NCLT New Delhi-II (26.05.2023) In Navayuga Engineering Company Ltd. Vs. Mr. Umesh Garg, RP of Athena Demwe Power Ltd. [CA. NO. 237/ND/2018 IN Company Petition No. (IB)-244(ND)/2017] held that;
Adjudicating Authority would have been well within its powers to reject a Resolution Plan if the disqualification of SRA under Section 29A of IBC, 2016 is brought to/comes to its notice before its approval.
The Section 29A(c) of IBC, 2016 has three essential conditions that viz,
(a) the account of the Corporate Debtor must be NPA,
(b) such account must be under the management or control of such persons (Resolution Applicant) or of whom such person is a Promoter, and
(c) at least a period of one year has elapsed from the date of such classification till the date of commencement of CIR process of the Corporate Debtor.
Excerpts of the order;
VI. Discussion and Observations
# 15. We have heard the Ld. Counsels for the Applicant, RP, and CoC in detail and perused the documents placed on records including their Written Submissions and Convenience compilations.
# 16. From the records, it is observed that RP/CoC has considered the Applicant/NECL as ineligible under Section 29A of IBC 2016 and held that the Resolution plan submitted by the Applicant/NECL falls within the purview of Section 29A(c) of IBC,2016 mainly on the following grounds that the:
(i) Applicant/NECL is the Promoter of the ADPL/Corporate Debtor.
(ii) Applicant/NECL is a promoter of another Corporate Debtor namely, East Coast Energy Pvt. Ltd, whose account has been declared as NPA.
# 17. The Applicant/NECL submitted that the decision to consider them ineligible under Section 29A of IBC, 2016, and treat them as falling within the purview of Section 29A(c) was communicated by the RP vide e-mail dated 22.06.2018 (hereinafter referred to as the “disqualification e-mail”). When we peruse the said e-mail, we find that the disqualification was not done or communicated on the ground of any connection of the Applicant with M/s East Cost Energy Pvt. Ltd. However, during the course of the hearing, Ld. Counsel appearing for the Applicant submitted that this additional ground, to disqualify the Applicant/NECL has been resorted to subsequent to the issuance of the abovementioned disqualification e-mail communication. This act was not disputed by the Ld. Counsels appearing for the RP and CoC. In our considered view, the ground which was neither considered by CoC in its meeting nor recorded in its minutes nor communicated by RP to the Applicant to disqualify the Applicant, cannot be relied upon at this belated stage. Hence, this Adjudicating Authority will limit its adjudication to the grounds, based on which disqualification of the Applicant/NECL was arrived at and communicated vide e-mail dated 22.06.2018.
# 18. Accordingly, the issue, which emerges for our consideration and Adjudication is “Whether the Applicant / Navayuga Engineering Company Limited (NECL), was a ‘promoter’ of the Corporate Debtor/ Athena Demwe Power Ltd (ADPL).”
# 19. For this purpose, when we refer to the word ‘promoter’, we observe that the same is not defined under IBC, 2016. Therefore, in line with the provisions under Section 3(37) of IBC 2016, we have to rely upon the definition provided under Section 2(69) of the Companies Act, 2013, which reads thus:
# 2(69) - promoter; means a person -
(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;
On perusal of Section 2(69)(b) of the Companies Act, 2013, we observe that the adjective “control” has been used. The definition of “control” is given under Section 2(27) of the Companies Act, 2013, which reads thus:
#2(27) - control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;
# 20. Thus, we find that the definition of “control” is quite inclusive and non-exhaustive in nature. Therefore, we would like to examine whether the Applicant/NECL was having control over the affairs of the ADPL/Corporate Debtor in terms of this definition.
# 26. On perusal of the above clauses, it is observed that the “Effective Date” of the MOU was the date on which it was executed by and between the parties i.e., 23.03.2016. This date is also evident from the date of the Stamp Paper, annexed with the said MOU.
# 27. We also observe that there are no timelines stipulated in the MOU with respect to the Receipt of regulatory approvals, Execution of definitive Shareholders’ Agreements, etc. Further, Clause 4.5 of the MOU mentions that “…Till the financial closure of the project is achieved or Definitive Agreements executed, the internal management of the Company would be run on the basis of the provisions of this MOU.” Moreover, even if the MOU was subject to regulatory approvals and approvals by senior lenders, which if not received, the Applicant could have followed the procedure to seek termination of the MOU by following the mandate of clause 8.9, which was not followed. Hence, both in effect and practice, clause 4.5 of the MOU remained operational.
# 28. Furthermore, we observe that by virtue of Clause 3.2 (reproduced in para 24 above), from the Effective Date i.e., 23.03.2016, the Applicant was vested with the right to nominate the majority of the Directors on the reconstituted Board of ADPL/CD, which depicts that the Applicant/NECL was capable of constituting the composition of the Board.
