SCI (2019.01.31) in Vijay Kumar Jain vs Standard Chartered Bank [CIVIL APPEAL NO.8430 OF 2018] held that;
This statutory scheme, therefore, makes it clear that though the erstwhile Board of Directors are not members of the committee of creditors, yet, they have a right to participate in each and every meeting held by the committee of creditors, and also have a right to discuss along with members of the committee of creditors all resolution plans that are presented at such meetings under Section 25(2)(i).
It is also important to note that every participant is entitled to a notice of every meeting of the committee of creditors. Such notice of meeting must contain an agenda of the meeting, together with the copies of all documents relevant for matters to be discussed and the issues to be voted upon at the meeting vide Regulation 21(3)(iii).
Obviously, resolution plans are “matters to be discussed” at such meetings, and the erstwhile Board of Directors are “participants” who will discuss these issues. The expression “documents” is a wide expression which would certainly include resolution plans.
Therefore, a combined reading of the Code as well as the Regulations leads to the conclusion that members of the erstwhile Board of Directors, being vitally interested in resolution plans that may be discussed at meetings of the committee of creditors, must be given a copy of such plans as part of “documents” that have to be furnished along with the notice of such meetings.
As a result of the aforesaid discussion, the arguments of the respondents that “committee” and “participant” are used differently, which would lead to the result that resolution plans need not be furnished to the erstwhile members of the Board of Directors, must be rejected.
Therefore, the contention that a director simplicitor would have the right to get documents as against a director who is a financial creditor is not an argument that is based on the proviso to Section 21(2), correctly read, as it refers only to a financial creditor who is a related party of the corporate debtor. For this reason, this argument also must be rejected.
Excerpts of the order;
# 1. The present appeal arises out of an Appellate Tribunal’s judgment rejecting the appellant’s prayer for directions to the resolution professional to provide all relevant documents including the insolvency resolution plans in question to members of the suspended Board of Directors of the corporate debtor in each case, so that they may meaningfully participate in meetings held by the committee of creditors [“CoC”].
# 2. We may take the facts of Civil Appeal No.8430 of 2018. Ruchi Soya Industries Ltd. – the corporate debtor, was incorporated on 06.01.1986. It is said to be a profit-making company in the business of processing of oil-seeds and refining crude oil for edible use. In September, 2017, Company Petition Nos.1371 and 1372 were filed by Standard Chartered Bank Ltd. and DBS Bank Ltd., being financial creditors of the aforesaid corporate debtor. These two company petitions were admitted on 8 th and 15th December, 2017, respectively, by the National Company Law Tribunal [“NCLT”]. One Shri Shailendra Ajmera of Ernst and Young was appointed as the Interim Resolution Professional in both petitions. The CoC was constituted under Section 21 of the Insolvency and Bankruptcy Code, 2016 [“Insolvency Code” or “Code”], and the appellant being a member of the suspended Board of Directors was given notice and the agenda for the first CoC meeting held on 12.01.2018, and was permitted to attend the aforesaid meeting. He alleges, which is disputed by the respondents, that subsequent meetings of the CoC were held in which he was denied participation. As a result, 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.
# 3. By an order dated 01.08.2018, the NCLT dismissed the application with liberty to the appellant to attend CoC meetings but not to insist upon being provided information considered confidential either by the resolution professional or the committee of creditors. Against this order, the appellant filed an appeal before the Appellate Tribunal which recognized the appellant’s right to attend and participate in CoC meetings, but denied the appellant’s prayer to access certain documents, most particularly, the resolution plans. Thereafter, an application for modification/clarification of the Appellate Tribunal’s order was also dismissed. Aggrieved by the order dated 09.08.2018 of the Appellate Tribunal, the appellants have filed the present appeal. In the meanwhile, on 23.08.2018, the resolution plan of one Adani Wilmar Limited was approved by majority of 96.86% of the committee of creditors. On 24.08.2018, the resolution professional submitted its resolution plan, as approved by the CoC, to the Adjudicating Authority. On 27.08.2018, this Court, by an interim order, stated, while issuing notice, that the bids will not be finalized by the Adjudicating Authority without the leave of this Court. On 10.09.2018, this Court clarified, in an application filed by the resolution professional, that the Adjudicating Authority could continue with the proceedings but no order could be passed on the same until this Court adjudicates on the present appeal.
