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Hijacking the CIRP: How a Minority Operational Creditor's Attempt to Derail the Process Led to Liquidation

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In a compelling decision under the Insolvency and Bankruptcy Code, 2016 (IBC), the National Company Law Tribunal (NCLT), Mumbai Bench-I, recently addressed a scenario where a minority Operational Creditor attempted to exploit statutory loopholes to control and ultimately derail a Corporate Insolvency Resolution Process (CIRP).

The ruling in the matter of Statomat Special Machines (India) Private Limited serves as a cautionary tale about the disproportionate power that can fall into the hands of a minor creditor when the primary financial stakeholder is a related party, and how the NCLT steps in to resolve such deadlocks.

The Setup: A Rs. 3.5 Lakh Creditor Controls a Rs. 16 Crore CIRP

The CIRP of Statomat Special Machines (India) Private Limited (the Corporate Debtor) was initiated by its Financial Creditor, Schaeffler Elmotec Statomat GmbH, under Section 7 of the IBC. The Financial Creditor held a massive aggregate claim of Rs. 16,54,89,030/-. However, because the Financial Creditor was a related party to the Corporate Debtor, it was statutorily excluded from membership in the Committee of Creditors (CoC).

This exclusion created a unique vacuum, allowing an Operational Creditor—VG VS & Co. Chartered Accountants—whose admitted claim was a mere Rs. 3,50,289/-, to become the sole member of the CoC, thereby wielding 100% of the voting rights.

The Operational Creditor's Maneuvers to Derail the Process

Empowered by its absolute control over the CoC, the Operational Creditor initiated a series of aggressive steps that threatened to derail the CIRP and sideline the Financial Creditor entirely.

  1. Attempting to Replace the IRP: The Operational Creditor's first major move was filing an application to replace the existing Interim Resolution Professional (IRP), and appoint a Resolution Professional of its own choosing. This move signaled an intent to take complete administrative control over the CIRP, despite holding a fraction of a percent of the total debt.
  2. Filing a Defective Withdrawal Application: To prevent the Operational Creditor from hijacking the process, the Financial Creditor intervened and offered to settle the Operational Creditor's minor claim in full. The Financial Creditor discharged the entire Rs. 3,50,289/- claim on 5th March 2026;However, instead of simply exiting the process, the Operational Creditor immediately filed Form FA under Regulation 30A, seeking to unilaterally withdraw the CIRP. This was a blatant procedural overreach. Under Section 12A of the IBC read with Regulation 30A, a withdrawal application must be signed by the original petitioner (the Financial Creditor). By executing the form itself, the Operational Creditor attempted to unlawfully terminate the CIRP without the Financial Creditor's consent.
  3. Arguing the Financial Creditor's Debt was Extinguished: In a final attempt to derail the Financial Creditor's standing, the Operational Creditor contended that the Corporate Debtor no longer owed any debt to the Financial Creditor because the debt had been written off.
The NCLT's Intervention: Restoring Order Through Liquidation

The NCLT saw through these maneuvers and systematically dismantled the Operational Creditor's attempts to hijack the proceedings.

First, the Tribunal outright rejected the argument regarding the written-off debt. The NCLT clarified that a financial creditor writing off a debt is merely an accounting entry required to state assets at fair value and debit the loss to the Profit and Loss Account; it does not result in the discharge of the Corporate Debtor's actual debt.

Second, the Tribunal noted that upon receiving full payment, the Operational Creditor ceased to be a creditor of the Corporate Debtor. Consequently, the CoC stood dissolved, as the only remaining creditor was the related-party Financial Creditor, who is statutorily debarred from CoC membership under the proviso to Section 21(2) of the Code.

Relying on the NCLAT's precedent in STROS Sedlcanske Strojirny, a.s. vs. Poonam Basak, the NCLT observed that a CIRP cannot proceed without a CoC, and tribunals cannot overreach to accommodate related parties into the CoC. Since the withdrawal application was procedurally invalid and the CoC was empty, the NCLT ruled that the only legally available course of action was to admit the Corporate Debtor into liquidation.

Key Takeaways:
  • Minority Creditor Risks: When major financial creditors are related parties, minority operational creditors can gain disproportionate power. Businesses must be wary of such creditors attempting to leverage their 100% voting rights to replace IRPs or dictate terms.
  • Accounting Entries vs. Legal Rights: Writing off a bad debt in the books of accounts does not extinguish the legal right to recover that debt under the IBC.
  • Strict Procedural Compliance: Attempts by a creditor (who has not initiated the CIRP) to withdraw a CIRP unilaterally will fail. The NCLT strictly enforces the mandate that Section 12A withdrawals require the original applicant's signature.

The author appeared for Schaeffler Elmotec Statomat GMBH (Financial Creditor).