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Under Insolvency and Bankruptcy Code if there is a default by any company in making payments to the creditors then those creditors can initiate insolvency resolution process. The National Company Law Tribunal (NCLT) initiates a corporate insolvency resolution process after filing of an application by creditor, operational creditor or corporate itself. Insolvency resolution process start if the application is accepted by NCLT then an interim resolution professional will be appointed for taking the power of a company which is defaulted. After that committee of creditors is formed and resolution plan is to be prepared by the creditor and the documents are to be provided to the board of directors by the creditors. Vijay Kumar Jain v. Standard Chartered Bank deals with the appeal which arises because Appellate Tribunal’s judgment reject the appellant’s prayer for directions to the resolution professional to give all relevant documents including the insolvency resolution plans to the board of directors, which were in question.
Standard Chartered Bank Limited (Financial Creditor) filed an application to NCLT under Section 7 of insolvency and bankruptcy code against Ruchi Soya Industries Ltd. (Corporate Debtor), another application was filed by DBS Bank limited (financial creditor) against Ruchi Soya Industries limited. It is said to be a profit-making company in the business of processing of oilseeds and refining crude oil for edible use of which Vijay Kumar Jain is the director and shareholder. Both the petitions were admitted by the NCLT. Shri Shailendra Ajmera of Ernst and Young was appointed as the Interim Resolution Professional in both of the petitions.
The Committee of creditors was constituted under Section 21 of the Insolvency and Bankruptcy Code, 2016 and Vijay Kumar Jain being a member of the suspended Board of Directors was given notice and the motive for the first Committee of creditors meeting held on 12.01.2018 and was permitted to attend the aforesaid meeting. He alleges, which was disputed by the respondents, that the subsequent meetings of the Committee of creditors were held in which he was denied participation. As a result, the appellant filed an application under which he should be permitted immediately to attend those subsequent meetings and also of sharing resolution plans which was dismissed by NCLT and the appellant was only permitted to attend those meetings.
Against this order appellant filed an appeal in appellate tribunal which states that permission is to be given to the appellant to attend and participate in committee of creditors meetings, but the appellant’s appeal was denied accessing the resolution and related plans.
After that, an application for modification/clarification of the Appellate Tribunal’s order was also dismissed. Aggrieved by the order of the Appellate Tribunal, the appellants had filed the present appeal. Meanwhile a resolution plan was approved by the majority of COC, but court passed an interim order that the bids will not be finalized by the Adjudicating Authority without the leave of this Court which means that Adjudicating Authority could continue with the proceedings, but no order could be passed on the same until this Court adjudicates on the present appeal.
- Whether an appeal over an order of dismissing winding up against corporate debtor would have any bearing on the Adjudicating Authority passing an order under section 7 of the IBC Code?
Appellants referred to Sections 24, 25, 29 and 31 of the Code and according to section 24(3) they stated that notice of each meeting of the committee of creditors to the members of the suspended Board of Directors must be given, and under Regulation 21, the notice of these meetings must not only contain an agenda of the meetings, but it must also contain copies of all documents relevant to the matters and issues to be discussed. This means that the resolutions plan and relevant documents must be served to the board of directors. They also state that they are the ‘participants’ under the meetings of committee of creditors which means they does not have voting rights but in order to participate effectively they must be served with all the documents so that their views can also be taken.
According to them, Section 31(1) of the Code states that once the resolution plan is passed by the Adjudicating authority it is bind on the board of directors in which they have vital stake which is passed by the COC and some of the board directors has given personal guarantee owed by the corporate debtors.
On behalf of this counsel of resolution professional state that according to section 30(3) of the code and Regulation 39(2) of the Insolvency and Bankruptcy Board of India Regulations, 2016 (CIRP Regulations) which made it clear that resolution plans were only to be given to the committee of creditors for its consideration. They further argued that the terms “committee” and “participant” are differently defined under the Regulations and that participants are expressly excluded by Regulation 39 of IBR, 2016 for sharing resolution plans documents. They also stated that Regulation 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, which made it clear that confidential information can only be shared with the consent of the relevant parties which includes creditors and resolution professional.
Counsel of committee stated that the expressions “information memorandum” and “resolution plan” are separately defined, procedure has been laid down in the Code and Regulations dealing with them. Resolution plan cannot therefore be said to be “documents” within the meaning of Regulation.
They further said that Section 21(2), made it clear that a director, who is also a financial creditor, has no right to participate in a meeting of the committee of creditors. They also stated that the confidentiality which is to be maintained will be breached if the documents is shared with board of directors and they may try to sabotage the corporate insolvency resolution process.
