Liquidation Is Only Recourse When Sole Financial Creditor Is A Related Party: NCLAT New Delhi

Background of the Case

The corporate debtor, M/s/ STROS Esquire Elevators & Hoists Pvt. Ltd., was incorporated as a joint venture vehicle by virtue of an agreement between the appellant and another company. The appellant had 50% shares in the corporate debtor and also advanced certain loans to it. Due to failure of recovery of the amount, the CIRP was initiated and the IRP was appointed.

The IRP found that the appellant is the sole financial creditor and it is also a related party; hence, the CoC could not be constituted. Coming across this dilemma, the IRP filed an application before the adjudicating authority seeking its directions.

The adjudicating authority appointed an amicus, who guided that the liquidation is the only resort available. However, the adjudicating authority didn't consider it and directed the appellant to withdraw the application for CIRP. Aggrieved by which, the appellant preferred the present appeal.

Submission of the Appellant

The appellant relied on the ruling of Phoenix ARC Private Limited vs. Spade Financial Services Limited and Others [(2021) 3 SCC 475] and argued that the proviso to section 21(2) bars the constitution of a CoC with the related party to avoid the conflicts of interest that may arise because of the related party becoming part of the CoC. However, in the present situation, the appellant is the sole financial creditor with no other creditors of any kind; hence, the constitution of the CoC with the sole financial creditor will be in tune with the intent of the proviso to section 21(2).

It also submitted that the order of the adjudicating authority would leave the appellant remediless in law. The resolution professional also concurred with the submissions of the appellant. And it also pointed out that the corporate debtor is not operational now.

Observations of the NCLAT

The NCLAT appreciated the submission of the appellant, but it didn't allow the constitution of the CoC. It observed that it is the prerogative of the legislature to consider it and said that it will not engage in overreaching exercises.

The bench observed that the corporate debtor is not a going concern and is about to die. Therefore, it would be wrong to attempt its revival. Hence, the liquidation is the only viable option. The bench further discussed that even if the corporate debtor would have been in a commercial existence, then also the resolution process could not have been commenced without constituting CoC. And the IBC doesn't provide for the commencement of CIRP without the constitution of CoC. Therefore, the liquidation is the only option left.

It must be underscored that no judicial fora which may include the Tribunals can declare its helplessness to remedy a situation and leave the one who approaches it stranded without a solution, the bench said.

The NCLAT lastly allowed the appeal by setting aside the impugned order and directed the liquidation of the corporate debtor.

Case Name: STROS-Sedlcanske Strojirny, a.s. v. Poonam Basak (IRP for STROS Esquire Elevators & Hoists Pvt. Ltd.)

Case No.: Company Appeal (AT) (Ins) No. 2159 of 2024

Bench: Justice Mr. N. Seshasayee (Member-Judicial), Mr. Arun Baroka (Member-Technical), and Mr. Indevar Pandey (Member-Technical),

For Appellant: Mr. Anandh K, Mr. Ang Bajaj, Ms. Vashita Sharma, Advocates

For Respondent: Mr. Poonam Basak, Interim Resolution Professional (IRP)

Order Date: 12 August 2025

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