5. Hindustan Oil Ltd. vs. Erstwhile Committee of Creditors of JEKPL Pvt. Ltd.Company Appeal (AT) (Insolvency) No. 969 of 2020 Date of order: 17th November, 2020
Insolvency and Bankruptcy Code, 2016 – Implementation of a Resolution Plan which was approved by Committee of Creditors could not be challenged by the unsuccessful applicants
FACTS
H Co is an unsuccessful resolution applicant whose Resolution Plan was rejected by the Committee of Creditors (‘CoC’). NCLT, vide an order dated 9th September, 2020, directed implementation of the approved Resolution Plan on or before the extended due date, 30th September, 2020.
H Co urged that the Creditors of the Corporate Debtor, in connivance with the Successful Resolution Applicant, accepted a re-negotiated fresh Resolution Plan and the application of the CoC u/s 60(5) of the Insolvency and Bankruptcy Code, 2016 (‘Code’) filed before the NCLT was not maintainable and should not have been entertained by the NCLT as the CoC had become functus officio after approval of the Resolution Plan.
It was further argued that NCLT had approved the Resolution Plan on 4th February, 2020 and in terms of the approved Resolution Plan the successful resolution applicant had to bring in Rs. 123 crores for resolution within 30 days of approval of the plan which expired on 5th March, 2020. However, the successful resolution applicant did not implement the Resolution Plan and the erstwhile CoC of the Corporate Debtor, in connivance with the successful resolution applicant, accepted a fresh Resolution Plan to the detriment of the legal rights of H Co whose Resolution Plan was rejected on the ground that he could not provide for a lump sum time-bound payment within 30 days of the approval of its Resolution Plan.
HELD
NCLAT heard the appeal filed by H Co and observed that it had no locus to question the implementation of the approved Resolution Plan of the successful resolution applicant. Directions given in the context of the application filed u/s 60(5) of the Code to the successful resolution applicant follows as a necessary corollary to the dismissal of appeal filed against approval of the Resolution Plan of the successful resolution applicant to implement the approved Resolution Plan on or before the extended date of 30th September, 2020.
It was observed that once H Co was out of the fray, it had neither locus to call in question any action of any of the stakeholders qua implementation of the approved Resolution Plan, nor could it claim any prejudice on the pretext that any of the actions post approval of the Resolution Plan of the successful resolution applicant in regard to its implementation had affected its prospects of being a successful resolution applicant.
H Co would not have any right to object if the terms of the approved Resolution Plan of the successful resolution applicant have been varied or the time extended to facilitate its implementation and the creditors have not claimed any prejudice on that count. In fact, the CoC comprising of the creditors as stakeholders did not object to the same. It was rather privy to it on account of hardship due to the prevailing circumstances.
It was further observed that this was not a case of alleged material irregularity in the Corporate Insolvency Resolution Process which is in the final stages with the approved Resolution Plan being under implementation. The outbreak of the Covid-19 pandemic slowed down the economic activity and operations were adversely impacted. NCLAT held that in the given context some necessary changes in the agreed terms and extension of time for implementation would not be uncalled for.
NCLAT thus held that H Co had no locus to maintain that the change in terms of the approved Resolution Plan in regard to extension of time for induction of upfront amount as also implementation of the Resolution Plan has jeopardised its legal rights qua consideration of its Resolution Plan.
The appeal of H Co was accordingly dismissed.
6. Ratna Singh vs. Theme Export Pvt. Ltd.Company Appeal (AT) (Insolvency) No. 917 of 2020 Date of order: 18th November, 2020
Section 61 of Insolvency and Bankruptcy Code, 2016 – Appeal against a liquidation order passed u/s 33 could only be made if there was a material irregularity or fraud in relation to such an order – IBC is not meant for initiating proceedings for prevention of oppression and mismanagement – It has been armed with Chapters II and III for initiation of action against wrongdoers, illegal transactions, etc.
FACTS
Mrs. R and Mr. B (‘appellants’) were directors in T Co (‘Corporate Debtor’). Corporate Insolvency Resolution Process was initiated against the Corporate Debtor by an operation creditor Mr. R u/s 9 of the Insolvency and Bankruptcy Code, 2016 (‘the Code’). The National Company Law Tribunal (‘NCLT’) admitted the application and appointed Mr. V as Insolvency Resolution Professional (‘IRP’). The first meeting of the Committee of Creditors (‘CoC’) was held on 28th September, 2019 and the second on 4th November, 2019 confirming IRP as Resolution Professional (‘RP’) and also deciding to liquidate the Corporate Debtor.
