2025 (11) TMI 1451 - AT - IBC

Suspended board's right to attend CoC upheld, 20th meeting voided for violating IBC and CIRP Regulations

NCLAT set aside the impugned order of the Adjudicating Authority and allowed the appeal filed by the suspended board's representative. It held that ... Legality of proceedings of 21st and 22nd CoC - the authorized representative of the suspended Board of Directors, was in fact not permitted to participate in the 20th CoC Meeting - whether, at all, there could be a submission of a de facto authorization, after the meeting, which could revalidate the authority in relation to a concluded meeting? - HELD THAT:- On a perusal of the records, upon issuance of the notice of 12.07.2024, it is absolutely false on part of the Appellant to submit that the representative of the Appellant was not permitted to attend the meeting. He attended the meeting, but when the aforesaid discrepancy was figured due to lack of proper authorization and non-providing of the required confidentiality undertaking, he was asked to leave the proceedings of the 20th CoC meeting, which was held under a hybrid mode. The finding has been recorded that, the Appellant cannot have any grievances as far as the 22nd CoC meeting of 18.12.2024 is concerned, for the reason being that, in the said meeting, the Applicant or his authorised representative have not participated nor has raised any objection regarding the process of the CoC meeting. The documents reveal that, in the 20th CoC meeting held on 16.07.2024, the debate was held pertaining to the plans submitted by the Prospective Resolution Applicants who were found to be legally eligible, but however, the CoC members sought time to confirm the plans, and the same was considered and subsequent to it, the proceeding was finalized. The 22nd CoC meeting, which was held on 18.12.2024, will not have any negative impact, on the 20th CoC meeting held on 16.07.2024, for the reason being that, the plan which was discussed amongst the members of the CoC, the same was already approved and has been submitted to the Ld. Adjudicating Authority for approval almost approximately five months prior to the holding of the 22nd CoC meeting. The attempt, which was being made by the Appellant, was to delay the proceedings, which was also observed by the Ld. Tribunal in the impugned order. Thus, the dismissal of the same by the impugned order is absolutely justified for the reasons which we have already observed in the body of the judgment. Hence the ‘appeals’ lacks ‘merit’ and the same are accordingly ‘dismissed’. Prayer for passing of necessary orders to hold that the 20th meeting of COC dated 16.07.2024, was not carried out in a fair and transparent manner - whether the act of RP in not permitting the representative of the Appellant to attend the said meeting and for not sharing the documents including the resolution plans with the Appellant prior to conduct of the said meeting is valid in law? - whether the aforesaid act will vitiate the decisions taken in the said 20th meeting of the COC? - HELD THAT:- The members of the suspended board of directors of the CD have a right to participate in the meetings held by the COC and also has a right to discuss with the members of the COC all the resolution plans that are presented at such meetings under section 25(2)(i) of the code and that they must be furnished with copies of such plans beforehand as per Rule 21(3) of the CIRP Regulations, if they are to participate effectively in the meeting of COC. In the instant case, the RP has issued notice to the suspended Director of the CD and Mr Nelluri Bapuji, his representative for the 20th meeting of COC. This is not disputed by the Appellant either. However, during the course of the meeting, Mr Bapuji was asked to leave the meeting as the members of the COC wanted to discuss certain matters confidentially without the presence of the representative of the suspended directors - The correct option for the RP and the COC members would have been to accept the presence of Mr. Bapuji, having permitted him to attend the past meetings of COC without any objection and to get the authorisation letter and the confidentiality undertaking later on and no damage would have been done to anyone. Or the meeting could have been postponed for a few days. By not doing so, the RP stood contravening the principles laid down by Hon’ble Apex Court in the matters of Vijay Kumar Jain [2019 (2) TMI 97 - SUPREME COURT]. Further, the manner in which the meeting was conducted raises suspicion especially when two PRAs were declared ineligible in the same meeting and the resolution plan of only one PRA was put to vote. The Ld. Adjudicating Authority erred in concluding that the Appellant had ample time to obtain proper authorisation which he did not and that he was expecting the meeting to be adjourned. Till this point of time, no evidence has been put forth by the RP to show that the Appellant had an intent in disrupting the CIRP proceedings. Thus, the allegation that the Appellant was expecting the meeting to be adjourned would be rather unfair. In respect of providing information and documents relevant to CIRP to the suspended directors by the RP, Ld. Adjudicating Authority has accepted the logic of RP that in the absence of confidentiality undertaking, the same could not be provided. The impugne dorder stands quashed - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a person claiming to be an authorised representative of the suspended board of directors may be excluded from participation in a Committee of Creditors (CoC) meeting for want of a written authorisation and confidentiality undertaking pursuant to Regulation 21(2) and Regulation 24 of the CIRP Regulations, and whether that exclusion vitiates the proceedings of the CoC meeting. 