Scheme Proponent Can't Be Forced To Pay EMD After Non-Acceptance In Liquidation: NCLAT

The National Company Law Appellate Tribunal (NCLAT) Chennai Bench has ruled that a scheme proponent cannot be compelled to forfeit its Earnest Money Deposit (EMD) guarantee after choosing to withdraw from the process once its scheme was not accepted during liquidation. The appellate bench comprising Justice N. Seshasayee (Judicial Member) and Jatindranath Swain (Technical Member) allowed the appeal filed by Sun Paper Ltd. against the order of the National Company Law Tribunal (NCLT) Chennai, which had directed it to deposit ₹2 crores into the liquidation estate of Servalakshmi Paper Ltd.

A Tale of Two Schemes in Liquidation

Servalakshmi Paper Ltd. was ordered into liquidation, and under Regulation 2B of the IBBI (Liquidation Process) Regulations, the liquidator invited schemes for sale of the corporate debtor as a going concern. Two proposals emerged: one from Sun Paper Ltd. and another from Seshasayee Paper and Boards Limited. Each proponent submitted an EMD guarantee of ₹2 crores.

The Committee of Creditors (CoC) initially approved Sun Paper’s scheme, but the liquidator expressed preference for Seshasayee Papers. The NCLT, in March 2020, remanded the matter back to the CoC for de novo consideration. Sun Paper challenged this remand order before the NCLAT in Company Appeal No. 451 of 2020, but withdrew the appeal in August 2020, citing delays caused by the Covid-19 pandemic.

Neither scheme ultimately received approval. The corporate debtor was eventually liquidated, with Seshasayee Papers purchasing it as a going concern. The liquidator then moved applications seeking realization of the EMD guarantees from both proponents. While Seshasayee Papers contested, Sun Paper could not appear due to pandemic restrictions. In May 2023, the NCLT directed Sun Paper to deposit ₹2 crores into the liquidation estate, prompting the present appeal.

Arguments Over Liability and Standing

Sun Paper contended that once its scheme was not accepted, it had no legal obligation to continue. The withdrawal of its appeal merely restored the position to the stage before the remand order. It also argued that the counsel noted in the NCLT order was not representing Sun Paper, and that it could not effectively participate due to Covid restrictions.

The liquidator countered that withdrawal of the appeal did not amount to withdrawal from the scheme process, and therefore the liability to deposit the EMD continued. He acknowledged that the corporate debtor was eventually sold to Seshasayee Papers in liquidation.

Commercial Realities and the Freedom to Walk Away

The NCLAT examined the nature of an EMD obligation in the context of scheme submission. It held that the EMD was furnished only for the purpose of submitting the scheme. Once the scheme was not accepted, the proponent had the freedom to decide whether to continue or withdraw.

The Tribunal emphasized commercial realities, observing that no business entity participates in liquidation proceedings for charity but to secure commercial advantage. It noted that a businessman cannot be forced to “look at the food in the plate without eating it for long.” Distinguishing between the liquidator's duty to maximize value and a proponent's commercial freedom, the NCLAT stated:

“Hence we are constrained to hold that when the appellant, impelled by its commercial acumen, opts to withdraw from the race when its scheme was not accepted for reasons which it considers relevant to its scheme of commercial decision, it only deserves to be respected and not punished.”

The Tribunal further noted that the liquidator failed to demonstrate any legal basis for demanding the deposit of the guarantee amount.

Key Observations from the Judgment

  • “Given these conflicting realities, a man in business only attempts to optimize his advantage within a time frame, and if he becomes impatient, he cannot be sentenced to force-stay in the race.”
  • “But they cannot be forced to look at the food in the plate without eating it for long. This is the reality of commerce.”
  • “The claim of the liquidator is wholly unsustainable in law.”
  • “A scheme proponent only undertakes to submit a scheme of his/its design and not any scheme to the satisfaction of the CoC or the Adjudicating Authority.”

Final Order and Implications

The NCLAT allowed the appeal and set aside the NCLT order dated 12.05.2023 in IA/846/2020 in CP/514/IB/2017. All pending applications were closed, and no costs were imposed. The ruling clarifies that a scheme proponent is not legally bound to continue with the process once its scheme is not accepted, and cannot be penalized by forfeiting the EMD guarantee for withdrawing at that stage. This decision reinforces the principle that commercial participants in insolvency proceedings are entitled to make independent business judgments without being forced to remain in a process that no longer serves their interests.