NCLAT (04.06.2021) in Jayanta Banerjee & Anr. Vs Shashi Agarwal Liquidator of INCAB Industries Ltd & Ors. [Company Appeal (AT) (Insolvency) No. 348 & 720 of 2020] held that;
that the default rule under the first proviso to Section 21(2) is that only those Financial Creditors that are related parties in praesenti would be barred from the 'COC'. However, the related Party Financial Creditors that seem to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2) should also be considered as being covered by the exclusion thereunder.
The formation of the Committee of Creditors in the instant case is a nullity in the eyes of the law. Since the illegally constituted committee of creditors took the decisions at every stage of CIRP. Therefore, the entire corporate insolvency resolution process of the Corporate Debtor is found to be vitiated. Therefore the impugned order of liquidation passed by the Adjudicating Authority deserves to be set aside.
Excerpts of the order;
These two Appeals emanate from the Common Order dated 7th February 2020 passed by the Adjudicating Authority/National Company Law Tribunal, Kolkata Bench, Kolkata in C.A. (I.B.) No. 1748/K.B./2019 and C.A. (I.B.) 57/K.B./2020 in C.P. (I.B.) No 1684/K.B./2018, whereby the Adjudicating Authority/NCLT initiated liquidation proceedings against the Corporate Debtor 'INCAB Industries Limited', wherein the Appellant of Appeal No.348 of 2020 was employed until the date of passing the order of liquidation. Parties original status in the Company Petition represents them in these Appeals for the sake of convenience.
Appellants Averment
# 2. The Corporate Debtor was admitted into the Corporate Insolvency Resolution Process (in short 'CIRP'), vide order dated 7th August 2019, and Respondent No. 1 was appointed as Interim Resolution Professional (IRP) of the Corporate Debtor.
# 3. Under the invitation of claims by the IRP, the Appellant and thousands of other employees who were employed with the Corporate Debtor submitted their claim, along with other Operational Creditors and Financial Creditors.
# 4. Subsequently, after forming the Committee of Creditors ('COC'), the resolution was adopted on 5th December 2019 to liquidate the Corporate Debtor, thereby sabotaging the chances of revival of the Corporate Debtor and pushing the Corporate Debtor employee's into an abyss with an uncertain future.
# 5. The liquidation order came into the Appellant's knowledge when the Application under Section 33 of the Insolvency and Bankruptcy Code, 2016, the Respondent filed C.A.(I.B.) No. 17/K.B./2019 before the Adjudicating Authority/NCLT Kolkata Bench. The Appellant intervened in the said matter and filed its opposition in the same. The Appellant also filed an Application under Section 60 (5) of the Insolvency and Bankruptcy Code 2016 being C.A. (I.B.) No. 57/K.B./2024 to remove the Respondent as the Resolution Professional working connivance with the majority of the creditors of theCorporate Debtor.
# 6. The Committee of Creditors (from now on referred to as CoC) also consist of 'Kamla Mills Private Limited' and 'Fasqua Investment Private Limited', both were managed and owned by one of the Directors of the Corporate Debtor, Mr Ramesh Ghamandiram Gowani, resigned from the management of the Corporate Debtor after the initiation of the Corporate Insolvency Resolution Process.
# 7. We have heard the arguments of the Learned Counsel for the parties and perused the record. The following issue arises in these appeals for our consideration.
1. Whether 'Kamla Mills Private Limited' and 'Fasqua Investment Private Limited' who were made part of CoC are related parties in terms of proviso to Section 21(2) of the Insolvency and Bankruptcy Code 2016?
2. Whether assignment of debt in violation of Section 5 of the SARFAESI Act 2002 and Factoring Regulation Act 2011 is valid?
3. Whether IRP/RP can constitute CoC based on submission of claims only, without verifying and admitting or rejecting the claims?
1. Whether 'Kamla Mills Private Limited' and 'Fasqua Investment Private Limited' who were made part of CoC are related parties in terms of proviso to Section 21(2) of the Insolvency and Bankruptcy Code 2016?
