NCLT on Gitanjali Gems Liquidation: Analysing its Role and Authority Under IBC, 2016

Introduction

The jewellery retailer Gitanjali Gems, which is owned by the wanted man Mehul Choksi, notified the exchanges on Monday that the NCLT Mumbai bench has mandated the company’s liquidation. The decree came into effect on February 7, 2024.

A company or corporation may be liquidated by winding up its operations by selling off its free assets to turn those assets into cash that can be used to pay off the unsecured creditors. The procedures may be commenced in accordance with IBC, 2016, and they may be filed with the NCLT.

IBC, 2016 in India places significant emphasis on the NCLT, which is the principal adjudicator of corporate bankruptcy resolution and liquidation cases. Among its duties are accepting or declining petitions to begin the Corporate Insolvency Resolution Process (CIRP) and supervising the acceptance or rejection of resolution plans that are filed throughout this procedure. The NCLT also serves as the ultimate adjudicator in situations when a resolution plan is disputed or non-existent, and if required, it issues orders for the corporate debtor’s liquidation. Maintaining the integrity and efficacy of the IBC’s framework for insolvency resolution is essential.

Furthermore, the NCLT arbitrates disagreements that arise throughout the insolvency resolution process to ensure that creditors are treated equally and fairly. Its rulings provide a formal legal framework for the handling of insolvency-related issues. They may be challenged to higher courts, including the Supreme Court and the NCLAT. The NCLT essentially acts as a cornerstone in the implementation of the IBC, maintaining the fundamentals of bankruptcy resolution and enhancing the overall effectiveness of India’s insolvency system.

Gitanjali Gems case

As a result of having liabilities of over Rs 12,000 crore, Gitanjali Gems was accepted into the CIRP in the month of October 2018. In July 2021, Nakshatra World, another corporation connected to Choksi, was accepted for liquidation

[Image Sources: Shutterstock]

Karnatka high court

Vijay Kumar Garg, who is the resolution professional for Gitanjali Gems Ltd., was the one who filed the application for liquidation. Judicial Member Kuldip Kumar Kareer and Technical Member Anil Raj Chellan were the members of the division bench that voted to approve the decision. The Enforcement Directorate (ED) and the Central. Bureau of Inquiry (CBI) were conducting an inquiry into the affairs of Gitanjali Gems, according to Garg, who told the NCLT that the business is being investigated for suspected fraudulent actions. Garg informed the tribunal in his application that immediately after the appointment, he wrote to various investigation authorities (including the ED and the CBI) requesting details and access to such properties, assets, stocks, and records of Gitanjali Gems to proceed further with the CIRP. Garg’s application was submitted to the tribunal. However, the authorities did not grant Garg’s plea and did not agree to release the attachment that had been placed on the properties of Gitanjali Gems in CIRP. Furthermore, Garg said that the odds of the firm’s rebirth were very low due to the fact that the CIRP had already expired in April 2019, which was 180 days ago. The company did not have any continuing commercial activities. Therefore, he began the liquidation process by submitting an application to begin the procedure. Additionally, he refused to take on the role of liquidator.[i]

The order passed by NCLT read:

“It is evident that the assets of Gitanjali Gems were under attachment by the Directorate of Enforcement under the provisions of the Prevention of Money Laundering Act (PMLA)  and considering the bleak chances of liquidation resolution amid the ongoing investigations and attachment of assets, the CoC had resolved to liquidate the Corporate Debtor by a majority of 90.16% voting in favour. This Bench is of the opinion that the Corporate Debtor is required to be liquidated”.

To understand the position of Gitanjali Gems and the NCLT’s judgment, we need to further understand the authority derived by the NCLT under the IBC.

NCLT’s role and authority under IBC, 2106

In “Gujarat Urja Vikas Nigam Limited v. Amit Gupta, SC stated, “NCLT has the authority to decide cases arising solely on the grounds of insolvency under IBC.”[ii] For the purpose of resolving insolvencies and liquidating corporate entities, the Insolvency and Bankruptcy Code acknowledges the NCLT, which was established according to Section 408 of the Companies Act of 2013.

