2021 (11) TMI 24 - AT - Insolvency and Bankruptcy

Tribunal voids CIRP initiation, releases Corporate Debtor. Order on fees and costs.

STATE OF TELANGANA, REP BY ITS PRINCIPAL SECRETARY, DIRECTOR OF SUGAR AND CANE COMMISSIONER, HYDERABAD, NIZAM SUGARS LIMITED Versus NIZAM DECCAN SUGARS LIMITED, MR. R. RAMAKRISHNA GUPTA, DELTA PAPER MILLS LIMITED, MR. G. GANGA RAJU, MR. GVK RANGA RAJU, MRS. G. VANI, ANDHRA BANK, SYNDICATE BANK, UCO BANK, INDIAN OVERSEAS BANK

The Tribunal held that the application under Section 10 was not maintainable due to the void ab initio resolution dated 30.03.2017. Consequently, the ... Liquidation of Corporate Debtor - Section 33 of IBC - Validity of Board Resolution passed without securing affirmative vote of the nominee director of the Appellant No. 3 - appeal against the order of admission is barred by limitation or not - material irregularity committed by RP in conducting the CIRP of the Corporate Debtor. Whether the board resolution dated 30.03.2017 is void ab-initio as it was passed without securing affirmative vote of the nominee director of the Appellant No. 3? - HELD THAT:- Admittedly, the Resolution dated 30.03.2017 was passed in the presence of Mr. Bhadru Malloth nominee director of NSL. It was argued on behalf of the Respondents that the presence of the nominee director and his consent to the Board resolution dated 30.03.2017 satisfies the affirmative vote requirement. There is a specific distinction between an affirmative vote and mere consent. Affirmative vote matters provided in AoA generally to protect the rights of minority shareholders. Mere consent or presence of nominee director of NSL cannot equated with the affirmative vote as provided in clause 107 of AoA - on 30.03.2017 without affirmative vote of nominee director of NSL Board resolution was passed for filing the application under Section 10 of IBC. Such application is not maintainable for want of affirmative vote of nominee director of NSL. The application under Section 10 filed by the VR Chary the Chief Financial Officer of NDSL was not maintainable. Whether the appeal against the order of admission is barred by limitation? - HELD THAT:- The order of admission dated 20.09.2017 had no legal existence. Therefore, such order can be challenged at any time even beyond the prescribed period of limitation - the Appeal is time barred such defence is not maintainable. Whether material irregularity committed by RP in conducting the CIRP of the Corporate Debtor? - HELD THAT:- In the present case the publication in the newspapers was made on 16.05.2018. Regulation 36-A did not mandate the publication of invitation of Resolution Plan either in Form-G or otherwise in newspapers. It is only the amended Regulation 36A which came into effect from 04.07.2018 that requires the publication of Form-G in the newspapers. Therefore, the publication in the newspaper made by the RP in the case on hand on 16.05.2018 was statutorily not required and hence, the Appellants cannot take advantage of the amendment that came later, to attack advertisement. Since, there is no resolution plan, the members of CoC unanimously passed the resolution to liquidate the Corporate Debtor and authorized RP to file an Application for liquidation - the RP filed the Application before the Adjudicating Authority for liquidation of Corporate Debtor Company. All the false and frivolous allegation raised in this Appeal does not constitute material irregularity and the same is made without any basis. The Appeal is not maintainable and liable to be dismissed - Appeal dismissed. Issues Involved:1. Validity of the board resolution dated 30.03.2017.2. Limitation period for filing the appeal against the order of admission.3. Alleged material irregularity by the Resolution Professional (RP) in conducting the Corporate Insolvency Resolution Process (CIRP).Detailed Analysis:Issue No. (i): Validity of the Board Resolution dated 30.03.2017The primary contention was whether the board resolution dated 30.03.2017 was void ab-initio due to the lack of an affirmative vote from the nominee director of the Nizam Sugars Ltd. (NSL). The Appellants argued that the resolution was passed without securing the necessary affirmative vote from the nominee director of NSL, as required by Clause 107 of the Articles of Association (AoA) of the Corporate Debtor, which mandates that certain actions, including voluntary liquidation, require the affirmative vote of at least one director nominated by NSL.The Respondents countered that the resolution was passed in the presence of Mr. Bhadru Malloth, the nominee director of NSL, and thus, his presence and consent sufficed. They further argued that the requirement for a special resolution by shareholders, as per the amendment to Section 10 of the IBC effective from 06.06.2018, was not applicable since the resolution was passed earlier.The Tribunal analyzed the relevant clauses of the AoA and previous judgments, particularly the Gaja Trustee case, which emphasized that decisions regarding liquidation must strictly adhere to the provisions of the AoA. The Tribunal concluded that the mere presence or consent of the nominee director does not equate to an affirmative vote. Therefore, the resolution dated 30.03.2017, passed without the affirmative vote of the nominee director of NSL, was void ab initio, rendering the application under Section 10 of the IBC not maintainable.Issue No. (ii): Limitation Period for Filing the Appeal Against the Order of AdmissionThe Appellants filed the appeal against the order of admission with a delay of 748 days. They argued that they were unaware of the fraud and suppression of material facts by the Corporate Debtor, which led to the delayed discovery of the fraud. They also contended that the Tribunal's order dated 24.07.2019, which allowed them to challenge the order of admission within ten days, implied permission to file beyond the limitation period.The Respondents argued that the Appellants were fully aware of the admission order dated 20.09.2017, as informed by the RP, and had even filed a claim before the RP. They contended that the plea of fraud was baseless and that the Tribunal's order did not extend the limitation period.The Tribunal found that the Appellants were indeed informed about the admission order and had not provided any substantial evidence of fraud. However, it accepted the argument that an order void ab initio could be challenged at any time, referencing the Supreme Court judgment in State of M.P. V/s Syed Qamarali, which held that an order made in breach of mandatory provisions is invalid and can be challenged beyond the prescribed period of limitation.Issue No. (iii): Alleged Material Irregularity by the RP in Conducting the CIRPThe Appellants alleged that the RP, in collusion with the private management, sought to liquidate the Corporate Debtor's assets by publishing the Expression of Interest (EOI) in newspapers with minimal circulation, contrary to Regulation 36-A of CIRP Regulations. They also claimed that the RP approached the State Government at a belated stage and failed to seek exclusion of time lost during CIRP.The Respondents countered that the publication of Form-G in newspapers was not statutorily required before the amendment to Regulation 36-A effective from 04.07.2018. They provided evidence of timely communications and efforts by the RP to engage with the State Government and other stakeholders. They argued that the CIRP costs were appropriately managed, and the decision to liquidate was a result of the CoC's resolution due to the absence of any resolution plan.The Tribunal found no merit in the Appellants' allegations, noting that the RP had complied with the regulations in effect at the time and had made genuine efforts to resolve the Corporate Debtor's situation. The Tribunal concluded that there was no material irregularity or fraud by the RP in conducting the CIRP.Conclusion:The Tribunal held that the application under Section 10 filed by VR Chary, authorized by the Board of Directors, was not maintainable due to the void ab initio resolution dated 30.03.2017. Consequently, the impugned order dated 20.09.2017 initiating CIRP and the subsequent order of liquidation dated 03.06.2019 were set aside. The Corporate Debtor was released from all proceedings and allowed to function independently through its Board of Directors. The Tribunal clarified that the appeal against the order of liquidation was allowed on the ground that the initiation of CIRP was void ab initio, not due to material irregularity. The Adjudicating Authority was directed to fix the fee of the RP/Liquidator, to be paid by the Corporate Debtor along with CIRP costs. The appeals were allowed with no order as to costs.