When Procedure Kills Revival: Criticising the NCLAT’s Judgement in Narayan Maheshwari

Amritanshu Rath & Shreya Tiwari*

Introduction

Liquidation is generally thought of as a consequence if the resolution process fails. It is usually perceived as a last resort when there is no scope for the recovery of the Corporate Debtor (“CD”) via other means. However, in its recent decision in Narayan Maheshwari v. Kavitha Surana (“Narayan Maheshwari”), the National Company Law Appellate Tribunal (Chennai Bench) (“NCLAT”) ordered the liquidation of the CD, despite the CD agreeing to enter into a One-Time Settlement (“OTS”) with its creditors and depositing the full amount.  NCLAT backed this decision, reasoning that the application for withdrawal of the insolvency proceedings of the CD was filed after the formal commencement of the liquidation process.

As per the authors, this decision raises serious concerns about whether the Code operates in a manner that frustrates its own objective of value maximisation and business revival. The NCLAT adopted a narrow and literal interpretation of Section 12A of the Insolvency and Bankruptcy Code, 2016 (“the Code”). Section 12A provides for withdrawal of insolvency proceedings during the corporate insolvency resolution process (“CIRP”). By treating liquidation as a rigid point of no return, the NCLAT prioritised procedural sequencing over commercial reality, effectively mandating liquidation even where creditor claims stood fully satisfied.

In this piece, the authors criticise the NCLAT’s approach, contending that it goes against the very objectives of the Code and the established principles of beneficial construction.

What is Section 12A of the Code?

Now, before we delve into the details of the case, it is important to first understand the provision in question here.

Section 12A of the Code was introduced via the Second Amendment to the Code in 2018. It permitted withdrawal of insolvency proceedings admitted under Sections 7, 9, or 10 of the Code. The provision allows such withdrawal where it is approved by at least ninety per cent of the voting share of the Committee of Creditors, thereby recognising settlement as a legitimate exit mechanism from insolvency.

Factual Matrix

In the case at hand, CIRP proceedings were initiated against the CD under Section 7 of the Code. But since no satisfactory resolution plan was submitted, the Resolution Professional made an application to the National Company Law Tribunal for commencing the liquidation proceeding. However, once the CD was placed under liquidation, the promoters and personal guarantors of the CD expressed their willingness to enter into the OTS. There were several rounds of negotiations involved, and eventually, the CD paid both the advance payment and the entire amount due under the OTS.

The dilemma facing the NCLAT was whether the proposal made by the OTS could now be entertained at this juncture itself, as the CD has moved into liquidation.

The NCLAT’s Findings

The dispute in this case was over the question of whether Section 12A of the Code would be applicable to Chapter III of the Code. Since Chapter III deals with the process of liquidation, the question translates to whether Section 12A can be invoked at all after the CIRP proceedings have reached the stage of liquidation (Narayan Maheswari, ¶1).

In dealing with the question at issue, the NCLAT concluded that the application of Section 12A was limited to proceedings under Sections 7, 9 and 10 of the IBC. The NCLAT derived that while adding 12A to the Code, the legislature was conscious of the fact that the provision would be confined to proceedings contemplated under the mentioned Sections of the Code. Moreover, if the legislature intended to extend the powers of the Adjudicating Authority (“AA”) to cover proceedings contemplated under Chapter III (dealing with liquidation), there would have been a specific amendment by way of insertion in Chapter III (Narayan Maheswari, ¶2 and ¶3).

The NCLAT borrowed the view of the Apex court laid down in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd., as per which, the provisions of the Code must be strictly confined within the framework of procedural and substantive law as envisaged under the Code. It was further held that the Code has been drafted thoughtfully and seeks to avoid the introduction of alien process for proceedings which the Code already contemplates. The Code gets regular updates from the legislature to keep away any judicial chaos, ensuring minimal innovation from the AA or appellate bodies. Therefore, any deviation from the foundational principles of the Code would be detrimental to the objectives of the Code (Narayan Maheswari, ¶24).

