Directors of corporate debtor entitled to insolvency resolution plans – SC

Members of suspended Board of Directors of corporate debtor entitled to insolvency resolution plans presented at COC meetings under Section 25(2)(i) – SC

ABCAUS Case Law Citation:
ABCAUS 2762 (2019) (01) SC

The Petitioner was aggriebed by the order of the Appellate Tribunal rejecting the 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).

In the instant case, the Petitions filed by the banks (financial creditors) of the Petitioner (corporate debtor) were admitted by the National Company Law Tribunal (NCLT). One Interim Resolution Professional (IRP) was appointed and the CoC was constituted under Section 21 of the Insolvency and Bankruptcy Code, 2016 (the Code), and the appellant being a member of the suspended Board of Directors was given notice and the agenda for the first CoC meeting and was permitted to attend the aforesaid meeting.

However, the Petitioner alleged that in subsequent meetings of the CoC he was denied participation. As a result, the appellant filed Miscellaneous Application before the NCLT in order that the appellant be allowed to effectively participate in these meetings. Subsequently, the appellant executed a nondisclosure 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.

The NCLT dismissed the application of the appellant 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, application for modification/clarification of the Appellate Tribunal’s order was also dismissed.

Aggrieved, the appellants had approach the Hon’ble Supreme Court.

In the meanwhile, the resolution plan was approved by majority of the committee of creditors. The resolution professional submitted its resolution plan, as approved by the CoC, to the Adjudicating Authority.

However, the Hon’ble Supreme Court, by an interim order, stayed the finalization of the bids . Later the Court clarified allowed the Adjudicating Authority to continue with the proceedings with stipulation that no order could be passed on the same until adjudication on the present appeal.

The Hon’ble Supreme Court observed that the statutory scheme of the IBC 2016 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).

The Hon’ble Supreme Court said that 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.

Therefore, the first important thing 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.

It was argued that Notes on Clauses to Section 24 provides 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.

However, the Hon’ble Supreme Court found that the third sentence of the Notes on Clause 24 is itself problematic and difficult to understand.

The Hon’ble Supreme Court opined that 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, 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.

The Hon’ble Supreme Court pointed out that 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. Also, under Regulation 37(d) of the CIRP Regulations, a resolution plan may provide for satisfaction or modification of any security interest. This would certainly include a guarantor who may be a member of the erstwhile Board of Directors.

The Hon’ble Supreme Court noted that 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.

The Hon’ble Supreme Court pointed out that 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.

The Hon’ble Supreme Court stated that 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 should 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.

Thus, the Hon’ble Supreme Court opined that 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 the Hon’ble Supreme Court rejected 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.

On the issue of confidentiality of the information, the Hon’ble Supreme Court stated that the resolution professional can take an undertaking from members of the erstwhile Board of Directors,  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.

The Hon’ble Supreme Court also rejected the argument on behalf of the committee of creditors based on the proviso to Section 21(2) as misconceived.

The Hon’ble Supreme Court stated that 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.

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