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Karnataka High Court Quashes CoC Resolutions Over Procedural Irregularities

Introduction

In the intricate domain of corporate insolvency, adherence to procedural norms is paramount to ensure fairness and transparency. This principle was vividly underscored in the case of Farooq Ali Khan v. Punjab National Bank[i], which was decided by the High Court of Karnataka (‘HC’). The case revolved around the validity of a resolution plan (‘Plan’) approved during a committee of creditors (‘CoC’) meeting that was convened with significantly inadequate notice, raising questions about the procedural integrity of the corporate insolvency resolution process (‘CIRP’). The ruling highlighted the critical importance of compliance with the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and its regulations.

Brief Facts

  • Associate Décor Limited (‘Company’), involved in manufacturing wood products, secured loans and credit facilities from a consortium of banks between 2010 and 2015, totalling about Rs. 582 crores.

  • Due to disputes among promoters and market changes, the Company defaulted on loan repayments, classifying it as a Non-Performing Asset (NPA) by 2016.

  • The consortium of banks initiated recovery proceedings, and Punjab National Bank (‘Respondent No. 1’) filed a petition under s. 7 of the IBC before the National Company Law Tribunal (‘NCLT’) for the CIRP.

  • Despite the Company’s improving operations, generating around Rs. 30 crores monthly, the NCLT appointed an interim resolution professional (‘IRP’) who took over the Company’s affairs. A CoC was formed with Respondent No. 1 holding 24.16% voting share, Respondent No. 2 holding 41.18% voting share, and Respondent No. 3 holding 34.66% voting share.

  • Various CoC meetings were held, with significant developments, including the receipt of resolution plans from prospective applicants and the scoring of these plans. On 11.02.2020, a crucial CoC meeting was convened with less than 3 hours' notice to the petitioner, during which a Plan was approved.

  • Aggrieved by the same, the petitioner filed the present writ petition (‘WP’), citing inadequate notice and procedural violations, and sought judicial intervention to quash the decisions made in the meeting.

Held

  • The HC allowed the WP filed by the petitioner and quashed the Plan that had been approved in the 19th CoC meeting held on 11.02.2020 due to procedural non-compliance. It also quashed the minutes of the 22nd CoC meeting held on 21.12.2022 as they were consequential to the invalid 19th meeting.

  • The HC, while allowing the petition, held that the notice for the 11.02.2020 meeting did not comply with the mandatory requirements of s. 24 of the IBC and r. 19(1) & (2) of the Insolvency and Bankruptcy Board of India (‘IBBI’) Regulations require at least 24 hours’ notice. It emphasized that any reduction in the notice period must be recorded in writing, which was not done in this case.

  • It further directed the CoC to reconsider the restructuring proposal submitted by the petitioner under s. 12A of the IBC while also granting the petitioner the liberty to file a complaint with the IBBI regarding the conduct of the resolution professional within 15 days.

Our Analysis                            

The HC’s decision emphasizes the importance of proper notice for CoC meetings as mandated under the provisions of IBC. The decision underlines that any deviation from the prescribed notice period must be supported by valid reasons and documented appropriately. Failure to comply with these notice requirements can invalidate resolutions in such meetings. Additionally, the HC noted concerns about the conduct of the resolution professional, particularly regarding the preparation of the information memorandum, which was alleged to be incomplete and erroneous. This decision highlights the necessity for transparency and adherence to procedural requirements in the CIRP to ensure fairness and legality.


 

 


End Note

[i] 2023 SCC OnLine Kar 175: (2024) 243 Comp Cas 708





Authored by Pratima Ajmera, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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