NCLT Ahmedabad-2 (30.03.2022) in Hemant Shantilal Shah s Anr. Vs. Care Office Ltd. [LA No. 434 of 2020 IN CP (IB) 602 of 2018 ] held that;
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 nonpayment 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.
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.
Resolution plan is a highly confidential document but when such document is required to be given to the most affected parties being erstwhile members of the Board of Directors of the corporate debtor, then the valuation report in our view which is an important document having bearing onto the fate of corporate debtor must be supplied to ex-management.
There is no specific provision to not to share copy of valuation report with ex-directors, we hold that in the interest of justice the copy of valuation report needs to be supplied to ex directors, as already directed by the Predecessor Bench.
We are of the opinion that Resolution Professional shall provide a copy of the valuation report to the suspended management of the corporate debtor subject to an undertaking from members of the suspended management, 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.
Excerpts of the order;
# 1. The instant Interlocutory Application is filed by Hemant Shantilal Shah and Heena Hemant Shah being ex-directors, of corporate debtor (for brevity Applicants), under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (for brevity Code) read with Rule 11 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, with following prayers:
a) Pass appropriate order to tag the present LA with IA no. 358 of 2020 CP(IB) no. 602 of 2018 before NCLT, Ahmedabad, and be pleased to decide the present application with IA no. 358 of 2020.
b) Pass appropriate order declaring that personal guarantees given by the Applicants to financial creditors of corporate debtor (Respondent No. 2 to Respondent No. 5) shall stand extinguished in the event the resolution plan filed in lA 358 of 2020 is approved by this Hon'ble Adjudicating Authority, in the manner in which it is filed, with regard to the aspect of personal guarantees.
c) Pass appropriate order declaring that mortgage of the personal assets of the Applicants mortgaged with the financial creditors of the corporate debtor (Respondent 2 to Respondent 5) shal stand extinguished in the event the resolution plan filed in IA 358 of 2020 is approved by this Hon'ble Adjudicating Authority, in the manner in which it is filed with regard to the aspect of mortgages.
d) Pass appropriate order declaring that resolution approving resolution plan passed by the CoC in its 8th meeting dated 26.02.2020 is illegal, null, and void (including in light of 3 different minutes of the meeting circulated by the Resolution Professional which are contradictory to each other) and pass appropriate order setting aside and quashing the same.
e) Pass appropriate order reducing the claim of State Bank of India (Respondent No. 3) by Rs. 16,55,36,540/- to Rs. 5,14,07,500.79/- qua the corporate debtor as per the SMS dated 19.07.2020 received by Applicant no. 1 from Respondent 3.
f). Pending admission, hearing, and disposal of the present application, this Hon'ble Adjudicating Authority be pleased to:
i. Pass appropriate order staying the proceedings of IA no. 358 2020 in CP(IB) no. 602 of 2018 before NCLT, Ahmedabad till the present application is not tagged with the IA 358 of2020.
ii. Pass order directing the Resolution Professional to produce the valuation reports of the business of the corporate debtor prepared during the CIRP of the corporate debtor.
g) Pass ex-parte ad-interim/interim order in terms of paragraph 86 (f) hereinabove and/or
.h) Pass any other order(s) that this Hon'ble Adjudicating Authority deems fit.
# 2. The Predecessor Bench, had directed vide order dated 15.12.2020, as follows
"RP is directed to file liquidation value and a valuation report before this Adjudicating Authority with a copy to the other side, within a week, by way of an affidavit."
Resolution Professional impugned the said order and filed the appeal bearing Company Appeal (AT) (Insolvency) No. 33 of 2021 and the Hon'ble NCLAT vide order dated 28/01/2021, had disposed of the appeal with observation that:
"It would be appropriate that the adjudicating authority take a re-look at the impugned order to the extent it directs providing liquidation value and a valuation report to the Respondent Nos.1 and 2 ie. Hemant Shantilal Shah and Heena Hemant Shah within the ambit of B Code' and Regulations framed thereunder. The appeal is accordingly disposed of"
# 3. Thereafter, the Predecessor Bench heard this IA on 15.02.2021 and reserved the order. Due to the Re Constitution of the Bench, this IA is now considered by this Bench. After hearing both sides on limited prayer being f(ii), liberty was granted to file written submissions. The applicant has filed its written submission and made the following contentions:
a. The non-compliance of the order dated 15.12.2020 by the Resolution Professional which was passed by this Hon'ble Adjudicating Authority as the said order was also not set aside by the Hon'ble NCLAT, though challenged by the Resolution Professional.
b. There is deliberate non-compliance on the part of the Resolution professional and the same calls for contempt of court proceedings against the resolution Professional.
c. The Resolution Professional has filed the valuation report. It is seen from the resolution plan that the assets of the corporate debtor are being sold at a throw-away price which is contrary to the object of the IB Code. which provides for the maximization of value of assets of the corporate debtor.
