2023 (2) TMI 949 - AT - Insolvency and Bankruptcy

Nominee Directors' Resignation Dispute: Impact on Creditor Committee Exclusion

P.P. Bafna Ventures Private Limited Versus Punjab National Bank, Purusottam Behera, KVR Industries Private Limited, Maligi Madhusudhana Reddy And P.P. Bafna Ventures Private Limited Versus KVR Industries Private Limited, Purusottam Behera, Punjab National Bank, Maligi Madhusudhana Reddy Resolution Professional

The Tribunal dismissed the appeals, ruling that the nominee directors' resignation was not effective, and the appellant was deemed a related party, thus ... Related parties to Corporate Debtor or not - continuation with the Committee of Creditors or not - requirement to reconstitute the Committee of Creditors or not - it is the stand of the Appellant, that it ceased to be ‘Related Parties’, before the relevant date, as contemplated under the I & B Code, 2016 - service of notice. Service of notice - HELD THAT:- In fact, the Onus, to prove Service of Summons, is on a Plaintiff. Where a question of Service of Notice, arises, the Court, is duty bound to Record a Finding - The Service of Summons, by a Courier, at the instance of Plaintiff, is permissible, as per decision of the Hon’ble Supreme Court of India in (2005) 6 SCC 344 [2005 (8) TMI 714 - SUPREME COURT]. Other Mode of Service are such as (a) Courier (b) Facts and (c) Electronic Mail Service or Service by Litigant, directly. Where the Registered Office of a Company is intact and working, it was held that the Service of Statutory Notice, for payment of Debt, a condition necessary for preserving a Winding up Petition, should have been served at the Registered Office. In Palmer’s Company Law (21st Edition at Page 543), it is stated that, a Director, can at any time, Resign, from his Office, and usually the Articles, make express provision accordingly. If he communicates his Resignation, to the Company, for instance, by a Notice, upon the Company, served in the manner, provided by Section 437, his Resignation, is effective. A Resignation, once made, cannot be Withdrawn, except with a Consent of a Company. One cannot ignore the vital fact that the Nominee Directors filed the e-form DIR-11 only on 03.03.2022. But, the Corporate Insolvency Resolution Process of the Corporate Debtor, had commenced on 18.02.2022, which indicates that only as an afterthought, the said e-form DIR-11, was filed by the Nominee Directors. Also that, no Form DIR-12, which is required to be filed by the Company, Viz. the Corporate Debtor, was ever filed. In effect, this Tribunal, is of the considered view that, when the Notice of Resignation, had not reached the Company, Bafna remains as a Director, in the Corporate Debtor, and his position as Related Party, may not get erased, in the eye of Law - In the instant case, it cannot be brushed aside that the Corporate Debtor was admitted into CIRP on 18.02.2022 and the Resignation Letter, was sent on 11.02.2022, one week before the Corporate Debtor, being taken into the Corporate Insolvency Resolution Process. Also that, till the filing of Section 7 Petition, under the Code, by Mr. Bafna, he continued as Nominee Director, till 11.02.202, which is a stark reality. It is to be remembered that the ingredients of Section 3 (24) of the Code, do not exclude those Directors, who are not under the Control of the Promoter of the Corporate Debtor, from the ambit of the Related Parties. Even otherwise, in a given case where a Related Party / Financial Creditor, ceases to be a Related Party, with the prime aim of taking part in the Committee of Creditors, then he / it, ought to be considered as a Related Party, for the purpose of Section 21(2) of the I & B Code, 2016, and not entitled to take part in the Committee of Creditors Meeting, as opined by this Tribunal. In the instant case, the Cover, given on 11.02.2022, had not reached the Company, as per the Track Record of the Courier (Filed on behalf of the Bafna), as rightly observed by the Adjudicating Authority (Tribunal), in the impugned order. Suffice it, for this Tribunal, to unerringly point out that the non-service of Resignation Letter, on the Company, leads to an inescapable conclusion that the ingredients of Section 168 of the Companies Act, 2013, were not complied with, and therefore, Mr. Praful Bafna and Mr. Yogesh Bafna, remain to be the Nominee Directors, and hence, they are not entitled to be a part and parcel of the Committee of Creditors, as held by this Tribunal. In view of the foregoing detailed qualitative and quantitative discussions and reasons, this Tribunal, taking note of the divergent contentions advanced on either side, keeping in mind the surrounding facts and circumstances in an integral manner, and also on going through the impugned order dated 22.08.2022 in IA (IBC) Nos. 53 and 54 of 2022 in CP (IB) No. 204/7/AMR/2019, passed by the Adjudicating Authority (NCLT, Amaravati Bench), comes to a consequent conclusion that there is no Irregularity or Illegality, in regard to the conclusion, arrived at in partly allowing the two Applications / Petitions. Petition dismissed. 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.