# 4. On behalf of the appellants, we have heard Shri Shyam Divan and Shri Arvind Kumar Gupta. The learned counsel referred to Sections 24, 25, 29 and 31 of the Code together with Regulations made thereunder. According to the learned counsel, under Section 24(3), the resolution professional has to give notice of each meeting of the committee of creditors to the members of the suspended Board of Directors, and under Regulation 21, the notice of these meetings shall not only contain an agenda of the meetings but shall also contain copies of all documents relevant to the matters to be discussed and issues to be voted upon at the meeting. This necessarily means that access to the resolution plans and other relevant documents under consideration at these meetings must be supplied together with the notice of the meeting to members of suspended Board of Directors. They drew a dichotomy between the committee of creditors and meetings of the committee of creditors and stated that as they are “participants” in the meetings of the committee of creditors, albeit without voting rights, yet, they are persons who, in order to participate effectively, must be given the necessary documents so that their views can also be considered by the committee of creditors. According to them, Section 31(1) of the Code makes it clear that once the resolution plan is passed by the Adjudicating Authority, it shall be binding on the corporate debtor together with guarantors and other stakeholders. This being the case, it is clear that the erstwhile Board of Directors, which consists of persons who may have given personal guarantees for the debts owed by the corporate debtor, will be bound by the resolution plan, and therefore, have a vital stake in what ultimately gets passed by the committee of creditors. Apart from this, under Section 60(5) of the Code, such persons have a right to challenge the terms of a proposed resolution plan before the Tribunal, and under Section 61,
may go further against the Adjudicating Authority’s order to the Appellate Tribunal. They relied upon and referred to the Bankruptcy Law Committee Report of 2015 to buttress their submissions.
# 5. As against this, Dr. Abhishek Manu Singhvi, and Mr. Raunak Dhillon, appearing on behalf of the resolution professional, relied strongly on Section 30(3) of the Code and Regulation 39(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) 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. They also argued, that if any of the Regulations go beyond the provisions of the Code, they must be struck down as ultra vires, as under Section 30(3) of the Code, the resolution professional is required to present resolution plans only to the committee of creditors. They relied upon the Notes on Clauses to Section 24 of the Code, which, according to them, made it clear that the reason for the participation of the erstwhile Board of Directors in meetings of the committee of creditors is so that they may give information to assess the financial position of the corporate debtor. They are not in the position, therefore, of other creditors, who may go into merits and demerits of resolution plans as such resolution plans affect creditors only and not such persons. They relied upon this Court’s judgment in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353 [“Mobilox Innovations”], for the proposition that Notes on Clauses are important parliamentary material that may be relied upon to understand the object of the Section in question. They also relied strongly upon Regulation 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, read with the First Schedule thereto, which made it clear that confidential information can only be shared with the consent of the relevant parties. Further, the confidential information contained in proposed resolution plans can only be shared with members of the committee of creditors after receiving an undertaking from them under the Regulations. They further argued that persons such as the appellant are not persons aggrieved and since no prejudice is caused to them, do not have a right to file any application under Section 60(5) of the Code or appeals to the Appellate Tribunal from orders of the Adjudicating Authority under Section 61.
