2020 (3) TMI 1398 - AT - Companies Law

Tribunal Asserts Jurisdiction for Interim Orders & Resolution Framework in IL&FS Case

The Tribunal upheld its jurisdiction under Sections 241 and 242 of the Companies Act, 2013, to pass interim orders and regulate the conduct of IL&FS ... Vacation of interim order - interim orders were passed relating to change of the management - red entities/green entities - Section 241 and 242 of the Companies Act, 2013 - HELD THAT:- It is clear that 133 Entities of IL&FS Group Companies incorporated outside the territorial jurisdiction of India, i.e., Offshore Group Entities were excluded from the purview of interim order passed by this Appellate Tribunal on 15th October, 2018. However, ‘resolution’ of Offshore Group Entities has been allowed subject to decision of the Management of the Board of Directors and supervisions of the Hon’ble Justice (Retd.) D.K. Jain. Twenty-two entities have been classified as ‘Green Entities’, who were in a positon to clear the dues of many of the Secured Creditors including the Interveners/ Respondents, who are objecting and derived the benefit of the interim order. Thirteen Entities were declared “Amber Entities” who had the ability for making payment to some of the Senior Secured Creditors as and when fall due. Many of them had the cash flow sufficiency to meet current operational payments. In fact, out of 13 Amber entities, four were declared ‘Green Entities’ who can meet the liability of Secured Creditors and other creditors. It is only the Red Entities, which are about 55 in number, with regard to whom the resolution process is yet to be started - the matter progressed in smooth manner in view of the interim order enabling number of Companies including Green Entities to make payment through Senior Secured Creditors, Financial Creditors and other creditors and for resolution process. This in addition to the 133 Offshore Entities of IL&FS Group Companies, which were kept out of the purview of the interim order. They having become competent, the interim order was vacated. There can be no deprivation of property except in accordance with law: Contractual rights of L&T IDF and IIDL and the right to receive its legitimate dues thereunder constitute ‘property’ protected under Article 300A of the Constitution of India. Therefore, L&T IDF and IIDL cannot be deprived of their right in property i.e. the right to recover the interest and principal amounts thereunder, by modifying the terms of such contract inter alia by way of resolution framework report dated 25.10.2019 (Resolution Framework Report), save under authority of law - HREL not even a party to the proceedings before Hon’ble Appellate Tribunal. The Hon’ble Appellate Tribunal cannot make orders in relation to counter-parties of HREL when HREL is not an Appellant in the instant matter and even L&T IDF and IIDL have not made HREL a party to the Appeals. Section 242 vests the Tribunal with the power, if, on an application made under 241, the Tribunal is of the opinion – ‘that the Company’s affairs have been or are being conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interests of the company; and (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up, then in such case the Tribunal, with a view to bring to an end the matters complained of, make such order as it thinks fit’ - The present case shows that prima facie case has been made out by the Central Government that the affairs of the six Companies of IL&FS & Group Companies are being conducted in a manner prejudicial to the public interest and there is a likelihood of the winding up of the Company - the Tribunal with a view to bring an end to the matter complained of is required to pass final order. Therefore, it is clear that for regulating the conduct of the company’s affairs upon such terms and conditions, it is open to the Tribunal to pass interim order, which is just and equitable - it is clear that Tribunal/ Appellate Tribunal is required to follow principles of natural justice and other provisions of the ‘Companies Act, 2013’ or the ‘Insolvency and Bankruptcy Code, 2016’ and of any rules made thereunder for regulating its own procedure. Since the amendment of Section 424 with effect from 15th November, 2016, the Tribunal/ Appellate Tribunal is vested with the power to follow the procedure of Insolvency and Bankruptcy Code, 2016, in addition to the procedure laid down in the Companies Act, 2013 and the rules framed under the aforesaid Code and Act. Tribunal/ Appellate Tribunal has ample power to pass interim order in terms of Section 242(4) of the Companies Act as passed on 15th October, 2018 and requires no modification/ recall. The matter should be taken up by the new Management/ Board