[IBC proceedings] "Decision taken by Liquidator in the best interests of the company should be left at that:" NCLT, Kolkata

The National Company Law Tribunal (NCLT), Kolkata recently emphasised that decisions taken in good faith by liquidators engaged to manage the affairs of companies undergoing liquidation proceedings under the Insolvency and Bankruptcy Code (IBC), are protected (Basavaraj Koujalagi & 82 others v. Sumit Binani, liquidator of Gujarat NRE Coke Limited)..A Bench comprising Judicial Member, Rajasekhar VK, and Technical Member, Harish Chander Suri passed the ruling in an application moved by over 80 workers of the Dharwad Unit of Gujarat NRE Coke Limited, which went into liquidation in 2018. .The workers raised several allegations against the liquidator, Sumit Binani, including that he was only interested in closing down the Dharwad plant that is otherwise operational and generating revenue. .Among other prayers, the NCLT was also urged to restrain the liquidator from taking any coercive decision to close down the operations of the Dharwad plant. .While dismissing the plea, the NCLT made several pertinent observations on the degree of autonomy accorded to liquidators, including the following:.1. Rejecting a challenge to the liquidator's decision to terminate a contract between the company and Jeju Metals Private Limited (JMPL), the tribunal observed:"No doubt, the Covid-19 pandemic intervened, but then it is not for the Adjudicating Authority to step into the shoes of the liquidator and examine the commercial viability of the contract. The liquidator is responsible for the affairs of the company in liquidation and if the decision is taken by him in the best interests of the company, then the matter should be left at that. The workers cannot be used as the thin edge of the wedge to revisit the termination of the contract, for that would amount to JMPL riding piggyback on the workers to further its own cause."If JMPL thought that the termination of the contract was wrong, it had all the resources and the legal framework to challenge the same, the NCLT added. Since JMPL had chosen not to do so, the tribunal drew an inference hat JMPL was not aggrieved by the termination of the contract. .2. The liquidator cannot be expected to foot the bill from his own pocket in the absence of adequate cash flows to the corporate debtor.Contrary to the workmen's claims, the NCLT found that the liquidator had paid wages to the workmen to the extent possible, from available funds. In this regard it was noted that in September 2020, it was submitted that owing to limited cash flow, the liquidator had only paid half the salary due to some of the workers drawing higher salaries, while others were paid in full..3. The NCLT found that the liquidator, in this case, had taken every possible step to keep the Dharwad plant operational. On the other hand, the outstanding expenses of the company went beyond its liabilities. From April-December 2019, the revenue generated was ₹18.50 crores, whereas the expenditure was ₹32.55 crores, thereby making the unit nonviable. There were no documents pointing to other sources of revenue to meet the company's expenses either, the NCLT observed. As such, the tribunal went to highlight that, "the liquidator cannot be expected to keep it afloat when the balance sheet of the company is in the red.".4. "At some point of time, hard decisions are called for in the life of a company, and these have to be taken. Nonviable units will have to be closed down", the NCLT went on to comment.Actions will have to be measured up against the objectives of the Code, one of which is to free up resources of nonviable companies by permitting an easy exit, the tribunal said."It cannot be misconstrued to keep nonviable units afloat by some sleight of hand under the guise of keeping it as a “going concern,” thereby defeating a key objective of the Code," the ruling further stated..5. In rejecting a plea for an independent probe into the liquidator's action, the NCLT also pointed out that actions taken by the liquidator in good faith have been protected under the IBC."We hold that in the absence of any allegation of fraud or bias in the decisions of the liquidator, we cannot order a roving inquiry just on the basis of perceived loss of employment of the workers on account of a business decision taken by the liquidator to terminate the arrangement with JMPL. To hold otherwise will set a wrong precedent, and insolvency professionals shall not be able to take independent decisions, leading to a failure of the system. Such an approach should, therefore, be shunned. Actions taken in good faith by a public servant always enjoy protection under the law, and the IBC is no different, providing for the same under section 233 of the Code," the tribunal held. .In this case, the workmen had sought directions against the liquidator on the following, among other, allegations:he has withheld salaries payable to the workers; obstacles were created by him which prevented the running of the Dharwad plant and that the production at the plant gradually declined and finally stopped for no fault of the workers; he terminated a contract between the company and Jeju Metals Private Limited, which had earlier allowed processing of coke from coal at the Dharwad plant. The said termination was obnoxious and without reason, it was argued..The liquidator countered that the company’s financial health had severely deteriorated much prior to the commencement of its liquidation process and that despite various constraints, he has tried to take all possible steps to revive the company. Inter alia, he submitted that the contract with JMPL was terminated as JMPL defaulted on several payments due to the company. .The tribunal ultimately found merit in the liquidator's contentions. It dismissed the workmen's arguments that there was a viable agreement with JMPL, which was self-sufficient to pay off their wages and that it was terminated without reason. ."We have seen from the correspondence exchanged ... that the admitted position was that JMPL was not in a position to commence its operations in the plant, firstly due to ‘market conditions’ and later due to the Covid-19 pandemic. In such circumstances, it is a matter of conjecture whether JMPL would have come as the knight in shining armour to save the workers. Considering that no payments have come forth from JMPL after the termination of the contract, we are not too sure that this could have happened," the tribunal opined. .Whereas the liquidator had earlier been directed to dispose of the company as a going concern, this did not happen within the stipulated three-month period. .The NCLT, therefore, directed the liquidator to proceed with the sale of assets of the company without further ado as per section 33 of the IBC..Advocates Swatarup Banerjee, Arindam Paul, Shariful Haque, and Md Zohaib Rauf appeared for the workmen/ applicants. Advocates Krishnaraj Thaker, Arjun Asthana, Sreenita Ghosh-Dastidar, and Ujjaini Chatterjee appeared for the liquidator..[Read Order]