# 6. Shri Krishnan Venugopal and Shri Nakul Sachdeva, learned counsel appearing on behalf of the committee of creditors, argued that the expressions “information memorandum” and “resolution plan” are separately defined and a specific procedure has been laid down in the Code and Regulations dealing with them. They cannot therefore be said to be “documents” within the meaning of Regulation 21. They also strongly relied upon the Notes on Clauses and stated that the role of members of the suspended Board of Directors is that of information givers and not information seekers. They further relied upon the proviso to Section 21(2) which, according to them, 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. Thus, a harmonious construction of the various provisions of the Code would lead to the anomaly that a director simplicitor would have the right to get documents but a director who is a financial creditor would have no such right. They also adverted to the expression “participant” as opposed to the expression “committee” and stated that the legislature, in its wisdom, created a differentiation between the two. They also stated that the confidentiality requirement would be breached if a copy of the resolution plan were to be given to the members of the suspended Board of Directors and added that it would be in the interest of some members of the suspended Board who may attempt to sabotage the corporate insolvency resolution process, for which reason also, resolution plans should be kept hidden from them. They argued that the “persons aggrieved” in Section 61 would necessarily refer to persons aggrieved for the purpose of Section 60(5) also, and as members of the ex-Board of Directors cannot be said to be persons aggrieved, they cannot possibly approach the Adjudicating Authority under Section 60(5) or the Appellate Tribunal under Section 61.
# 7. Having heard learned counsel for all parties, it is important to first advert to the relevant provisions of the Code and the Regulations made thereunder. The relevant provisions of the Code are hereinbelow: . . . . .
The relevant provisions of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 read as under:
8. The statutory scheme of the Code, insofar as the former members of the Board of Directors are concerned, is as follows:
A committee of creditors is first constituted under Section 21 consisting only of all the financial creditors of the corporate debtor.
Under Section 24, all meetings of this committee are to be conducted by the resolution professional who, however, does not happen to be part of this committee. Section 24(3)(b) is important in that, the resolution professional has to give notice of each and every meeting of the committee of creditors, inter alia, to members of the suspended Board of Directors. Like operational creditors who may attend and participate in such meetings, provided the aggregate dues owing to them are not less than ten per cent of the total debt, both such operational creditors and erstwhile members of the Board of Directors have no vote. Section 25(2)(f) and (i) are also important in that, once the resolution professional convenes meetings of the committee of creditors, he is to present all resolution plans at these meetings. Under Section 30, the resolution professional shall examine each resolution plan received by him in which he must confirm, inter alia, that such plan provides for the repayment of the debts of operational creditors which shall not be less than the amount to be paid to them in the event of liquidation of the corporate debtor. This plan is then submitted to the Adjudicating Authority if it is approved by the requisite majority of the committee of creditors.
The Adjudicating Authority under Section 31(1), if satisfied that the plan passes muster, shall then, by order, approve such plan, which shall be binding on all stakeholders involved in the resolution plan, including guarantors.
# 9. This statutory scheme, therefore, makes it clear that though the erstwhile Board of Directors are not members of the committee of creditors, yet, they have a right to participate in each and every meeting held by the committee of creditors, and also have a right to discuss along with members of the committee of creditors all resolution plans that are presented at such meetings under Section 25(2)(i). It cannot be gainsaid that operational creditors, who may participate in such meetings but have no right to vote, are vitally interested in such resolution plans, and must be furnished copies of such plans beforehand if they are to participate effectively in the meeting of the committee of creditors. This is for the reason that under Section 30(2)(b), repayment of their debts is an important part of the resolution plan qua them on which they must comment. So the first important thing to notice is that even though persons such as operational creditors have no right to vote but are only participants in meetings of the committee of creditors, yet, they would certainly have a right to be given a copy of the resolution plans before such meetings are held so that they may effectively comment on the same to safeguard their interest.