The corporate entity’s registered office’s situs is the determining factor in settling bankruptcy and liquidating corporate debtors, corporate individuals, and personal guarantors. As per Section 60(1) of IBC, “NCLT has jurisdiction over the location of the corporate entity’s registered office, is where applications for starting the liquidation resolution procedure or liquidation of corporate debtors must be lodged.” Similarly, a corporate person’s voluntary liquidation application must be submitted to the NCLT, which has authority over the location of the corporate entity’s registered office. According to the ruling of Justice Ashok Bhushan (chairperson), and Shreesha Merla (Technical Member) in “Anil Kumar Malhotra v. Mahindra & Mahindra Financial Services Ltd.”:

The Facility Agreement between the parties cannot restrict the NCLT’s regional/ territorial jurisdiction to adjudicate a matter under the Insolvency and Bankruptcy Code, 2016.”[iii]

Although the Debt Recovery Tribunal (DRT) is acknowledged as the “adjudicating authority for partnership firms and individuals,” Section 60(3) of IBC states- “In the event that an individual is a personal guarantor of a corporate debtor and the corporate debtor’s liquidation proceedings or liquidation resolution process is pending before an NCLT, the NCLT will also receive an application pertaining to the bankruptcy or liquidation resolution of the corporate debtor’s personal guarantor.” The NCLT will have the same authority as the DRT in handling applications pertaining to the liquidation resolution or bankruptcy of personal guarantors of corporate debtors when handling these cases.

Section 7(1) of IBC discusses “the prohibition of direct liquidation of the debtor by the creditors. Before being put into liquidation, the debtor must go through the IBC’s CIRP. If the debtor defaults for at least 10 lakh rupees (as notified by the Central Government vide Notification No. S.O. 1543(E) dated 9th April 2021), a financial or operational creditor may start the resolution procedure by submitting an application to the NCLT, which has jurisdiction over the debtor’s registered office.” Several broad distinctions exist between filings from an operational creditor and financial creditors.

Section 10 of IBC discusses the “Initiation of corporate insolvency resolution process by the corporate applicant.The CIRP of the corporate debtor begins when the NCLT accepts the creditor’s application to begin liquidation resolution.”

Sections 30 and 31 of IBC mention “the Submission and approval of the resolution plan by NCLT. The debtor will not go into liquidation if the CIRP is successful, that is, if the committee of creditors and the NCLT accept the debtor’s resolution plan. However, the NCLT will issue a debtor liquidation order in the following circumstances:

  • No application is submitted to the NCLT for approval of the resolution plan within the allotted time frame [180 days, extendable to 330 days from admission as identified by Section 12(1) sub-section 2 of IBC];
  • The resolution plan, if submitted earlier, is denied by the NCLT for non-compliance;
  • The committee of creditors decides to liquidate the debtor before the resolution plan is confirmed; or
  • The corporate debtor violates a resolution plan approved by the NCLT.”

According to Section 33 and 34 of the IBC, NCLT has the jurisdiction to appoint a liquidator. “The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator” -as per Section 33(7) of IBC.

Like a resolution specialist, the liquidator accepts possession of the debtor’s assets (the board of directors is still suspended) and asks the debtor’s creditors to submit claims. The liquidator creates a liquidation estate, sells the assets that comprise the estate, and distributes funds to the stakeholders in accordance with the IBC’s specified distribution cascade. The liquidator applies to the NCLT for the debtor’s dissolution once all assets have been sold and the proceeds have been allocated. There cannot be any lawsuits or other legal actions brought against the debtor during the liquidation phase. The liquidator may provide a scheme or sell the business as a going concern throughout the liquidation process.

As per IBC, with the exception of the need that the corporate debtor’s partners or shareholders approve the resolution, the procedures for starting a liquidation resolution process are substantially the same for both voluntary and involuntary filings. Furthermore, whereas creditor-filed actions are contentious and the debtor has specific defences against admission, voluntary proceedings are often non-contentious. Both voluntary and involuntary bankruptcy resolution procedures follow the same procedure for reaching a resolution once the CIRP begins. As per Section 33(1) of the IBC, “in both situations, the NCLT issues a liquidation order if a settlement is not reached within the allotted time frames. The liquidation procedure is the same in both situations.”

