composite sale to Welspun Steel, which was allowed by the NCLT.

R.K. Industries appealed against the NCLT judgment before the National Company Law Appellate Tribunal (NCLAT), which restrained the sale to Welspun Steel and directed that the entire sale process should be restarted, and fresh offers should be invited from all prospective buyers. The NCLAT’s judgment was challenged before the Supreme Court.

Supreme Court’s findings

The Supreme Court made the following observations:

(i) under the terms and conditions of the Swiss challenge process documents, the prospective bidders were informed that the liquidator reserves the right to cancel the Swiss challenge process at any time. Therefore, merely because R.K. Industries had submitted a bid and was declared as the anchor bidder did not vest a right on it to insist that the said process must be taken to its logical conclusion;

(ii) under the Code, the liquidator is given complete discretion to decide on the most suitable method to maximise the value of the assets of a corporate debtor. In arriving at the decision, the liquidator can consult the SCC, but the recommendations of the SCC are not binding on the liquidator; and

(iii) once the liquidator applies to the NCLT for appropriate orders, including the decision to sell the assets of the corporate debtor by adopting a particular mode of sale, and the NCLT grants approval to such a decision, then there is no provision in the Code that empowers the NCLAT to suo motu conduct a judicial review of the said decision. The scope of judicial review in commercial decisions taken by the liquidator is restricted to instances of arbitrariness or mala fide intent.

In view of the above, the Supreme Court set aside the direction of the NCLAT and allowed the liquidator to proceed with the sale to Welspun Steel.

Our thoughts

The R.K. Industries judgment is significant as it recognises that the power of the liquidator to take commercial decisions is supreme with regards to realization of the assets of the corporate debtor. With the Supreme Court restricting the scope of judicial review of such commercial decisions, liquidators will be able to take bona fide decision to ensure faster realization of assets and conclusion of liquidation process. This will certainly help better realisation for all creditors and further the purpose of the Code!

Authors: Souvik Ganguly, Altamash Qureshi and Shrishti Mishra. 

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