NCLT passed the liquidation order primarily on the basis of the recommendation of the CoC which had the strength of 98.5% voting shares. While passing the liquidation order, NCLT took a conscious decision not to challenge the commercial wisdom of the Financial Creditor.
Aggrieved by the order, both ex-directors filed the present appeal for staying the liquidation proceedings and quashing the impugned liquidation order. The appellants submitted that Ms N, a director of the Corporate Debtor, siphoned off money, evidence of some of which was submitted before the NCLAT.
It was further submitted that the Corporate Debtor has availed financial credit facility from Bank of Baroda to the tune of Rs. 25 crores, mortgaging its plant, machinery and assets, including accessories, stock and fabric as primary security and the factory at Okhla along with personal / corporate guarantees of the three directors and the same was being renewed by the bank since 2005. The performance of the Corporate Debtor started deteriorating from F.Y. 2015-16 – from approximately Rs. 100 crores to about Rs. 30 crores in 2018-19 on account of various frauds, leading to oppression and mismanagement by Mrs. N, director of the Corporate Debtor, along with certain other related parties and employees. Mr. Ravinder Rai, ex-accountant of the Corporate Debtor, even provided to the IRP all the data of the illegal acts committed by Mrs. N on 18th November 2019 prior to filing of liquidation proceedings by the IRP.
The appellants had also written to Mrs. N demanding explanation for the theft and criminal breach of trust amounting to oppression and mismanagement, apart from visiting Bank of Baroda and informing the Chief Manager, Mr. Lalit Kumar Luthra, about theft, etc., and demanded the stock statements and the fixed assets register along with the list of machinery pledged to the Bank on 31st December, 2018.
The respondents have not filed their counter objections. As per the written submission and also the oral submission made by the respondent’s counsel, section 61(4) of the I&B Code, 2016 clearly stated that an appeal against the liquidation order could be challenged only on the ground of material irregularities or fraud committed in relation to such liquidation order. It was also submitted that the appellants did not challenge the liquidation order per se but their grievance was against the act of oppression and mismanagement by the other director of the Corporate Debtor.
It was further submitted that the appellants failed to initiate the filing of a petition u/s 241-242 of the Companies Act, 2013 which deals with oppression and mismanagement at the appropriate stage. Hence they cannot challenge the issue of oppression and mismanagement u/s 61(4) of the Code and so the application needs to be dismissed. The Liquidator further submitted that the documents are being reviewed by the Forensic Auditor, M/s K.R.A. and Company, Chartered Accountants, for certain transactions under sections 43, 45 and 66 of the Code and an appropriate application shall be filed by the Liquidator based on its findings. Further, the Liquidator argued that there were no chances of revival of the Corporate Debtor and hence the CoC had passed a resolution liquidating the Corporate Debtor. Thus, this application needs to be dismissed.
HELD
The NCLAT heard the parties at length. It was observed that the Corporate Debtor had three directors – the two appellants were directors and the other director was Ms N; the shareholding of Ms N in the Corporate Debtor was 92% and of the appellants 8%.
NCLAT observed that Chapter III of Part II of IBC, 2016 has a mechanism even during liquidation process to initiate action for various wrongdoings from sections 43 to 51 and section 66, which are all related to undervalued transactions, avoidable transactions, defrauding creditor, fraudulent trading or wrongful trading, etc. It was observed that the Liquidator, who is also erstwhile IRP, was required to take necessary action and the Bank of Baroda is to provide appropriate assistance. Bank of Baroda was supposed to check the flow of inventory, cash–to-cash cycle, etc., as they had lent Rs. 25 crores.
The NCLAT relied on judgments which had held that the commercial wisdom of the CoC cannot be looked into by either the NCLT or the Appellate Authority. It relied on section 61 of the Code and observed that an appeal against a liquidation order passed u/s 33 may be filed on the grounds of material irregularity or fraud committed in relation to the liquidation order. NCLAT did not find any irregularity or fraud committed in relation to the impugned order. It was observed that the Code is not meant for initiating proceedings for prevention of oppression and mismanagement but is armed with provisions under Part II Chapter – III for initiation of action against wrongdoers / illegal transactions, etc. NCLAT upheld the order by passed by the NCLT and the appeal was dismissed.