# 4. During the arguments the learned counsel of the Applicants pressed for prayer f (ii)' before progressing further and requested to the limited issue of supplying a copy of valuation report to the ex-directors to enable them to point out the anomalies in valuation reports, before passing any order, which may be highly prejudicial to the corporate debtor leading to defeating the intent of resolution of corporate debtor through CIRP. The Resolution Professional vehemently objected to the prayer of ex-directors seeking copy of valuation report. After hearing both sides the order was reserved on a limited issue whether ex-directors be given copy of valuation report of the assets of corporate debtor with reference to the prayer f(ii), which is reproduced hereunder for ready reference Prayer f(ii)':
"Pass order directing the Resolution Professional to produce the valuation reports of the business of the corporate debtor prepared during the CIRP of the corporate debtor."
The question arises that "whether the suspended management of the Corporate Debtor is entitled to get the copy of the valuation reports prepared during CIRP and whether Resolution Professional can supply the valuation report copy as per provisions of the IB Code?
# 5. The applicants emphasized on the judgment of the Hon'ble Supreme Court in the case of Vijay Kumar Jain V. Standard Chartered Bank & Ors. (Civil Appeal No. 8430 of 2018) dated 31.01.2019 wherein the following observation is made
Para 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."
Relying on this judgement. The applicants prayed that copy of valuation report be supplied to them.
# 6. The respondent has also filed its written submission that valuation of the corporate debtor is filed before the Hon'ble Adjudicating Authority in a sealed cover for the perusal, as directed vide order dated 15.12.2020. However, with respect to the direction to provide a copy of valuation report to the other side, it was challenged by Resolution Professional before Hon'ble NCLAT, wherein vide order dated 28.01.2021, it is observed that
"as liquidation value and liquidation report is disputed, it would be appropriate that the Adjudicating Authority take a re-look at the impugned order to the extent it directs providing of liquidation value and a valuation report to the Respondent Nos. 1 and 2 herein within the ambit of IB Code' and Regulations Framed thereunder."
# 7. Another Company Appeal (AT) (Insolvency) No. 1002 of 2021 was filled by the Resolution Professional before Hon'ble NCLAT challenging the order dated 25.10.21, which was disposed of with the observation that Learned Adjudicating Authority shall endeavor to dispose of the applications IA No. 358/2020 and IA No. 434/2020 on the date fixed if possible or at an early date thereafter.
# 8. Heard submissions and perused the documents on record. It is observed that the Adjudicating Authority vide order dated 15.12.2020, directed Resolution Professional to file liquidation value and valuation report before this Authority with a copy to the other side, which was challenged by Resolution Professional before Hon'ble NCLAT. The Appellate Authority found it appropriate for the Adjudicating Authority to re-look at the impugned order to the extent of providing liquidation value and a valuation report to the erstwhile directors/promoters.
# 9. It is further noted that in the 7th CoC meeting dated 13th February 2020, the Resolution Professional presented the valuation report before the members of the committee for discussion. However, as per section 24(3|b) of the IB Code read with regulation 21(3)(iii) of the 1BBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the Resolution Professional shall give notice of each meeting of the CoC to the members of the suspended management along with the copy of all documents relevant to the matters to be discussed and issues to be voted upon at the meeting.
It is argued by Resolution Professional that as per wording of section 24(3)(b) read with Regulation 21(3)(iii) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the documents were to be supplied to members of CoC. It is further submitted that since the suspended management is not member of the CoC, but merely participant in meetings of CoC, without any voting rights. This being the reasons, behind suspended management not entitled to copy of valuation report.
We refer to the judgement dated 31.01.2019 of Hon'ble Supreme Court in Vijay Kumar Jain V. Standard Chartered Bank & Ors. (Civil Appeal No. 8430 of 2018) wherein the copy of the resolution plan was directed to be given to ex-directors. On reading the judgement, we found following paras relevant to this case and decide the issue before us:
12... 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:
(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;
XXXXXX
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. 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 nonpayment 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 nondisclosure agreement in which the resolution professional can be indemnified in case information is not kept strictly confidential."
Resolution plan is a highly confidential document but when such document is required to be given to the most affected parties being erstwhile members of the Board of Directors of the corporate debtor, then the valuation report in our view which is an important document having bearing onto the fate of corporate debtor must be supplied to ex-management.
In present case it is the valuation report which is in question. Whether it can be shared by Resolution Professional with ex-directors specially when the ex-management alleges and apprehends that properties of corporate debtor are being valued and offered at throw away price. In our view, the ex-management is the appropriate concerned parties to comment on valuation of properties of corporate debtor. The corporate debtor is the body of Ex-management and they were in control and handling the same till CIRP initiation. It would be prejudicial if they are not even allowed to view the valuation and point out the shortfalls in valuation, if any. The intent of code being maximization of value while insolvency resolution process, all concerned should be given access to the document which will be crucial for deciding the worth of the corporate debtor which is intended to be given a new lease of life. There is no specific provision to not to share copy of valuation report with ex-directors, we hold that in the interest of justice the copy of valuation report needs to be supplied to ex directors, as already directed by the Predecessor Bench.
Accordingly, we direct Resolution Professional to supply copy of valuation report to the applicants within 2 days of this order.
# 10. We are of the opinion that Resolution Professional shall provide a copy of the valuation report to the suspended management of the corporate debtor subject to an undertaking from members of the suspended management, 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.
# 11. The application is partially allowed in terms of prayer f (i), only.
# 12. For other prayers the application is listed for further consideration on 05.04.2022
-----------------------------------------------------
No comments:
Post a Comment