Nominee Directors' Resignation Dispute: Impact on Creditor Committee Exclusion

The Tribunal dismissed the appeals, ruling that the nominee directors' resignation was not effective, and the appellant was deemed a related party, thus excluded from the Committee of Creditors. This decision aimed to prevent conflicts of interest and uphold the integrity of the Corporate Insolvency Resolution Process, emphasizing the necessity of due diligence by the Interim Resolution Professional and the prevention of related parties influencing the CoC.

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Issues Involved:

1. Whether the resignation of the nominee directors was effective and whether they ceased to be related parties.
2. Whether the appellant should be considered a related party and thus excluded from the Committee of Creditors (CoC).
3. Whether the Interim Resolution Professional (IRP) acted diligently in verifying the resignation of the nominee directors.
4. Whether the appellant's participation in the CoC would sabotage the Corporate Insolvency Resolution Process (CIRP).

Detailed Analysis:

1. Effectiveness of Resignation and Related Party Status:

The Tribunal examined whether the resignation of the nominee directors, Mr. Praful Prakash Bafna and Mr. Yogesh Prakash Bafna, was effective and whether it excluded them from being related parties. The appellant contended that the resignation letters were sent via courier on 11.02.2022, which should be deemed as served. However, the Tribunal observed that the resignation letters were not served on the company as required under Section 168 of the Companies Act, 2013, because the courier could not deliver the letters due to the door being locked. Furthermore, the pin code on the courier receipt was incorrect, which further invalidated the service of the resignation letters.

2. Appellant as a Related Party:

The Tribunal held that due to the non-service of the resignation letters, the nominee directors continued to be directors of the corporate debtor, thereby maintaining their status as related parties. Additionally, the Tribunal referred to the judgment in Phoenix ARC Private Limited vs. Spade Financial Services Limited, which states that if a related party financial creditor ceases to be a related party with the sole intention of participating in the CoC, they should still be considered a related party for the purpose of Section 21(2) of the Insolvency and Bankruptcy Code, 2016. The Tribunal concluded that the appellant's intention to resign was to participate in the CoC, thus they should be excluded.

3. Diligence of the Interim Resolution Professional (IRP):

The Tribunal examined the role of the IRP in verifying the resignation of the nominee directors. The IRP had relied on a legal opinion and the resignation letters dated 11.02.2022. However, the Tribunal noted that the IRP did not exercise due diligence as the resignation letters were not properly served, and the IRP should have verified the resignation more thoroughly. The Tribunal cautioned the IRP to be more vigilant in the future but did not find any malafide intention on the part of the IRP.

4. Potential Sabotage of CIRP:

The Tribunal considered whether the appellant's participation in the CoC would sabotage the CIRP. The Tribunal noted that the appellant had significant control over the affairs of the corporate debtor, which could lead to conflicts of interest. The Tribunal emphasized the intent behind the first proviso to Section 21(2) of the Code, which aims to prevent related parties from sabotaging the CoC. The Tribunal concluded that allowing the appellant to participate in the CoC would be against the intent of the Code and could jeopardize the CIRP.

Conclusion:

The Tribunal dismissed the appeals, upholding the decision that the nominee directors' resignation was not effective, and the appellant was a related party. Consequently, the appellant was excluded from the CoC to prevent potential conflicts of interest and ensure the integrity of the CIRP. The Tribunal emphasized the importance of due diligence by the IRP and the need to prevent related parties from influencing the CoC.

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