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February 2019

CORPORATE LAW CORNER

By Pooja J. Punjabi
Chartered Accountant
Reading Time 9 mins

9.  Lalit Mishra vs. Sharon Bio Medicine Limited Company Appeal (AT) (Insolvency) No. 164 of 2018  Date of Order: 19th December, 2018

 

Insolvency and Bankruptcy Code, 2016 – Shareholders and promoters are not creditors – Right available to surety (who are also the promoters and shareholders) under contract law will not be applicable in case of an approved resolution plan

 

FACTS

 

National Company Law Tribunal (“NCLT”) passed an order whereby a resolution plan was approved in respect of S Co. L was a promoter of S Co. Predominantly, the grounds of appeal are that L and others although are promoters and shareholders, no amount has been provided for them; and some of the promoters being personal guarantors are discriminated against.

 

L has also submitted that the security interest which include the personal guarantees of L have been reduced to ‘nil’ and thereby the ‘Resolution Plan’ have been submitted against the provisions of sections 133 and 140 of the ‘Indian Contract Act’. 

 

HELD

 

NCLAT examined the various clauses of the resolution plan approved by the NCLT. It was observed that restructuring of the financial debt as part of the ‘Resolution Plan’ approved by the NCLT under the Code did not envisage complete discharge of the liability of personal guarantors of the S Co. The plan mentioned that all securities/ collaterals/ margin money/ fixed deposit with lien provided by S Co shall be deemed to be released immediately on Effective Date. It is subsequently mentioned that the personal guarantee provided by the existing promoters of S Co shall not result in any liability towards S Co or the ‘Resolution Applicants’.

 

This ‘treatment of security’ and with regard to personal guarantee provided by the existing promoters of S Co is alleged to be in violation of section 140 and section 133 of the ‘Indian Contract Act’.

 

However, it was held that intention of the law was maximisation of the value of the assets of the ‘Corporate Debtor’, then to balance all the creditors and make availability of credit and for promotion of entrepreneurship of the ‘Corporate Debtor’. The Code prohibits the promoters from gaining, directly or indirectly, control of the ‘Corporate Debtor’, or benefiting from the ‘Corporate Insolvency Resolution Process’ or its outcome. The Code seeks to protect creditors of the ‘Corporate Debtor’ by preventing promoters from rewarding themselves at the expense of creditors and undermining the insolvency processes.

 

The NCLAT held that the shareholders and promoters are not creditors and thereby the ‘Resolution Plan’ cannot balance the maximisation of the value of the assets of the ‘Corporate Debtor’ at par with the creditors. They were also ineligible to submit the ‘Resolution Plan’ to again control or takeover the management of the ‘Corporate Debtor’. Further it was held that there was no discrimination if no amount is given to the promoters/shareholders and the other equity shareholders who are not the promoters have been separately treated by providing certain amount in their favour. The appeal was accordingly dismissed.

 

10.  KKR Jupiter Investors (P.) Ltd. vs. JBF  Petrochemicals Ltd. [2018] 100 taxmann.com 341 (NCLT-Ahd.) Date of Order: 19th November, 2018

 

Section 60(5)(c) r.w.s 7 of Insolvency and Bankruptcy Code, 2016 -_ Proceedings u/s. 7 can only be initiated by or against the corporate debtor – No other person (including a financial investor, promoter or shareholder) can intervene in the proceedings so initiated

 

FACTS

 

K Co, is a financial investor of J Co. In April 2018 K Co came to know that corporate insolvency resolution process u/s. 7 of the Insolvency Bankruptcy Code, 2016 has been initiated against J Co by one of its financial creditors. K Co as a financial investor submitted that it proposed to implement a comprehensive solution to the problems faced by all the stakeholders of J Co within a reasonable time period and sought the co-operation of the financial creditor. This was mainly based on the contention that corporate insolvency resolution process would not serve any beneficial purpose to the stakeholders including financial creditor and the proposed financing would resolve the issues whereby the lender would receive payment of outstanding principal amount under the facility arrangement and K Co’s interest would also be preserved. The applicant thus filed intervention application for affording an opportunity to it to raise all the issues for the effective adjudication in the matter.

 

HELD

 

National Company Law Tribunal (“NCLT”) examined the provisions of section 60(5) of the IBC which deal with adjudicating authority for corporate persons. It observed that an application/proceeding u/s. 60(5) of the IBC could be filed by or against the corporate debtor. This was unlike the K Co’s case, where, the intervention application was filed against the financial creditor.