# 29. Further, as we have noticed from the email communications between the parties (NECL and ADPL), especially the mail dated 10.01.2017, the Applicant was advising the Corporate Debtor on policy-related issues viz., investment, subscription of shares, EPC Contracts, etc, which indicates that the Applicant/NECL was exercising its ‘control’ over the Corporate Debtor/ADPL through policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly in terms of the term ‘Control’ as defined under Section 2(69)(b) of the Companies Act, 2013.
# 32. In view of the Judgement of the Hon’ble Apex Court (Supra), it can be inferred that the amendment in Section 29(A)(c) i.e., “at the time of submission of the resolution plan” was clarificatory in nature. Hence, the trigger point of Section 29A is the date when the Resolution Plan was actually submitted by the Resolution Applicant to the CoC. In view of the above and therefore, the date of transfer of shares by the Applicant/NECL in Regina (RIPL) during the period when Section 29A of IBC, 2016 was not notified, will/does not create an escape route for the Applicant, since the date on which the Resolution plan was actually submitted by the Applicant/NECL to the CoC i.e., on 04.06.2018, the Section 29A of IBC, 2016 was in force.
# 37. In view of the examination of the aforesaid chain of events and documents placed on record, we observe that the entire transaction of the transfer of shares of Regina (RIPL) by the Applicant/NECL was done in cash, the date of receipt of which cannot be proved beyond doubt (in the absence of any digital record), especially when both the transferor and transferee of shares are known and connected. Further, as noted earlier, when the Applicant/NECL had given a loan of Rs. 328 Crores to Regina (RIPL), the transfer of its shares by the Applicant/NECL at a nominal amount of Rs. 1,00,000/- (One Lakh) only, that too only 6 days prior to the date of commencement of the CIR Process of the Corporate Debtor/ADPL, raises serious doubts about the fairness of the connected-party transaction. In the circumstances, there exist sufficient grounds for agreeing with the contention of CoC/RP that the transaction was a sham.
# 38. However, it is still contended by the Applicant/NECL that there is nothing illegal in the transaction and there is no law, which prohibits such a transaction even if it was done in cash. Further, it was argued as to what price, the shares should be sold is the prerogative of the Transferor and Transferee of shares and the RP has no jurisdiction to raise any objections towards it. In view of such a contention raised by the Applicant that the transactions of shares of the Applicant/NECL in Regina (RIPL) were genuine and legal, which for the time being if we assume so, a question arises, whether Regina (RIPL) can still be considered under the “control” of the Applicant/NECL
# 41. At this stage, at the cost of repetition, we again refer to the definition of ‘Control’ as defined under Section 2(69)(b) of the Companies Act, 2013, which reads thus:
#2(27) - control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;
We observe that the definition of “Control” is an inclusive and non exhaustive one that, inter alia, includes the following -
a) right to appoint a majority of directors, or
b) to control the management, or
c) policy decision exercisable by a person or persons acting individually or in concert, directly or indirectly
d) including by virtue of their shareholding or management rights or shareholders agreement or voting agreements or in any other manner.
# 42. Therefore, in terms of Section 2(69)(b) of the Companies Act 2013, besides shareholding, there are other ways of exercising ‘control’ over a company/entity. As observed earlier, the RP has alleged that Mr. K. Vijayabhaskar, to whom 50% of the shares of Regina (RIPL) were transferred, was an official acting on behalf of the Applicant/NECL and to substantiate this fact, he had referred to Mr. K. Vijayabhaskar’s email id mentioned in the share transfer deed. Accordingly, at this stage, we would like to examine Whether there was any direct or indirect connection between Mr. K. Vijayabhaskar and other Directors of Regina (RIPL) with the Applicant/Navayuga/NECL or its Related/Connected Entities.
# 49. Thus, it is observed that even though the Applicant/Navayuga/NECL sold its 100% shareholding in Regina (RIPL) and even if we assume that the said sale was genuine and legal, we find that the Directors of the Connected/Related Companies to the Navayuga (NECL)/Applicant still continued/are continuing in the Board of Regina (RIPL). Thus, on the lifting of the Corporate Veil, we have no doubt in our mind that the Applicant/Navayuga (NECL) was indeed exercising control over Regina (RIPL) through the Directors of its Related/Connected Companies.
# 50. Thus, we have examined the transaction of shares in Regina (RIPL) from both angles. Not only, we did not find any reason to differ with the contention of RP/CoC that the transaction was a sham, but also even for the sake of argument, while assuming the transaction to be genuine, we found that the Applicant/NECL was exercising control over Regina (RIPL) through the Directors of its Related/Connected Companies. Hence, we find no merit in the contention raised by the Applicant/NECL that after the sale of its shareholding, it was not in a position to control Regina (RIPL) hence, it cannot be said to be in control of the ADPL/Corporate Debtor
VII. Procedural Impropriety
# 51. It is further submitted by the Applicant/NECL that it is post submission of EOI, the RP vide its following email dated 02.05.2018 communicated that prima facie, the Applicant herein was eligible to submit the Resolution Plan. In the normal course, it was the duty of the RP to verify the eligibility of the Resolution Applicants immediately on/after receipt of EOIs only. It was not apt for the RP to wait till the submission of the Resolution Plan and then, consider and decide the eligibility of the Resolution Applicants under Section 29A of IBC 2016. Even if we assume this as a lapse, the fact that the Applicant/NECL was disqualified under Section 29A would not have changed and the outcome still would have remained the same. Furthermore, in our considered view, even if the fact of disqualification of the Applicant/NECL under Section 29A of IBC 2016 had come to the notice of RP/CoC subsequent to the opening of the Resolution Plan, RP/CoC are duty bound to take cognizance of such a fact prior to approval of Resolution Plan and act as per the provisions of the IBC 2016. Certainly, the procedure(s) cannot take precedence or override the legal infirmity, even if the same is noticed subsequently. Even for that matter, post-approval of a Resolution Plan by the CoC, this Adjudicating Authority would have been well within its powers to reject a Resolution Plan if the disqualification of SRA under Section 29A of IBC, 2016 is brought to/comes to its notice before its approval.
