Tribunal Invalidates Respondent's SCC Inclusion, Directs Reconstitution

The Tribunal found the inclusion of Respondent No. 2 in the Stakeholders' Consultation Committee (SCC) invalid. The Applicant, nominated by a majority of shareholders, was deemed the rightful representative. The Liquidator's reliance on Regulation 31A(4) was deemed unwarranted. The Tribunal directed the Liquidator to accept the Applicant's nomination and reconstitute the SCC accordingly. Additionally, the Insolvency and Bankruptcy Board of India (IBBI) was advised to issue clear guidelines on the nomination process under Regulation 31A(3) to prevent future uncertainties.

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Issues Involved:
1. Validity of the inclusion of Respondent No. 2 in the Stakeholders' Consultation Committee (SCC) as the representative of shareholders.
2. Criteria and process of nomination of representatives for the SCC under Regulation 31A(3) and 31A(4) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
3. Alleged conflict of interest involving Respondent No. 2.

Detailed Analysis:

1. Validity of the inclusion of Respondent No. 2 in the SCC:
The Applicant, an Ex-Director and shareholder holding 8.33% of the Corporate Debtor's (CD) share capital, challenged the inclusion of Respondent No. 2 in the SCC. The Applicant argued that Respondent No. 2 was erroneously included as the representative of shareholders by the Liquidator (Respondent No. 1), despite the Applicant being nominated by a majority (60%) of shareholders. The Applicant contended that the Liquidator ignored this majority nomination and instead selected a non-participative shareholder, relying on Regulation 31A(4).

2. Criteria and process of nomination under Regulation 31A(3) and 31A(4):
The Tribunal examined Regulation 31A(3) and 31A(4) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Regulation 31A(3) allows the Liquidator to facilitate stakeholder nominations for inclusion in the SCC, while Regulation 31A(4) applies if stakeholders fail to nominate their representatives, in which case the stakeholder with the highest claim amount is included.

The Liquidator argued that since only 3 out of 5 shareholders nominated the Applicant, and these represented only 24.99% of the shareholding, the nomination was not valid. The Liquidator assumed that all shareholders must unanimously nominate a representative, failing which the stakeholder with the highest shareholding (Respondent No. 2) would be included under Regulation 31A(4).

The Tribunal found this interpretation incorrect, noting that Regulation 31A(3) does not prescribe criteria for nomination based on the value of shareholding. The Applicant's nomination by a majority of shareholders (3 out of 5) was valid, and the Liquidator's application of Regulation 31A(4) was unwarranted.

3. Alleged conflict of interest involving Respondent No. 2:
The Applicant highlighted a conflict of interest, noting that Respondent No. 2 was involved in pending arbitration proceedings against the CD and had previously exited the CD in violation of the shareholders' agreement, contributing to the CD's insolvency. The Liquidator dismissed this concern, stating that conflict of interest is irrelevant for SCC inclusion, as the SCC's scope is limited to advising the Liquidator on matters related to sale under Regulation 32.

Judgment:
The Tribunal concluded that the Liquidator's decision to include Respondent No. 2 in the SCC was invalid. The nomination of the Applicant by a majority of shareholders was valid, and the Liquidator should have accepted it. The Tribunal set aside the Liquidator's nomination of Respondent No. 2 and directed the Liquidator to accept the Applicant's nomination as the representative of shareholders in the SCC.

The Tribunal also advised the Insolvency and Bankruptcy Board of India (IBBI) to issue clear guidelines on the criteria and process of nomination under Regulation 31A(3) to avoid future ambiguities.

Order:
The application was allowed, and the Liquidator was directed to reconstitute the SCC by including the Applicant as the representative of shareholders. The IBBI was advised to notify clear guidelines regarding the nomination process under Regulation 31A(3).

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