# 10. However, it was argued before us that the Notes on Clauses to Section 24 make it clear that the erstwhile members of the Board of Directors are participants in these meetings only so that the committee of creditors and the resolution professional may seek information from them. The Notes on Clauses, heavily relied upon by learned counsel for the respondents, read as follows:
“Clause 24 prescribes the modalities for the meeting of the committee of creditors. The meetings are conducted by the resolution professional and may be attended by the members of the board directors or partners of the corporate debtor. This gives an opportunity for the committee of creditors and the resolution professional to seek information that they may require to assess the financial position of the corporate debtor and prepare a resolution plan.” (emphasis supplied)
# 11. This Court in Mobilox Innovations (supra) stated:
“27. The notes on clauses annexed to the Bill are extremely important and read as follows……” xxx xxx xxx “38. It is, thus, clear that so far as an operational creditor is concerned, a demand notice of an unpaid operational debt or copy of an invoice demanding payment of the amount involved must be delivered in the prescribed form. The corporate debtor is then given a period of 10 days from the receipt of the demand notice or copy of the invoice to bring to the notice of the operational creditor the existence of a dispute, if any. We have also seen the notes on clauses annexed to the Insolvency and Bankruptcy Bill of 2015, in which “the existence of a dispute” alone is mentioned. Even otherwise, the word “and” occurring in Section 8(2)(a) must be read as “or” keeping in mind the legislative intent and the fact that an anomalous situation would arise if it is not read as “or”……”
# 12. There is no doubt whatsoever that Notes on Clauses are an important aid to the construction of Sections of the Code as they show what the Drafting Committee had in mind when such provisions were drafted. However, a closer look at the Notes on Clause 24 makes it clear that the third sentence of the Notes on Clause 24 is itself problematic. First and foremost, it speaks of the resolution professional seeking information. The resolution professional does not seek information at a meeting of the committee of creditors, which is what Section 24 is all about. The resolution professional only seeks information from the erstwhile Board of Directors under Section 29 before preparing an information memorandum, which then includes the financial position of the corporate debtor and information relating to disputes by or against the corporate debtor etc. All this has nothing to do with Section 24 of the Code which deals with meetings of the committee of creditors. Secondly, the resolution professional does not prepare a resolution plan as is mentioned in the Notes on Clause 24; he only prepares an information memorandum which is to be given to the resolution applicants who then submit their resolution plans under Section 30 of the Code. The committee of creditors, in turn, gets information so that they can assess the financial position of the corporate debtor from various sources before they meet. It is, therefore, difficult to understand the Notes on Clause 24. Even assuming that the Notes on Clause 24 may be read as being a one-way street by which erstwhile members of the Board of Directors are only to provide information, we find that Section 31(1) of the Code would make it clear that such members of the erstwhile Board of Directors, who are often guarantors, are vitally interested in a resolution plan as such resolution plan then binds them. Such plan may scale down the debt of the principal debtor, resulting in scaling down the debt of the guarantor as well, or it may not. The resolution plan may also scale down certain debts and not others, leaving guarantors of the latter kind of debts exposed for the entire amount of the debt. The Regulations also make it clear that these persons are vitally interested in resolution plans as they affect them. Thus, under Regulation 36 of the CIRP Regulations, the information memorandum that is given to each member of the CoC and to any potential resolution applicant, will contain details of guarantees that have been given in relation to the debts of the corporate debtor (see Regulation 36(2)(f) of the CIRP Regulations). Also, under Regulation 37(d) of the CIRP Regulations, a resolution plan may provide for satisfaction or modification of any security interest. Security interest is defined by Section 3(31) of the Code as follows:
“3. Definitions.—In this Code, unless the context otherwise requires,—
xxx xxx xxx
(31) “security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person:
Provided that security interest shall not include a performance guarantee;
xxx xxx xxx”
This would certainly include a guarantor who may be a member of the erstwhile Board of Directors. Further, under Regulation 37(1)(f), a resolution plan may provide for reduction in the amount payable to the creditors, which again vitally impacts the rights of a guarantor. Last but not least, a resolution plan which has been approved or rejected by an order of the Adjudicating Authority, has to be sent to “participants” which would include members of the erstwhile Board of Directors – vide Regulation 39(5) of the CIRP Regulations. Obviously, such copy can only be sent to participants because they are vitally interested in the outcome of such resolution plan, and may, as persons aggrieved, file an appeal from the Adjudicating Authority’s order to the Appellate Tribunal under Section 61 of the Code. Quite apart from this, Section 60(5)(c) is also very wide, and a member of the erstwhile Board of Directors also has an independent right to approach the Adjudicating Authority, which must then hear such person before it is satisfied that such resolution plan can pass muster under Section 31 of the Code.
