Application under Section 230 of Companies Act and Regulation 2B of IBBI Liquidation Regulations denied due to absence of CoC recommendation and attempts to delay liquidation by suspended director
In a significant ruling dated September 4, 2026, the National Company Law Tribunal (NCLT), Amaravati Bench, dismissed the interlocutory application filed by the liquidator of M/s. Mangalagiri Textile Mills Pvt. Ltd., seeking permission to explore a scheme of compromise or arrangement under Section 230 of the Companies Act, 2013, read with Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016. The application was filed in the backdrop of the Corporate Insolvency Resolution Process (CIRP) failing and the corporate debtor being ordered into liquidation by the tribunal on July 21, 2026.
The financial creditor, State Bank of India (SBI), was the sole member of the Committee of Creditors (CoC), holding 100% voting rights. During the CIRP, the resolution plan submitted by the suspended director, Dr. G. Nagasaina Rao, was approved by the CoC but ultimately failed due to Dr. Rao's inability to furnish the required Performance Bank Guarantee (PBG) despite multiple extensions. This failure led to the liquidation order. Subsequently, the liquidator sought leave from the tribunal to explore a compromise or arrangement to revive the corporate debtor under Section 230 of the Companies Act.
However, the tribunal scrutinized the application and highlighted critical procedural lapses. It noted that Regulation 2B mandates a recommendation from the CoC under Regulation 39BA of the CIRP Regulations before a liquidator can file a proposal for compromise or arrangement. The tribunal found that no such substantive recommendation had been made during CIRP. Although the 22nd CoC meeting had discussed the possibility of compromise while fixing the liquidator's fees, this did not amount to an official recommendation. The CoC's subsequent resolution post-liquidation authorizing the liquidator to file the application could not retrospectively fulfill this statutory requirement.
Further, the tribunal distinguished the present case from the precedent set in Shahid Ali v. Kuldeep Verma, explaining that in that case, the suspended director's resolution plan was never approved and was only permitted to file a scheme after another plan became non-responsive. In contrast, here, Dr. Rao's plan was approved but failed due to non-compliance with PBG submission, leading to liquidation.
The tribunal also observed that Dr. Rao's letter seeking initiation of compromise appeared to be a mere attempt to delay the liquidation process, especially considering his history of repeated extensions sought during the CIRP and failure to comply with crucial requirements. The tribunal expressed concerns over Dr. Rao's conduct and noted pending investigations into potentially avoidable or fraudulent transactions (PUFE transactions) identified in the liquidation order, which further undermined the bona fides of the compromise proposal.
In view of the above, the tribunal held that the liquidator's application was not maintainable under Section 60(5) of the Insolvency and Bankruptcy Code, 2016, nor under the inherent powers vested in the tribunal under Rule 11 of the NCLT Rules, 2016. Consequently, the application was dismissed, and the liquidation process was permitted to proceed without further delay.
This ruling reaffirms the strict compliance requirements under the Insolvency and Bankruptcy Code and associated regulations concerning compromise or arrangement schemes during liquidation and underscores the judiciary's stern stance against attempts to delay insolvency resolution processes through procedural loopholes.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 - Liquidation - Compromise or arrangement under Section 230 of Companies Act, 2013 - Leave sought by Liquidator to explore scheme under Regulation 2B of IBBI (Liquidation Process) Regulations, 2016 - In absence of recommendation of CoC under Regulation 39BA during CIRP, subsequent resolution of CoC after liquidation cannot retrospectively cure statutory requirement - Suspended director whose resolution plan had earlier been approved but who failed to furnish Performance Bank Guarantee despite repeated extensions, cannot be permitted to use Section 230 route to delay liquidation - Application rightly dismissed.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Section 7, 21(2), 21(11), 29A(g), 33, 43, 45, 49, 50, 60(5), 66;
Companies Act, 2013 Section 230, 240A;
IBBI (Liquidation Process) Regulations, 2016 Regulation 2B, 32, 32A, 39BA;
CIRP Regulations Regulation 39BA, 39D;
National Company Law Tribunal Rules, 2016 Rule 11.
