Can we pass an arrest order under insolvency law, NCLAT asks Centre

The National Company Law Appellate Tribunal (NCLAT) has sought response from the Ministry of Corporate Affairs and the Insolvency and Bankruptcy Board of India on whether it or the National Company Law Tribunal (NCLT) can pass penal orders against entities which are successful bidders for companies under the Corporate Insolvency Resolution Process (CIRP), but fails to follow the process through.

The NCLAT’s question is to do with the case of the Liberty House Group, a London-based industrial and metal company, which withdrew from the CIRP after being declared the successful resolution applicant for Amtek Auto. The company was referred to the NCLT under the Insolvency and Bankruptcy Code (IBC) after it defaulted on loans worth Rs 123 billion. Last year, Liberty House had won the resolution application with a bid of Rs 42 billion, in which banks had agreed to take a 67 per cent haircut.

The NCLAT wants to know if it can go ahead and penalise errant resolution applicants like Liberty House under Section 74(3) or Section 235(A) of the IBC. 

Section 74(3) of the IBC stipulates that officers of those companies who knowingly and wilfuly contravene the terms of the resolution plan should be sentenced to imprisonment for one to five years and fined anywhere between Rs 1 lakh and Rs 1 crore.

Section 235(A), on the other hand, recommends a fine of up to Rs 2 crore in cases where a person or a company contravenes any provision of the IBC and where no specific penalty or punishment is specified.  

However, since these IBC provisions have not been exercised so far, the NCLAT has sought clarification on whether it can pass an order of arrest against the offenders directly or if it needs to go to any other court for it.

The NCLAT also wants to know if the Committee of Creditors (CoC) or any other stakeholder needs to be heard in cases where the successful resolution applicant alleges that the delay was on the part of the lenders or others. It has further asked if the government does not complain against errant bidders, what would be the way to take action against them. Under the IBC, no special courts — other than the NCLAT or NCLT — can take decisions on these matters. 

Liberty House has claimed that it withdrew from the CIRP because it was not given adequate information on the company by the resolution professional (a person appointed by the CoC to manage the affairs of the company till the successful resolution applicant takes over). It has claimed, moreover, that there were valuation differences between what it had been told and what the reality was.

However, the lenders claimed that Liberty House had deliberately not gone ahead with the CIRP even though it has been given all the data. The CoC of Amtek Auto had also sought to bar Liberty House from bidding for any insolvent company in the future. In their application seeking to invoke Section 74 of the IBC against Liberty House in the NCLT-Chandigarh, the CoC had said in December last year that there was lack of bona fide intent on the part of the company to follow the terms of the resolution plan approved by the adjudicating authority.

Liberty House, the lenders had alleged, was seeking to manipulate the statutory mandate of the IBC and reintroduce mischiefs into the insolvency regime of the country which the code had sought to eradicate. They have also filed a civil suit before appropriate courts, seeking damages from Liberty House as it had failed to comply with the terms of the resolution plan within the stipulated time.