Summary of the Court Decision and Judgement
As on behalf of the above arguments the respondent who based their arguments that “committee” and “participant” are used differently, which would lead to the result that resolution plans need not be served to the former members of the Board of Directors, is to be rejected. The true intention of the Code drawn by the legislature which can be achieved by reading the plain language of the Sections. Where the confidential information is concerned it is clear that the resolution professional can take an undertaking from members of the former Board of Directors, as has been taken in the facts of the present case, to maintain confidentiality.
The source of this power is Regulation 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, This can be in the form of a non-disclosure agreement which is stated by the appellant in his plea, in which the resolution professional can be indemnified in case information is not kept strictly confidential.
Also, the arguments given by committee of creditors is also rejected because they focus their arguments on related parties. Under Section 21(2) clarifies that a director who is also a financial creditor who is a related party of the corporate debtor shall not have any right of representation, participation, or voting in a meeting of the committee of creditors. But they mislead the section because section 21 (2) clearly refers to financial creditor who is a related party.
In the judgement, arguments of Committee of creditors and resolution professional is rejected. It also states that in each of these cases, the appellants will be given copies of all resolution plans submitted to the Committee of creditors within a period of two weeks from the date of this judgment. The resolution applicant in each of these cases will then assemble for a meeting of Committee of creditors within two weeks after that, which will include the appellants as participants.
The committee of creditors then will draft a new resolution plan which then by majority either will be reject or accept and then the further procedure will be followed which is given in the code.
The judgement which is passed by the court is correct because they also mention Bankruptcy Law Committee Report of November 2015 which states that the court will enable balance between the creditors and debtors.
The law must ensure that information that is essential for the insolvency and the bankruptcy resolution process is created and available when it is required. It must ensure that access to this information is made available to all creditors to the enterprise, either directly or through the regulated professional. It must enable access to this information to third parties who can participate in the resolution process, through the regulated professional.” Paragraph II (7) correctly reflects the reason for Section 24(3)(b) of the Code.
The resolution plans should be given to the board of directors as they can provide better information to the committee of creditors regarding their debts. In spite of Section 60(5) of the Code, board of directors have a right to challenge the terms of a proposed resolution plan before the Tribunal under section 61 of the code which will increase the court cases and burden on courts, providing of resolution plans before passing them to adjudicating authority will save the time.
Section 24 of the code states that former board of directors are the party to the meetings with COC and resolution professional so that they can seek information from them. By giving resolution plans to the former board of directors will increase the efficiency if the resolution plan as they can give best information and the advice on the effects of such plans.
The resolution professional only seeks information from former Board of Directors under Section 29 before preparing an information memorandum, which includes the financial position of the corporate debtor and information relating to disputes by or against the corporate debtor and many more. The resolution professional does not seek information at a meeting of the committee of creditors for which there is Section 24.
Suspended directors comes within the definition of “related party” in the Code and related parties are excluded from the COC even if they are creditors of the company so there has been taken away. Based on this judgement they will be given documents relating to resolution process and also are allowed in attending the meetings which would protect their interest.
However, there is one lacuna that suspended directors will include promoter nominated directors. Under this situation sharing of resolution plans may give rise to the conflict of interest.
Another conflict may also arise when the default in paying creditors is because of some personal reason of board of directors and the creditors took some decision on some unavoidable transactions which affects the board of directors and therefore it may not be proper for these matters to be discussed before them.
In the conclusion of this case, it was held that the appellants will be given the copy of documents submitted to Committee of creditors within two weeks after the judgement has been passed. After that, a meeting will commence with resolution professional and COC which includes the appellant as the participants. Further with a majority of COC the resolution plan may be approved or reject, and the further procedure is to be followed which is given in the code and the decision of NCLT be set aside.
The court decision was right as they are the participants under the code who needs to be provided with all the documents relating to the resolution plan and may involve in the meeting. As they can provide with correct information and may help the creditors to save the company with best interest as after all the company belongs to the director and they will suggest the plans with best of their knowledge.
The appellant filed Miscellaneous Application No.518 of 2018 on 07.06.2018 before the NCLT in order that the appellant be allowed to effectively participate in these meetings. It is stated before us that in the tenth meeting dated 12.08.2018, the appellant executed a non-disclosure agreement for sharing resolution plans of the corporate debtor. Under the said agreement, the appellant undertook to indemnify the resolution professional and keep information that is received as to the resolution plan strictly confidential.