# 13. It is also important to note that every participant is entitled to a notice of every meeting of the committee of creditors. Such notice of meeting must contain an agenda of the meeting, together with the copies of all documents relevant for matters to be discussed and the issues to be voted upon at the meeting vide Regulation 21(3)(iii). Obviously, resolution plans are “matters to be discussed” at such meetings, and the erstwhile Board of Directors are “participants” who will discuss these issues. The expression “documents” is a wide expression which would certainly include resolution plans.
# 14. Under Regulation 24(2)(e), the resolution professional has to take a roll call of every participant attending through video conferencing or other audio and visual means, and must state for the record that such person has received the agenda and all relevant material for the meeting which would include the resolution plan to be discussed at such meeting. Regulation 35 makes it clear that the resolution professional shall provide fair value and liquidation value to every member of the committee only after receipt of resolution plans in accordance with the Code [see regulation 35(2)]. Also, under Regulation 38(1)(a), a resolution plan shall include a statement as to how it has dealt with the interest of all stakeholders, and under sub-clause 3(a), a resolution plan shall demonstrate that it addresses the cause of default. This Regulation also, therefore, recognizes the vital interest of the erstwhile Board of Directors in a resolution plan together with the cause of default. It is here that the erstwhile directors can represent to the committee of creditors that the cause of default is not due to the erstwhile management, but due to other factors which may be beyond their control, which have led to non-payment of the debt. Therefore, a combined reading of the Code as well as the Regulations leads to the conclusion that members of the erstwhile Board of Directors, being vitally interested in resolution plans that may be discussed at meetings of the committee of creditors, must be given a copy of such plans as part of “documents” that have to be furnished along with the notice of such meetings.
# 15. As a result of the aforesaid discussion, the arguments of the respondents that “committee” and “participant” are used differently, which would lead to the result that resolution plans need not be furnished to the erstwhile members of the Board of Directors, must be rejected. Equally, the Regulations, far from going beyond the Code, flesh out the true intention of the Code that is achieved by reading the plain language of the Sections that have already been adverted to. So far as confidential information is concerned, it is clear that the resolution professional can take an undertaking from members of the erstwhile 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, read with paragraph 21 of the First Schedule thereto. This can be in the form of a non-disclosure agreement in which the resolution professional can be indemnified in case information is not kept strictly confidential.
# 16. The argument on behalf of the committee of creditors based on the proviso to Section 21(2) is also misconceived. The proviso to 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. Directors, simplicitor, are not the subject matter of the proviso to Section 21(2), but only directors who are related parties of the corporate debtor. It is only such persons who do not have any right of representation, participation, or voting in a meeting of the committee of creditors. Therefore, the contention that a director simplicitor would have the right to get documents as against a director who is a financial creditor is not an argument that is based on the proviso to Section 21(2), correctly read, as it refers only to a financial creditor who is a related party of the corporate debtor. For this reason, this argument also must be rejected.
# 17. We may also mention in passing that the Bankruptcy Law Committee Report of November, 2015 stated:
“II. The Code will enable symmetry of information between creditors and debtors.
5. 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.
6. The law must ensure that access to this information is made available to all creditors to the enterprise, either directly or through the regulated professional.
7. The law 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.
# 18. We may indicate that the time that has been utilized in these proceedings must be excluded from the period of the resolution process of the corporate debtor as has been held in Arcelormittal India Private Limited v. Satish Kumar Gupta & Ors., Civil Appeal Nos. 9402-9405/2018 [decided on 04.10.2018] (at paragraph 83). In each of these cases, the appellants will be given copies of all resolution plans submitted to the CoC within a period of two weeks from the date of this judgment. The resolution applicant in each of these cases will then convene a meeting of the CoC within two weeks thereafter, which will include the appellants as participants. The CoC will then deliberate on the resolution plans afresh and either reject them or approve of them with the requisite majority, after which, the further procedure detailed in the Code and the Regulations will be followed. For all these reasons, we are of the view that the petition and appeal must be allowed and the NCLAT judgment set aside.
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An important Article; Supreme Court On The Rights Of Suspended Board In Vijay Kumar Jain V. Standard Chartered Bank: Some Implications
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