The NCLAT also reasoned that the inherent powers of the Court can be exercised in matters of procedures and other things, only where the law is silent (Narayan Maheswari, ¶27). The NCLAT further held that since Section 12A was added exclusively to Chapter II of the Code, it is only logical to conclude that the legislature did not intend the provision to be applicable at the stage of liquidation. In the absence of such intent, the provision cannot be stretched beyond the ambit mentioned in the Code (Narayan Maheswari, ¶28).

The Problem with the NCLAT’s Approach

There are two major flaws in the NCLAT’s approach here: Firstly, it undermines the very objectives of the Code, which are value maximisation and revival of the CD; secondly, it goes against the established principles of interpretation of beneficial statutes.

The Supreme Court (“SC”) has consistently held that the Code is not a mere recovery mechanism for creditors, but a beneficial legislation aimed primarily at the revival of the corporate debtor and the maximisation of value. In Babulal Vardharji Gurjar v Veer Gurjar Aluminium Industries (¶19), the SC recognised that the intention of the Code is to protect the CD and put it back on its feet. In Swiss Ribbons v Union of India (¶12), the SC held that the Code prioritises “revival over liquidation”. This view was further affirmed in Duncans Industries v A. J. Agrochem (¶7.2), where the SC recognised that the very preamble of the Code specifies the object as the “revival of the corporate debtor where liquidation is the last resort”. The NCLAT itself had previously held in Binani Industries v Bank of Baroda (¶17) that the main objective of the Code is value maximisation.

Moving on to the established principles of beneficial construction of statutes, when multiple interpretations of a statute are possible, the court should choose the interpretation that helps to carry out the objectives of the statute in question. In Allahabad Bank v. All India Allahabad Bank Retired Employees Association, the SC held that remedial statutes meant for a beneficial purpose should always receive a liberal construction. In Union of India v Pradeep Kumari, it was observed that ‘it is well settled that in beneficial legislation, the Court should adopt that construction which advances the policy of legislature to extend the benefit rather than a construction which has the effect of curtailing it.’ This same view was followed in Edukanti Kistamma v S Venkatareddy, where the SC cautioned against constructions that frustrate statutory objectives.

Viewed against this backdrop, the NCLAT’s approach appears doctrinally inconsistent. By treating the location of Section 12A within Chapter II of the Code as determinative of its scope, the NCLAT effectively adopted a construction which frustrates the Code’s objectives. This interpretation is an ideal example of preferring statutory architecture over statutory objectives.

In this case, the NCLAT overlooked the important fact that revival is the main object of the Code. In case revival is not possible, maximisation of value for creditors is aimed for. Hence, the procedure shall not take precedence over the interest of creditors, especially when an alternative is consensually sought by the creditors. Liquidation cannot be seen as an independent mechanism that must be put into force after the proceedings reach a certain stage. It can be only triggered after no other option which is more beneficial can be found. However, in case the failure of the CIRP process is reversed through a consensual settlement, insisting on liquidation does not serve the utilitarian purpose and rather reinforces rigid institutional supremacy.

This also translates to the understanding that liquidation is to be seen as a final, death stage for a CD. Once liquidation sets in, any commercial realities, one-time settlement offers cease to hold any value; essentially meaning that any scope of revival dies once liquidation sets in. Thus, this order transforms liquidation from a last resort (as intended by the Code) to a procedural inevitability, thereby compromising with the core objectives of revival and value maximisation in the process.

Conclusion

The decision of the NCLAT in Narayan Maheshwari demonstrates the need for balance between procedural rigidity and legislative objectives. By sanctifying the commencement of liquidation as an irreversible procedure, the NCLAT killed any possible chances of revival. It becomes difficult to reconcile this view with the mentioned objectives of the Code. What the NCLAT ought to have done instead was to allow the withdrawal of the CIRP process when all creditor dues were paid for, and there was a clear scope for revival of the CD, despite liquidation being commenced formally. Therefore, a purposive reading that adopted a flexible approach, aiming more at revival than protecting the design of the Code, could have been more beneficial. Nonetheless, it is possible that this interpretation might be corrected in another edition of amendments to the Code or through any other judicial decision. Till the balance between procedure and the objectives of the Code is restored, the insolvency process will remain open to being dictated by rigid rules rather than solutions that further the objectives.

*The authors are Second-year B.A., LL.B. (Hons.) students at National Law University Odisha, Cuttack.