7. Jaideep Halwasiya vs. AA Infraproperties (P.) Ltd. [2020] 121 taxmann.com 240 (NCLAT) Date of order: 4th September, 2020
At the Annual General Meeting (AGM) and Extra Ordinary General Meeting (EOGM), new directors were appointed and existing director ‘J’ was removed from directorship – In view of the fact that neither any resolution nor any minutes of board meetings were in existence, nor any notice of agenda was circulated in the prescribed manner, the appointment of new directors and removal of ‘J’ as director was to be stayed
FACTS
This appeal was filed by ‘J’, a minority shareholder of ‘AA’ against the order dated 21st February, 2020 passed by the National Company Law Tribunal, Kolkata Bench (‘the Tribunal’) declining grant of interim relief requested by J. The Tribunal had declined to record findings on the factual controversy as regards serving of notices of AGM dated 24th September, 2019 and EOGM dated 4th January, 2020. The Tribunal further observed that allowing interim relief as claimed in the Company Petition would tantamount to deciding the main petition.
Admittedly, there are two groups of shareholders in the company. The minority shareholders’ group comprises of J holding 12.5% shares, whereas the majority group holds 87.5% shares. Several allegations of oppression and mismanagement as regards management and operations of the company were levelled by J which included not being served notice of AGM dated 24th September, 2019 and notice of EOGM dated 4th January, 2020 which was pending. It was during the pendency of this petition that J sought interim relief alleging that the respondents in collusion and connivance with each other illegally appointed new directors in the AGM on 24th September, 2019 and ousted J from directorship in the EOGM on 4th January, 2020. All these acts of commission attributed to the respondents were alleged to have been done without giving notice to J. Interim relief was sought on the strength of these allegations claiming that the resolutions passed in such meetings were bad in law and void ab initio. J further alleged that the acts of the respondents, being oppressive in nature, are prejudicial to his interest in the company.
The respondents have refuted the allegations and pleaded that notice of the meetings in which the resolutions inducting new directors in the company and removing J from the post of director were passed, were given well in advance to J. It was further pleaded that the majority shareholders were within their rights to pass such resolutions appointing other persons as directors and removing the existing directors, including J.
It was further submitted that the respondents were illegally trying to usurp control over the company by forcing the ouster of J from the Board and appointing new directors. It was submitted that the Respondents adopted a modus operandi creating an impression that new directors were appointed at the meeting held on 24th September, 2019 and subsequent to this alleged AGM, an EOGM was held on 4th January, 2020 wherein J was removed. It was pointed out that there was no resolution nor any minutes of the alleged Board Meeting dated 22nd June, 2019 to show that the two directors of the company had decided to hold the AGM on 24th September, 2019. No minutes as required u/s 118 of the Act had been produced by the company to support its plea. It was further submitted that as regards the alleged agenda and notice dated 6th June, 2019, no notice or agenda was ever circulated. The documents relied upon by the respondents in this regard were fabricated as they did not bear the necessary signatures and were not on the letterhead of the company. The notice of AGM was never served on J or any other shareholder. Even service was not effected through the prevalent mode of service. The annual returns were filed without holding an AGM and on the date of the alleged meeting one of the shareholders (a director) was not even in India.
It was submitted that since J did not attend any meeting purportedly held on 24th September, 2019 the minimum required quorum for the General Meeting as per section 103(1)(b) of the Act was not present. Such a meeting would therefore have no meaning and cannot be said to exist in law. Thus, it was contended that the AGM of 24th September, 2019 is non est and the resolutions passed on that date deserved to be stayed. Further, the purported resolution of 4th January, 2020 for removal of J as Director was entirely illegal and void ab initio. There was no evidence to show that notice of the Board Meeting to be convened on 26th November, 2019 was served on J. The genuineness of the alleged notice for the EOGM of 12th December, 2019 was disputed. The variation in addresses was also highlighted. Thus, the very foundation of removal of J from the Board was nothing but fraudulent and was sought to be supported by fabricated documents.
HELD
The Appellate Tribunal observed / noted as under:
J is admittedly a minority shareholder whilst the respondents and associates are the majority shareholders. With allegations of the respondents making all efforts to usurp control over the company through all means, fair or foul, emanating from J, it is demonstrated by J that no resolution or any minutes of the Board Meeting of 22nd June, 2019, stated to be the edifice of the alleged AGM, was in existence to even suggest that the two directors decided to hold the AGM on 24th September, 2019. It was contended on behalf of J that adherence to the statutory requirement u/s 118 of the Companies Act has not been established by respondents which justifies drawing of an inference that neither any such Board Meeting was conducted nor any minutes of such Board Meeting recorded. It was also pointed out that no notice or agenda was circulated in the prescribed manner and bearing the signatures of J. As regards the notice said to have been issued on 5th August, 2019, similar contentions have been raised, it being further pointed out that the prevalent modes of service have not been resorted to.