# 49. Hon'ble Supreme Court in the case of Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475 : (2021) 2 SCC (Civ) 1: 2021 SCC OnLine SC 51, has laid down the law that the term related Party in the context of IBC is defined to ensure that those entities which are related to the Corporate Debtor can be identified clearly since their presence can often negatively affect the insolvency process. Hon'ble Supreme Court has further propounded that the default rule under the first proviso to Section 21(2) is that only those Financial Creditors that are related parties in praesenti would be barred from the 'COC'. However, the related Party Financial Creditors that seem to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2) should also be considered as being covered by the exclusion thereunder. Therefore Mr Ramesh Ghamanndiram Gowani's resignation from the Board of Directors of the Corporate Debtor 'Incab Industries Limited' after initiation of the Corporate Insolvency Process will not circumvent the exclusion under the first proviso to Section 21 (2) of the Code. Thus Financial Creditors' Fasqua Investment Private Limited' & 'Kamla Mills Ltd' are the related Party of the Corporate Debtor 'Incab Industries Ltd' in terms of Section 5 (24)(f) of Insolvency and Bankruptcy Code 2016 and terms of Ist proviso to Sec 21(2) of I & B Code; they are not entitled to represent, participate and vote in the CoC of the corporate debtor 'Incab Industries Ltd.'
2. Whether assignment of debt in violation of section 5 of the SARFAESI Act 2002 and Factoring Act 2011 is valid?
# 56. The deed of assignment derives its source from Section 130 of the Transfer of Property Act, 1882, that was executed in compliance with the said provisions. Therefore, there exists no violation of any of the provisions of the Insolvency and Bankruptcy Code 2016.
Finding
# 60. Based on the above discussion, we believe that because the parties to the assignment deed were not made Party either before the Adjudicating Authority or before this Appellate Tribunal, the assignment in question can not be raised on this ground.
Point No 3. Whether IRP/RP can constitute CoC based on submission of claims only, without verifying and admitting or rejecting the claims?
# 61. In the instant case, we have noticed that the Committee of Creditors decided to liquidate the Corporate Debtor even without the valuation of the Corporate Debtor. We have also seen that the IRP/RP has formed the Committee of Creditors even without admitting the claim, i.e. only based on claims submission. It is essential to evaluate the validity of the Committee of Creditors, which was constituted even without verification, admission or rejection of claims. It is essential to evaluate how the Corporate Insolvency Resolution Process can go on without knowing the actual percentage of voting share of a Financial Creditor, based on the Financial Debt owed by that creditor. In this case, we have also noticed that no Information Memorandum was prepared. An order of liquidation is passed on the pretext of the proviso to Section 33 (2) of the Insolvency and Bankruptcy Code. In the instant case, liquidation has been started even without valuation and determination of the liquidation value.
# 62. Under the Insolvency and Bankruptcy Code 2016, the role assigned to the Committee of Creditors is of paramount importance. Section 28 of the I & B code 2016 specifically provides the actions that require the approval of the Committee of Creditors. The success of corporate insolvency resolution entirely depends upon the validly constituted Committee of Creditors. Therefore the legislature has barred the representation, participation and voting by related parties in a meeting of Committee of creditors under the proviso to section 21 (2) of the I.B. code 2016.
# 81. In the instant case, we find that the IRP/RP had formed the Committee of Creditors based on the Financial Creditors' submission of claims even without verification, despite that one of the financial creditors had explicitly requested to defer the e-voting on the resolution of the 5th CoC dated 5th December 2019, till the verification of voting percentage and compliance of CIRP process. The IRP/RP has formed the Committee of Creditors without admitting the claims of the Financial Creditors, which violate Regulation 12 (3) of the CIRP Regulations.
# 82. We also find that during CIRP, five meetings of the Committee of Creditors took place. Still, till the end of CIRP, IRP did not verify the claims submitted by the Financial Creditors but allotted the voting share to the Financial Creditors, based on the submission of claims. The procedure adopted by the IRP/RP was against the statutory provision of the Code despite the fact that compliance with the statutory requirements of the Code was mandatory.
# 83. We have also noticed that the IRP/RP has not prepared the Information Memorandum. In the Minutes of the fourth COC meeting dated 11 November 2019, it is stated that verification of claims is under process, and the amount of claims is to be determined. The Information Memorandum, as specified under Regulation 36, will be ready by 22 November 2019. However, in the fifth CoC meeting, i.e. the last meeting, it was decided that there is no need for an Information Memorandum. It was also decided that there is no requirement of Transaction and Forensic Audit and also no need for publication of Form-G for the invitation of expression of interest. The COC also decided to liquidate the corporate debtor. Therefore, there is no need to prepare Information Memorandum.