of Directors, who should take into consideration the decision of the Company Law Board and the settlement reached between the parties. It will be open to the New Management / Board of Directors of IL&FS and Group Companies to negotiate with SRS Orion Investments Ltd. and others (Applicants) for fresh terms of settlement, if they intend to change the shareholding of HCPL and sell it to some other person. Thereafter, the matter should be placed before the Hon’ble Justice (Retd.) D.K. Jain for its approval and if approved such proposal should be placed before the NCLT for its approval. Upon receipt of such approval, only the shareholding of HCPL be transferred - If no terms of settlement is reached or decision is disapproved by Hon’ble Justice D.K. Jain or the NCLT, in such a case, the NCLT will decide the claim of the Applicant – SRS Orion Investments Ltd. and others. Applications, which are filed for renewal of the Fixed Deposit, are allowed. Issues Involved:1. Jurisdiction of the Tribunal under Sections 241 and 242 of the Companies Act, 2013.2. Interim relief and moratorium for IL&FS and its group companies.3. Resolution process and framework for IL&FS and its group companies.4. Distribution mechanism for creditors, including public fund creditors.5. Specific claims and objections by creditors and other stakeholders.Detailed Analysis:1. Jurisdiction of the Tribunal under Sections 241 and 242 of the Companies Act, 2013:The Tribunal addressed whether it could pass orders under Section 241 read with Section 242 for resolving issues faced by IL&FS and its group companies. It was determined that the Tribunal has broader powers under Sections 241 and 242 than those under the Insolvency and Bankruptcy Code (IBC). The Tribunal can pass orders to regulate the conduct of the company's affairs in a manner that is just and equitable, including interim orders akin to a moratorium under Section 14 of the IBC.2. Interim relief and moratorium for IL&FS and its group companies:The Tribunal initially passed an interim order on October 15, 2018, staying all proceedings against IL&FS and its group companies. This order was justified on the grounds of public interest and the potential catastrophic impact on the financial market. The Tribunal held that it has the power to pass such interim orders under Section 242(4) of the Companies Act, 2013, to regulate the conduct of the company's affairs. The interim order was extended to facilitate the resolution process and prevent multiple litigations across different forums.3. Resolution process and framework for IL&FS and its group companies:The Tribunal approved a resolution framework that included categorizing IL&FS group companies into 'Green,' 'Amber,' and 'Red' entities based on their financial health. The resolution process involved appointing valuers, constituting creditors' committees, and seeking approvals from the new Board of IL&FS, Justice (Retd.) D.K. Jain, and the NCLT. The framework aimed to maximize asset value and ensure fair and equitable distribution to all stakeholders.4. Distribution mechanism for creditors, including public fund creditors:The Tribunal rejected the application of Section 53 of the IBC for distribution, emphasizing the need to protect public interest. Instead, a pro-rata distribution mechanism was adopted, considering the significant investments by public fund creditors such as pension funds, provident funds, and insurance funds. The Tribunal highlighted that these investments represent public money, and their interests must be safeguarded.5. Specific claims and objections by creditors and other stakeholders:Several creditors, including L&T Infra Debt Fund, IndusInd Bank, and Bajaj Finance, raised objections to the interim order and the resolution framework. They argued that their contractual rights were being violated and that the Tribunal lacked jurisdiction to modify third-party contracts. The Tribunal dismissed these objections, stating that the interim order was necessary to prevent a financial crisis and that the resolution framework was in the public interest. Specific claims, such as those by SRS Orion Investments Ltd., were directed to be resolved through negotiations with the new management of IL&FS, subject to approval by Justice (Retd.) D.K. Jain and the NCLT.Conclusion:The Tribunal upheld its jurisdiction under Sections 241 and 242 of the Companies Act, 2013, to pass interim orders and regulate the conduct of IL&FS and its group companies. The interim relief and resolution framework were deemed necessary to protect public interest and ensure a fair distribution to all stakeholders. The Tribunal directed the resolution process to be concluded within 90 days, with monthly updates to be provided.