It has been pointed out that although Form No. MGT 7 was filed even without holding the AGM, the Annual Report falsely declared that the AGM had been attended by both J as well as the directors. It has been pointed out that J never attended any such meeting and one of the other directors was not in India on that date. It was also pointed out that after the respondents realised that the fraud played by them in this regard had been discovered, one of the respondents cooked up another false story by setting up the plea that someone had attended the meeting on his behalf and a clerical error had been made in the Annual Report. No authorisation in this regard has been produced by the respondents to demonstrate that someone else had attended as a representative in the alleged AGM. It was submitted on behalf of J that since J did not attend any purported meeting on 24th September, 2019 the minimum required quorum of the General Meeting not being present, any resolutions said to have been passed on such date were required to be stayed. On the strength of these relevant facts, it was contended on behalf of J that the ouster of J as director was entirely illegal.
Since the foundation was bad, it was contended that the entire superstructure was bound to collapse. J has demonstrated all these circumstances to show that he has raised a fair question which requires a probe in the Company Petition. The arguments raised on this score cannot be dismissed off hand. Given the status of J, it can be safely stated that with the existence of a prima facie case in his favour, the balance of convenience lies to the side of J who is faced with the prospect of his interests and legal rights being seriously jeopardised in the wake of the Tribunal order.
For the foregoing reasons, the Appellate Tribunal opined that the order of the Tribunal suffered from grave legal infirmity besides factual frailty. Therefore, it cannot be supported. The appeal was allowed and the order of the Tribunal was set aside. The appointment of new directors and removal of J as director of the company was stayed till the decision on the Company Petition.
8. Jaishree Dealcomm (P) Ltd. vs. Registrar of Companies [2020] 119 taxmann.com 418 (NCLAT) Date of order: 29th November, 2019
Section 252 read with sections 164 and 248 of the Companies Act, 2013 – Name of the company was struck off from the register of companies – Directors filed an application for restoration of name which was dismissed on the ground that they being disqualified could not maintain an appeal – But from share certificates and annual returns of the company it was found that said directors were also shareholders and thereby entitled to file an appeal as per section 252(3) – Further, the company had not filed annual returns since F.Y. 2013-14 onwards though it was regularly carrying on its business as evidenced by auditors’ reports and financial statements for years ended 31st March, 2014 to 31st March, 2017 – It was held that the order striking off the name of the company from the register of companies was prejudicial to the shareholders and was to be set aside and the name restored
FACTS
J Pvt. Ltd. is a company incorporated under the Companies Act, 1956 and having its registered office in Kolkata. It was served notice u/s 248(1)(c) of the Companies Act, 2013. Thereafter, a public notice was issued and the company’s name struck off from the register of companies.
This order was challenged before the NCLT, Kolkata. However, NCLT dismissed the appeal on the ground of maintainability that u/s 252(3) of the Companies Act, 2013 a company or any member or creditor or workman can file application for restoration of the name of the company. NCLT had, while dismissing the appeal, also observed that as per section 164(2)(a) of the Companies Act, 2013, directors being disqualified cannot maintain the appeal. Being aggrieved, the directors preferred the present appeal.
It was submitted that the directors who had preferred this appeal were also shareholders of the company. Further, J was regularly carrying on business as stated in the main object clause of the Memorandum of Association of the company and was regularly filing income-tax returns with the Income-tax Department. However, J had inadvertently failed to file its audited financial statements and annual returns from financial year 2013-14 onwards which were annexed with the Memo of Appeal. It was apparent from the audited balance sheets that J had been carrying on business.
The ROC, West Bengal, submitted that J had been grossly negligent in not filing the annual returns and financial statements since F.Y. 2013-14, thus the order of the NCLT / ROC be upheld.
HELD
The Appellate Tribunal observed / noted as under:
The Memo of Appeal was filed by shareholders of the company and it was considered on merit. Clearly, the company had not filed annual returns since F.Y. 2013-2014. However, it was regularly carrying on its business and filed the reports of the auditors and financial statements for the years ended 31st March, 2014 to 31st March, 2017. The audited financials were perused and it was apparent that J has been carrying on its business continuously. Therefore, the order of striking off the name of the company from the register of companies is prejudicial to the shareholders of the company. The order is liable to be set aside and is hereby set aside.
It was further ordered that within 30 days of restoration of the company’s name in the register maintained by the Registrar of Companies, the company will file all its annual returns and balance sheets due for the period ending 31st March, 2014 to date. The company will also pay requisite charges / fee as well as late fee / charges as applicable.
In spite of the present orders, the ROC will be free to take any other steps, punitive or otherwise, under the Companies Act, 2013 for non-filing / late filing of statutory returns / documents against the company and directors.
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