# 53. Thus, we find that the Corporate Debtor was NPA since 31.05.2013 and continuing so on the date of filing of the Resolution Plan by the Applicant/NECL, which is one of the criteria laid down for disqualification under Section 29A(c) of IBC 2016.
IX. Conclusion
# 54. As per the Judgement of the Hon’ble Apex Court in ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1, the amendment in Section 29(A)(c) i.e., “at the time of submission of the resolution plan” was clarificatory in nature. Hence, the trigger point of Section 29A is the date when the Resolution Plan was actually submitted by the Resolution Applicant to the CoC. In the instant case, the Resolution plan was submitted by the Applicant/NECL to the CoC on 04.06.2018, when Section 29A of IBC, 2016 was already in force.
# 55. In the sequel of the discussion and observations in Part VI of this order, we conclude that the Applicant herein/NECL was a ‘promoter’ exercising its ‘control’ over the Corporate Debtor/ADPL in view of the following findings –
(i) Clause 4.5 of the MOU dated 23.03.2016 i.e.,“…Till the financial closure of the project is achieved or Definitive Agreements executed, the internal management of the Company would be run on the basis of the provisions of this MOU” remained operational both in effect and practice. Further, even if the MOU was subject to regulatory approvals and approvals by senior lenders, which if not received, the Applicant did not get the MOU terminated in terms of clause 8.9.
(ii) By virtue of Clause 3.2 of the said MOU, from the Effective Date i.e., 23.03.2016, the Applicant was vested with the right to nominate the majority of the Directors on the reconstituted Board of ADPL/CD, which depicts that the Applicant/NECL was capable of constituting the composition of the Board.
(iii) The Applicant/NECL was exercising its ‘control’ over the Corporate Debtor/ADPL through the exchange of variouscommunications/policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly in terms of the term ‘Control’ as defined under Section 2(69)(b) of the Companies Act, 2013.
(iv) The entire transaction of the transfer of shares of Regina (RIPL) by the Applicant/NECL was done in cash, the date of receipt of which cannot be proved beyond doubt in the absence of any digital record, especially when both the transferor and transferee of shares are known and connected to each other. Further, while the Applicant/NECL had given a loan of Rs. 328 Crores to Regina (RIPL), the act of transferring its shares including to one of the Directors of Regina at a nominal amount of Rs. 1,00,000/- (One Lakh), that too only 6 days prior to the date of commencement of the CIR Process of the Corporate Debtor/ADPL, raises serious doubts about the fairness of the transaction. In the circumstances, there exists sufficient ground for agreeing with the contention of CoC/RP that the transaction was a sham.
(v) Even otherwise, on lifting the Corporate Veil of Regina (RIPL), we found that the Applicant/Navayuga (NECL) was exercising control over Regina (RIPL) through the “Directors of its Related/Connected Companies” even on the date of submission of the Resolution Plan.
# 56. We have also noted, in paragraph 53 above, from the documents placed on record that the Corporate Debtor was NPA since 31.05.2013.
# 57. The Section 29A(c) of IBC, 2016 has three essential conditions that viz,
(a) the account of the Corporate Debtor must be NPA,
(b) such account must be under the management or control of such persons (Resolution Applicant) or of whom such person is a Promoter, and
(c) at least a period of one year has elapsed from the date of such classification till the date of commencement of CIR process of the Corporate Debtor.
# 58. In the instant case, we have found that all the three ingredients of the Section 29A(c) are met i.e., (a) the account of the Corporate Debtor/ADPL was NPA since 31.05.2013, (b) a period of more than 4 years has lapsed from the date of NPA till the commencement of CIRP of the Corporate Debtor on 28.09.2017, and (c) the Applicant herein/NECL has been found to be a ‘promoter’ exercising its ‘control’ over the Corporate Debtor/ADPL through Regina (RIPL).
# 59. In view of the above, we find no error committed by the RP/CoC in holding the Applicant/NECL as ineligible in terms of Section 29A(c) of IBC, 2016 to submit the Resolution Plan. Hence, all the prayers made in the present application stand rejected. 60.
The Application is accordingly, Dismissed.
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