# 85. Based on the above discussion, we are the considered opinion that the Constitution of the Committee of Creditors violates the proviso to Section 21 (2) of the I & B code 2016 read with 12(3) of CIRP Regulations. Therefore, the Constitution of the creditors' committee is a nullity in the eye of law that vitiates the entire CIRP. Liquidation is like a death knell for the corporate entity/corporate person. Liquidation based on the resolution of the CoC, which consists of related party Financial Creditors having 77.20 % vote share, is a matter of grave concern. Hon'ble Supreme Court in the case of Phonix ARC (supra) has described the entering of such related party Financial Creditors in the Committee of Creditors as an act of commercial contrivances through which these entities sought to enter the COC, which could affect the other independent Financial Creditors. An order for liquidation of corporate debtor based on the sole decision of related parties Financial Creditors could be fatal for the existence of the corporate debtor, cannot be sustained. It is also pertinent to mention that when the Constitution of the Committee of Creditors itself is found to be tainted, then the decision of that COC cannot be validated on the pretext of exercise of commercial wisdom.
# 86. We have also noticed that the role of IRP/RP/liquidator was not impartial in the conduct of the corporate insolvency resolution process; therefore, we think it proper to change the Resolution Professional. The above discussions show that the Resolution Professional failed to discharge duties and responsibilities cast on the Resolution Professional under the IBC and Regulations' provisions. ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’ are related parties that were made part of this CoC and were in a commanding position to rush through the decision to liquidate the Corporate Debtor. Facts show that the Corporate Insolvency Resolution Process was initiated in view of Section 9 of the IBC. The petition was admitted on 7th August 2019, and the 5th CoC meeting held on 8th December 2019, which is within 122 days, decided to liquidate the Corporate Debtor. The CoC had two entities holding the majority of the voting rights of 77.20%. However, their claims were not even admitted and were also related parties and thus, the whole process before CoC has got vitiated. In view of the extraordinary facts of the present matter and the disputes being raised by so many workers through the Appellants, the interest of justice requires certain directions to do justice in the matter. The impugned order dated 7th February 2020 was passed within 184 days of the petition being admitted on 7th August, 2019. The Application under Section 33 of the IBC appears to have been filed on 17th December, 2019. It appears in the interest of justice that the time spent before the Adjudicating Authority when the application under Section 33 of the IBC was filed, till now should be excluded from calculating the period under Section 12 (1), (2) & (3) of the IBC. Parties and Corporate Debtor need not suffer for time spent during this period before Adjudicating Authority and in Appeal, as an effort at Resolution needs to be made.
# 87. We further observe that the corporate insolvency process in the instant case is totally in disregard of the provision of the Code and Regulations thereunder. The formation of the Committee of Creditors in the instant case is a nullity in the eyes of the law. Since the illegally constituted committee of creditors took the decisions at every stage of CIRP. Therefore, the entire corporate insolvency resolution process of the Corporate Debtor is found to be vitiated. Therefore the impugned order of liquidation passed by the Adjudicating Authority deserves to be set aside.
# 88. For the reasons mentioned above, we order that:-
(i) The Company Appeal (AT) (Insolvency) Nos. 348 of 2020 and 720 of 2020 are allowed with the following directions:-
(a) The impugned order passed in C.A. (I.B.) No. 1748/K.B./2019 and C.A. (I.B.) 57/K.B./2020 in C.P. (I.B.) No 1684/K.B./2018 whereby the Adjudicating Authority directed initiation of liquidation proceedings against the Corporate Debtor- ‘INCAB Industries Limited’ is quashed and set aside. Actions taken pursuant to impugned order are also quashed and set aside and shall not be binding on the corporate debtor. The Original Application under Section 9 of IBC is restored to the file of the Adjudicating Authority (National Company Law Tribunal, Kolkata Bench, Kolkata).
(b) The Adjudicating Authority is directed to appoint another IRP/ Resolution Professional in place of Respondent No.1- Shashi Agarwal, at the earliest, preferably within seven days (from the list, if any, maintained by the Adjudicating Authority or urgently getting names from IBBI).
(c) The time spent from the date of earlier filing of the application under Section 33 of the IBC, i.e. 17th December 2019, till date is excluded from the period of CIRP.
(d) Respondent No.1- Shashi Agarwal will immediately hand over the complete charge of the Corporate Debtor to the new IRP/ Resolution Professional as the Adjudicating Authority may appoint.
(e) The new IRP/ Resolution Professional will collate all the claims submitted by Creditors before the earlier IRP/ Resolution Professional and, depending on the claims admitted from CoC excluding ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’ and proceed further with the CIRP.
(f) Parties to appear before Adjudicating Authority on 09th June 2021.
(g) Copy of the present order may be sent to IBBI for further action(s), which may be deemed fit, if any, against the earlier Resolution Professional.
(h) Appeals are disposed accordingly. No costs.
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