NCLAT Reinforces Procedural Adherence in IBC Recovery: Limitations on Liquidators under Section 60(5)(b)

1. Introduction

The case of Ramachandra D. Choudhary v. Bansal Trading Company And Others adjudicated by the National Company Law Appellate Tribunal (NCLAT) on September 1, 2022, establishes significant precedent regarding the procedural boundaries within the Insolvency and Bankruptcy Code, 2016 (IBC). The dispute arose from the Liquidator of M/s. Oasis Tradelink Ltd.'s attempts to recover outstanding amounts from various Sundry Debtors using Section 60(5)(b) of the IBC.

2. Summary of the Judgment

The NCLAT dismissed the appeals filed by Shri Ramachandra D. Choudhary, the Resolution Professional (Liquidator) of M/s. Oasis Tradelink Ltd., challenging the orders of the National Company Law Tribunal (NCLT) Ahmedabad Bench. The NCLT had deemed the Liquidator's applications for recovery of debts under Section 60(5)(b) as not maintainable, directing the Liquidator to use Sections 7 or 9 of the IBC or approach civil courts instead.

The Tribunal emphasized that the Liquidator must adhere to the procedural mechanisms outlined in the IBC and cannot bypass them by directly approaching adjudicating authorities for debt recovery. The judgment underscored the necessity of maintaining a unified insolvency framework to avoid procedural delays and ensure efficient liquidation processes.

3. Analysis

3.1 Precedents Cited

The judgment extensively referenced previous rulings to substantiate its stance:

Devmata Exim Pvt. Ltd. vs. Ms. Kavitha Surana: Highlighted the limitations of Liquidators in short-circuiting judicial proceedings through Section 60(5).
Embassy Property Development Private Limited vs. State of Karnataka: Reinforced the idea that adjudicating authorities cannot bypass existing judicial frameworks, emphasizing procedural adherence.
Gujarat Urja Vikas Nigam Limited vs. Mr. Amit Gupta & Ors.: Discussed the scope and limitations of NCLT's jurisdiction, ensuring it remains within the insolvency context.

These precedents collectively reinforce the principle that Liquidators must operate within the defined procedural confines of the IBC, ensuring that recovery actions are streamlined and do not overlap with other judicial processes.

3.2 Legal Reasoning

The core legal reasoning revolves around the interpretation of Section 60(5)(b) of the IBC, which pertains to the adjudicating authority's jurisdiction over claims against the corporate debtor. The Tribunal clarified that:

Section 60(5)(b) should be read in conjunction with Sections 7, 9, and 31(1)(k) of the IBC, guiding the Liquidator to initiate recovery through specified insolvency channels rather than direct adjudicative applications.
The Liquidator cannot leverage Section 60(5) to bypass judicial proceedings and must adhere to IBC's procedural mandates to ensure timely and effective liquidation.
A Linked Insanity Resolution Process (CIRP) under the IBC requires that all debt recovery actions be confined within the IBC framework to prevent fragmentation and delays.

The Tribunal emphasized that allowing Liquidators to bypass these procedures would undermine the IBC's objective of creating a streamlined and unified insolvency resolution process.

3.3 Impact

This judgment has profound implications for future insolvency proceedings under the IBC:

Procedural Clarity: Reinforces the necessity for Liquidators to strictly follow the IBC's procedural guidelines for debt recovery, ensuring uniformity across insolvency cases.
Jurisdictional Boundaries: Clarifies the limits of NCLT's jurisdiction, preventing encroachment into general civil judicial processes.
Efficiency in Liquidation: By adhering to the prescribed procedures, the liquidation process becomes more efficient, minimizing delays and enhancing creditor recoveries.
Legal Precedent: Establishes a robust legal precedent that affiliates future cases to follow similar interpretations, thereby reducing ambiguity in insolvency proceedings.

4. Complex Concepts Simplified

Understanding the intricacies of the IBC and the Tribunal’s reasoning can be challenging. Here are simplified explanations of key legal concepts involved:

Section 60(5)(b) of the IBC: Grants the National Company Law Tribunal (NCLT) jurisdiction to entertain claims made by or against a corporate debtor during insolvency proceedings.
Corporate Insolvency Resolution Process (CIRP): A process initiated under the IBC to resolve the insolvency of a corporate debtor, involving reorganization or liquidation.
Liquidator: An individual appointed to oversee the liquidation process, responsible for recovering and realizing the debtor's assets to repay creditors.
Adjudicating Authority: Bodies like NCLT and NCLAT that have the jurisdiction to adjudicate insolvency matters under the IBC.
Regulation 39 of IBBI (Regulation Process), 2016: Governs the roles and responsibilities of the Liquidator in the insolvency process, including debt recovery.

5. Conclusion

The NCLAT's decision in Ramachandra D. Choudhary v. Bansal Trading Company And Others underscores the imperative for Liquidators to operate within the procedural frameworks established by the IBC. By dismissing the Liquidator's applications to directly recover debts through adjudicating authorities, the Tribunal reinforced the necessity of adhering to Section 60(5)(b) alongside Sections 7 and 9 of the IBC. This judgment not only clarifies the jurisdictional boundaries of NCLT and NCLAT but also fortifies the IBC's objective of ensuring a streamlined and efficient insolvency resolution process. Future Liquidators must heed this precedent to avoid procedural lapses and ensure effective creditor recoveries within the legal confines of the IBC.