 

NCLT further observed that section 60(5)(c) had no applicability at the stage of adjudication on admissibility of application filed u/s. 7 of IBC. This was because section 60(5)(c) dealt with questions of priorities or any question of law or facts “arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor” or corporate person. NCLT, thus, concluded that the intervener cannot resort to section 60(5)(c) to invoke jurisdiction of the Tribunal to entertain the intervention application in a case where the proceedings are initiated by the financial creditor u/s. 7 of the IBC which is under way and the insolvency resolution process against the corporate debtor has not been initiated.

 

NCLT relied on the decision of the NCLAT in Axis Bank vs. Lotus Three [2018] 97 taxmann.com 96 wherein it was held that, third party i.e. an entity other than the financial creditor/corporate debtor is not offered the right to be heard and/or to intervene in a proceeding initiated u/s. 7. NCLT thus held that adjudicating authority was only required to satisfy that the default had occurred and the corporate debtor was entitled to point out that the default had not occurred, i.e. the debt was not due. No other person had the right to be heard at the stage of admission of application u/s. 7 and 9 including the shareholder or the personal guarantor. The Tribunal also relied on the decision of the Supreme Court in the case of Innoventive Industries Ltd. vs. ICICI Bank Ltd. [2017] 84 taxmann.com 320 (SC) to draw support for this position held by the Tribunal. NCLT, thus, rejected the application filed by K Co.

 

11. Vestal Educational Services (P.) Ltd. v. Lanka Venkata Naga Muralidhar [2018] 100 taxmann.com 286 (NCL-AT) Date of Order: 16th November, 2018

 

Section 62 of Companies Act, 2013 – Money was given by ex-director to Company for re-payment of loans taken by the company – Company alleged that amount was advanced against equity shares and not loan as was claimed by the ex-director – Company was required to establish that a valid offer of shares was made to and accepted by the ex-director and that procedure laid down u/s. 62 was complied with – Inability to prove the same rendered the allotment null and void.

 

FACTS

 

L is a shareholder of V Co and acted as a director of the same from December 2006 to October 2011. V Co had borrowed loan from SBI in 2009 against which properties of V Co were mortgaged and L also gave a personal guarantee.

 

The term loan became NPA in 2013 (i.e. after L ceased to be a director in October 2011). There was a one-time settlement agreed by V Co. Since the company could not meet its liability as per the one-time settlement scheme entered into with the Bank, it approached L to lend Rs. 1.54 crore. L deposited the said sum in the account of V Co.

 

L claimed that he sent reminders to the company for repayment of the amount and also sent legal notices asking for payment of amounts advanced by him to the company. Meanwhile, V Co sent a courier to the original petitioner showing the latest shareholding and on verification, the original petitioner found that amount lent by him had been converted into equity without his knowledge, intimation or authorisation and that the action  on the part of company to convert the amount into equity was to avoid the payment of money to him and clearly an afterthought.

 

The NCLT observed that there was no evidence as regards issue of notice offering shares and ultimately set aside the allotment made by the company and directed that the amount be paid to L.

 

V Co filed the present appeal pleading that amounts were advanced by L as a consideration for issue of shares and not as a loan as was held by NCLT.

 

HELD

 

NCLAT observed that having regard to the opposing nature of claims, burden was on V Co to show that when the payments were made by L, he had agreed that against the said amount, shares be issued to him. V Co was also required to establish that procedures laid down u/s. 62 of Companies Act, 2013 were complied with.

 

The NCLAT observed that there was no match between the amounts advanced by L and shares alleged to be allotted by V Co in light of ledger maintained by V Co.

 

NCLAT held that V Co was unable to establish at any point of time that L had in fact consented to the issue of equity shares against money advanced by him. Further, additional documents that V Co tried to submit in order to further its claim were never filed before NCLT and there was a concern on the genuineness of the documents so tendered for filing. NCLAT further held that had the documents been considered, the conclusion would still be the same as NCLT. V Co was unable to prove that shares were offered to L or that L had in fact accepted the offer alleged to have been made.

 

The appeal filed by V Co was accordingly aside and a cost of Rs. 1,50,000 was imposed upon V Co.

 

 

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