Introduction
In the case of State Bank of India v. Gayatri Projects Limited[i], the National Company Law Tribunal (‘NCLT’), Hyderabad Bench addressed the core issue of whether post-facto ratification can be granted for the payment of pre-corporate insolvency resolution professional (‘CIRP’) dues made by the resolution professional (‘Applicant’) without obtaining the approval of the committee of creditors (‘CoC’) for such payments as per the procedure laid down in the Insolvency and Bankruptcy Code, 2016 (‘IBC’).
Brief Facts
The corporate debtor (‘CD’) was a leading infrastructure company in India involved in major government projects across multiple locations.
The CIRP was initiated against the CD on 15.11.2022. On 03.01.2024, the NCLT extended the CIRP period until 08.01.2024. The Applicant filed an interim application (IA) on 07.01.2024, seeking the CD’s liquidation, which is pending adjudication.
Due to exigencies, the Applicant authorised the payment of pre-CIRP dues totalling Rs. 52.88 crores to avoid work stoppages, potential contract terminations, and the invocation of bank guarantees, which could negatively impact financial creditors (FC) and cause other damages.
On 07.01.2024, the Insolvency and Bankruptcy Board of India’s (‘IBBI’) disciplinary committee issued an order (dated 28.10.2022) finding that the payments made by the Applicant violated s. 14 of the IBC. The IBBI stated that the Applicant should have sought directions from the adjudicating authority (‘AA’) before making such payments to maintain the CD as a going concern.
Recognizing potential non-compliance, the Applicant filed a detailed special report with IBBI on 11.01.2024, outlining the CIRP and the non-compliance related to the pre-CIRP dues. The Applicant asserted that the payments were made to prevent disruptions and financial losses, acknowledging procedural errors but denying any malafide intent on the Applicant's part.
Held
The NCLT ordered the Applicant to seek ratification or approval from the CoC for Rs. 52.88 Crores paid by the Applicant as pre-CIRP dues. It further granted the Applicant the liberty to file a fresh application after obtaining the necessary CoC ratification or approval.
The NCLT referred to ss. 5(13) and 28 of the IBC, and it was observed that a plain reading of the said sections indicated that the IBC does not empower the AA to ratify the Applicant’s actions directly without the CoC’s prior approval. It is within the CoC’s domain to approve costs or payments made by the Applicant during CIRP to keep the CD as a going concern.
It referred to NCLAT's decisions in Avil Menezes (Liquidator) v. Abdul Qudduskhan[ii] and Anr and Bharat Hotels Ltd. v. Tapan Chakraborty[iii] to conclude that the CoC makes decisions regarding costs and their approval. The CoC may ratify, modify, or reject claimed costs. These issues must be resolved in CoC meetings, not by the Adjudicating Authority.
Lastly, it concluded that although the Applicant discussed paying pre-CIRP dues to operational creditors in the 17th CoC meeting, the CoC did not appear to approve or ratify these payments. Therefore, it directed the Applicant to seek approval from the CoC.
Our Analysis
The NCLT's directions to the Applicant to seek retrospective ratification from the CoC emphasise the IBC’s procedural rigour. The NCLT’s directives not only rectify procedural non-compliance but also reinforce the role of the CoC in overseeing significant decisions during the CIRP. By mandating that the Applicant obtain the CoC approval before taking such actions, the NCLT ensures that the interests of all creditors are adequately represented and that financial decisions are made transparently and in accordance with the statutory framework. Furthermore, this decision serves as a reminder of the stringent compliance requirements under the IBC and the necessity for the applicants to adhere to prescribed procedures to avoid challenges to their actions.
End Notes
[i] (2024) ibclaw.in 603 NCLT.
[ii] Company Appeal (AT) (Insolvency) No. 263 of 2024.
[iii] Company Appeal (AT) (Insolvency) No. 1074 of 2022.
Authored by Onam Singhal, Chartered Accountant at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion
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