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Can Post-Liquidation CoC Resolution Cure Missing Recommendation? NCLT Amravati Says No for Mangalagiri Textile Mills
The , has delivered a significant ruling clarifying that a resolution passed by the after the commencement of liquidation cannot the absence of a prior recommendation under Regulation 39BA of the (Liquidation Process) Regulations, 2016. The decision, which arose from the liquidation of , reinforces the for pursuing a under during the liquidation phase.
The bench, comprising Judicial Member Kishore Vemulapalli and Technical Member Umesh Kumar Shukla, dismissed an application filed by the liquidator seeking permission to explore a compromise with creditors. The tribunal held that a later resolution authorising the liquidator could not retroactively transform earlier CoC deliberations into the required recommendation, nor cure the .
Background: From Insolvency to Liquidation
was admitted into the on . The company’s Committee of Creditors was dominated by , which held 100% of the voting share, as another financial creditor was a related party and thus disenfranchised. During the CIRP, the CoC approved a submitted by the suspended director, Dr. G. Nagasaina Rao. However, despite multiple extensions, Rao failed to furnish the required , leading to the plan's failure. Consequently, the NCLT ordered the company’s liquidation on .
After liquidation proceedings began, Rao approached the liquidator with a fresh proposal for a , claiming that the company qualified as an under , which would make him eligible to offer such a proposal. The liquidator then filed an application under of the (Liquidation Process) Regulations, seeking judicial permission to negotiate a compromise.
The Statutory Framework: Regulation 2B and Regulation 39BA
Section 230 of the Companies Act provides a mechanism for a company to seek approval from its creditors or members for a . During liquidation, Regulation 2B of the (Liquidation Process) Regulations governs such proposals. Crucially, Regulation 2B requires the liquidator to file an application only if the CoC has made a recommendation to that effect under Regulation 39BA. Regulation 39BA outlines the procedure for the CoC to deliberate and recommend whether a should be explored.
The liquidator argued that the 22nd CoC meeting held on —before the liquidation order—had effectively provided such a recommendation. In that meeting, while fixing the liquidator’s fee, the CoC had included a provision for a fee for any period used for a under Section 230. The liquidator contended that this amounted to a prior recommendation.
Tribunal’s Reasoning: No Retrospective Cure
The NCLT rejected this argument, finding that the minutes of the 22nd CoC meeting contained no explicit recommendation under Regulation 39BA to explore a compromise. The tribunal observed that merely contemplating a period for compromise while fixing the liquidator’s fee could not be treated as the substantive recommendation required under the regulation. The bench stated:
“The subsequent resolution passed by the CoC after commencement of liquidation authorising the Liquidator to file the present IA cannot retrospectively convert the earlier deliberation into a recommendation under Regulation 39BA or cure the statutory requirement contemplated under Regulation 2B.”
This holding underscores a strict : the CoC’s recommendation must exist before the liquidation order, and a post-liquidation resolution cannot fill the gap. The tribunal emphasised that is not a formality but a .
Distinguishing the Shahid Ali Precedent
The liquidator sought support from the NCLAT’s ruling in , but the tribunal distinguished that case on its facts. In Shahid Ali , the suspended director’s was never approved by the CoC, whereas in the present case, Rao’s plan had been approved but failed due to his non-compliance with the bank guarantee requirement. The NCLT noted that Rao had been given multiple opportunities to furnish the guarantee and had failed, making his subsequent compromise proposal an attempt to circumvent the consequences of his own default.
Additional Concerns: and Pending Compliance
The tribunal also highlighted that the liquidation order had directed the liquidator to examine the and take appropriate steps under concerning . Compliance with these directions was still pending at the time of the application. The bench observed that the suspended director appeared to have approached the tribunal through the application to avoid the consequences of the referred to in the liquidation order.
This observation suggests that the tribunal viewed the compromise proposal as a tactical move rather than a genuine attempt to resolve the company’s affairs. The bench noted that allowing such an application while the liquidator had yet to complete the PUFE investigation could undermine the .
Implications for Legal Practice
This ruling provides critical guidance for insolvency professionals, creditors, and corporate lawyers. First, it clarifies that the CoC’s recommendation under Regulation 39BA must be explicit and documented before the liquidation order. Post-liquidation resolutions cannot retrospectively validate missing procedural steps. Second, the decision reinforces the principle that under the IBC is strict and not subject to later cure by subsequent CoC actions.
For liquidators, this means that any intention to explore a must be raised and resolved by the CoC during the CIRP itself. Failing that, the liquidation process must proceed without the possibility of a compromise unless a fresh recommendation is made—but the tribunal’s reasoning suggests that even a fresh recommendation after liquidation would not suffice if there was no prior deliberation.
For creditors, especially those holding significant voting shares like SBI, the ruling underscores the need to ensure that minutes of CoC meetings clearly reflect any recommendation to pursue a compromise. Ambiguous references to fees or time periods will not be construed as a substantive recommendation.
The decision also highlights the tension between the flexibility sought for MSMEs under Section 240A and the procedural rigour of the liquidation regulations. While the IBC provides certain relaxations for MSMEs, these do not override the specific requirements of Regulations 2B and 39BA.
Conclusion
The NCLT Amravati Bench’s decision in the Mangalagiri Textile Mills case serves as a timely reminder that the IBC’s liquidation framework is designed with careful procedural safeguards. The requirement of a under Regulation 39BA is not a mere technicality but a substantive condition that ensures creditors have a say before the liquidator embarks on a compromise. By dismissing the liquidator’s application, the tribunal has reinforced the importance of strict adherence to these regulations, thereby protecting the and the interests of all stakeholders.
The judgment is likely to be cited in future cases where liquidators seek to procedural gaps, and it will undoubtedly influence how CoC meetings are conducted and documented in the context of potential compromises. Legal professionals advising on liquidation matters must now ensure that any recommendation to explore a Section 230 compromise is clearly recorded in the minutes before the company is ordered into liquidation.