However, the procedure for initiating an involuntary and voluntary liquidation differs significantly. Section 59 of IBC states- “ in non-default situations, the debtor may only initiate voluntary liquidation; NCLT permission is not needed to initiate voluntary liquidation procedures.” In contrast, “a creditor may only engage in involuntary liquidation after first completing the resolution procedure” [as per Section 7(1)], and the NCLT is the body that issues the liquidation order in the event that the resolution process is unsuccessful.

The NCLT application must be submitted in the required format with the necessary fees, the prescribed papers (such as debt and default records), and prescribed supporting documentation. This application may be accepted or rejected by the NCLT, which will notify the applicant of its decision and compel it to correct any errors in the application within a specified time frame. The reorganization procedure, or the CIRP, begins when the NCLT issues an order accepting or admitting the application.  A “moratorium” on measures against the debtor is imposed upon the NCLT approving the admission order, and it remains in place for the duration of the settlement procedure. The debtor appoints an interim resolution professional (similar to an administrator) to supervise the resolution process, and the interim resolution professional takes over the board of directors’ authority when the board is suspended. The professional in charge of interim resolution invites claims from the corporate debtor’s creditors and establishes a committee of creditors, which has the authority to choose between keeping the interim resolution professional as the resolution professional and hiring a different resolution professional in its place. In addition to managing the debtor as a continuing concern, the resolution professional encourages individuals who meet the eligibility requirements set out by the resolution professional and approved by the committee of creditors to submit “resolution plans” for the debtor. A resolution plan for the debtor may be submitted by any individual who meets the requirements for eligibility and is not otherwise prohibited from presenting the plan under the IBC.

The resolution plan lays forth suggestions for ending the firm’s bankruptcy. These suggestions may include debt restructuring, asset sales, mergers, company acquisitions, or other strategies. In essence, this is the company’s reorganization strategy. “The committee of creditors (CoC)  Review each resolution plan that complies with the IBC’s standards before approval. Any resolution proposal that receives more than 66% of the vote in the committee is referred to the NCLT for final approval” [ as per Section 30(4) of IBC, 2016].  A resolution plan becomes legally enforceable upon approval by the NCLT for the corporate debtor and its staff, members, creditors, guarantors, and any parties with an interest in the resolution plan.

“Within 180 days (extendable to 330 days in specific situations), the full CIRP must be completed (from the date of admission of petition or application to the filing of the resolution plan with the NCLT for its approval). Mandatory liquidation of the firm will occur if no resolution plan is accepted by the committee of creditors and submitted to the NCLT within this time. The NCLT may also decide to prolong the 330-day timeframe under certain circumstances. If the NCLT rejects the resolution plan submitted for approval, the corporation may potentially be placed into liquidation [as per Section 31(2) of IBC, 2016].”[iv]

In “Manoj Kumar Khokhar v. State of Rajasthan,” it was stated- “NCLT has to document valid grounds in case of rejection of the resolution plan under Section 31(2) of IBC.”[v]

Conclusion

Following the completion of the Gitanjali Gems case, the role and authority of the NCLT have been brought to light. The case is an example of involuntary liquidation. The reasoning for the liquidation of the famous jewellery retailer by the NCLT is based on several reasons, including continuing investigations, the seizure of assets, and the low possibility of insolvency settlement. NCLT enabled the orderly winding up of Gitanjali Gems by invoking Section 33 of the IBC. NCLT serves as the authority for executing the IBC, ensuring that creditors’ rights, debtor rehabilitation, and economic stability are all considered.

Author: Ishika Sharma, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References

[i] https://www.livelaw.in/news-updates/nclt-orders-liquidation-of-mehul-choksi-promoted-gitanjali-gems-249343?infinitescroll=1

[ii] 2021 SCC OnLine SC 194

[iii] 2022 SCC OnLine NCLAT 200

[iv] https://www.lexology.com/library/detail.aspx?g=9c3e1f41-1d7d-48c1-9f82-ae6167d2486b

[v] (2022) 3 SCC 501

Tagged

CIRP, IBC, Liquidation, NCLT,

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