2022 (11) TMI 863 - Tri - Insolvency and Bankruptcy

Tribunal upholds Committee of Creditors' decision rejecting related parties' salary proposal during insolvency process.

The Tribunal held that the Committee of Creditors (CoC) rightfully rejected the proposal for payment of salaries to the Applicants, who were classified as ... Validity of order of CoC rejecting the claim -Seeking to release the lawful dues of the Applicant and credit/make payment of TDS for the months of September 2020 and October 2020 towards salary during the CIRP period alongwith interest - scope of Related Party - HELD THAT:- It is an admitted fact that the Applicants were part of suspended board of directors of the Corporate Debtor on the date of initiation of CIRP of the Corporate Debtor and even after initiation of CIRP as they had resigned from the post of directors on 28.10.2021. Thus, in view of Section 5(24) (a) the Applicants fall under the category of related party of the Corporate Debtor. The term related party transaction is not defined under the Code, therefore Section 188 of the Companies Act, 2013 is referred. On reading of Section 188 of the Companies Act, 2013 it is understood that related party transaction includes any contract or arrangement with a related party with respect to availing of any services. Therefore, availing of services from the Applicants would amount to related party transactions. The Code has given ample power to the CoC and one of the powers as provided under Section 28(1) (f) includes to take commercial decision to undertake or not to undertake related party transactions during the CIRP of the Corporate Debtor. Accordingly, the Resolution Professional in various CoC meetings had placed a resolution for payment of salary to the Applicants but the CoC in its commercial decision has rejected the resolution - the decision of COC should not be interfered with, since the Resolution Professional had time and again placed proposal before CoC for payment of salaries to the Applicants and CoC after detailed deliberations rejected the proposal. If in commercial wisdom the CoC has rejected the resolution for payment of salary to the Applicants, the question of reversing the decision cannot be considered. It is noted from the master data available on MCA portal that Applicant No. 1 was holding position of director since 30.11.2018 and Applicant No. 2 & Applicant No. 3 had held position of directors since 07.07.2019. In addition to the post of directors, the Applicant No. 2 & 3 were also holding the post of General Manager-Finance & Accounts and Vice President- Operations since 30.11.2013 & 03.12.2014 respectively and drawing the salaries of Rs. 5,06,452/- p.m. and Rs. 5,45,728/- p.m. This reflects that Applicants had considerable control over the management of affairs of the Corporate Debtor and in view of Section 19 of the Code are bound to extend all assistance and cooperation to the Interim Resolution Professional/Resolution Professional as may be required by him in managing the affairs of the corporate debtor. Application dismissed. Issues Involved:1. Entitlement of Applicants to salaries during the CIRP period.2. Classification of Applicants as related parties.3. Requirement of CoC approval for related party transactions.4. Compliance with Section 19 of the Insolvency and Bankruptcy Code, 2016.Issue-wise Detailed Analysis:1. Entitlement of Applicants to Salaries During the CIRP Period:The Applicants, who were part of the suspended board of directors of the Corporate Debtor, sought the release of their lawful dues for the months of September 2020 and October 2020, along with interest. They argued that they had rendered services during the Corporate Insolvency Resolution Process (CIRP) and were assured of their salaries. However, the CoC did not approve their salaries, which led to the filing of this application.2. Classification of Applicants as Related Parties:The Respondents argued that the Applicants, being directors, fall under the category of related parties as defined under Section 5(24)(a) of the Insolvency and Bankruptcy Code, 2016. The Tribunal agreed, stating, 'It is an admitted fact that the Applicants were part of suspended board of directors of the Corporate Debtor on the date of initiation of CIRP of the Corporate Debtor and even after initiation of CIRP as they had resigned from the post of directors on 28.10.2021. Thus, in view of Section 5(24)(a) the Applicants fall under the category of related party of the Corporate Debtor.'3. Requirement of CoC Approval for Related Party Transactions:The Respondents contended that any payment to the Applicants would qualify as a related party transaction under Section 28(1)(f) of the Code, which requires the approval of the Committee of Creditors (CoC). The CoC, in its commercial wisdom, rejected the resolution for the payment of salaries to the Applicants on multiple occasions. The Tribunal noted, 'The Code has given ample power to the CoC and one of the powers as provided under Section 28(1)(f) includes to take commercial decision to undertake or not to undertake related party transactions during the CIRP of the Corporate Debtor.'4. Compliance with Section 19 of the Insolvency and Bankruptcy Code, 2016:The Tribunal emphasized that the Applicants, being part of the management, were statutorily obligated to extend all assistance and cooperation to the Resolution Professional as required under Section 19 of the Code. The Tribunal stated, 'This reflects that Applicants had considerable control over the management of affairs of the Corporate Debtor and in view of Section 19 of the Code are bound to extend all assistance and cooperation to the Interim Resolution Professional/Resolution Professional as may be required by him in managing the affairs of the corporate debtor.'Conclusion:The Tribunal concluded that the decision of the CoC should not be interfered with, as the CoC had repeatedly rejected the proposal for payment of salaries to the Applicants in its commercial wisdom. The Tribunal cited the Hon'ble Supreme Court's judgment in Vallal RCK Vs. M/s. Siva Industries and Holdings Ltd., which held that the commercial wisdom of the CoC should be given paramount status without judicial intervention. Consequently, the Tribunal rejected the application and disposed of it accordingly.