2. Whether the defects alleged (non-submission of authorisation and confidentiality undertaking; non-circulation/provision of resolution plans, valuation reports and other documents prior to the meeting) are rectifiable or constitute a non-waivable/condition-precedent impediment that justifies denial of participation or cures by post-factum production. 3. Whether the Resolution Professional's (RP's) conduct in (a) not sharing certain documents prior to the meeting on the ground of non-receipt of confidentiality undertaking and (b) asking the representative to leave during a hybrid CoC meeting constituted arbitrary, mala fide or procedurally irregular action in breach of the Code and Regulations and relevant judicial precedent concerning access of suspended directors to CIRP documents. 4. Whether holding subsequent CoC meetings while an interlocutory application challenging an earlier CoC meeting was pending before the Adjudicating Authority invalidates those subsequent meetings. 5. Whether the Successful Resolution Applicant (SRA) was a necessary or permissive party to interlocutory proceedings challenging CoC meetings prior to crystallisation of rights and whether impleadment was required at that stage. 6. Whether costs imposed by the Adjudicating Authority for purported obstructions/dilatory conduct were justified. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of exclusion of authorised representative for want of written authorisation and confidentiality undertaking Legal framework: Section 24 of the Code (meeting of CoC) together with Regulation 21(2) (notice contents: advance disclosure of identity of authorised representative) and Regulation 24 (conduct of meeting, roll call and confirmation of receipt of agenda and relevant materials). Regulations inserted/clarified post-2018 make written authorisation and confidentiality undertaking material to participation. Section 24(3) mandates notice to suspended board and their representatives; proviso to Reg 21(2) requires advance informing of identity. Precedent treatment: The Apex Court's decision in Vijay Kumar Jain was repeatedly cited: suspended directors have a right to participate and to be furnished copies of resolution plans and relevant documents, but receipt of a confidentiality undertaking is an accepted mechanism to protect confidential information while enabling access. Interpretation and reasoning - Majority (The Court, Sharma J.): The notice expressly made submission of identity/authorisation and confidentiality undertaking a precondition (use of 'shall'). Once the representative did not possess or produce the required documents at the time of the 20th CoC meeting, he lacked the condition-precedent eligibility and could be asked to leave even in a hybrid meeting. Prior tolerance of his presence in earlier meetings does not create a vested right to participate thereafter; illegality or non-compliance earlier cannot be validated by later acquiescence. The defect was non-rectifiable at the meeting because the notice mandated advance disclosure. The RP's conduct in excluding the representative was lawful and not arbitrary; subsequent supply of minutes and documents upon receipt of the undertaking cured any information grievance. The presence or absence of the representative did not invalidate votes or decision-making because no vote was cast by the unauthorised person and quorum requirements were satisfied. Interpretation and reasoning - Dissent/Separate (Swain, M): The RP, having permitted the representative to attend previous meetings without objection and being aware that confidential documents would have to be furnished, should have adopted a less rigid approach. The representative's inability to produce documents immediately was a rectifiable defect; the RP ought to have accepted the representative's participation while securing a post-meeting authorisation/confidentiality undertaking or adjourning the meeting for a short period. The RP's insistence mid-meeting on authorisation and exclusion of the representative contravened the spirit and letter of Vijay Kumar Jain which mandates furnishing of resolution plans and emphasises the role of confidentiality undertakings as a mechanism rather than a bar. The RP's conduct raised reasonable suspicion of procedural unfairness when coupled with exclusion of two PRAs and selective advancement of one PRA's plan. Ratio vs. Obiter: Majority's conclusion that advance written authorisation/confidentiality undertaking (as per notice and Reg 21(2)) is a condition precedent and non-rectifiable at the meeting is treated as ratio by the majority. The minority treats that position as over-rigid and characterises acceptance/arrangement for rectification as the correct application of Vijay Kumar Jain - that approach constitutes the operative ratio of the dissent. Conclusion: Split decision. Majority: exclusion valid; no vitiation of 20th CoC meeting. Dissent: exclusion was contrary to statutory scheme and precedent; 20th meeting minutes should be set aside and process re-run after furnishing documents. Issue 2 - Rectifiability of defects (authorisation/confidentiality; circulation of documents) and duty to furnish documents prior to meeting Legal framework: Regulation 21(3)(iii) requires that copies of all documents relevant to matters to be discussed and issues to be voted upon be provided with the meeting notice. Regulation 24(2)(e) roll call requires statement that participant has received agenda and all relevant material. Vijay Kumar Jain emphasises that suspended directors/participants must be furnished copies to enable meaningful participation; confidentiality undertakings are a protective but not prohibitory mechanism. Precedent treatment: Vijay Kumar Jain treated as controlling statement that furnishing of resolution plans and documents is required; confidentiality undertaking is a permissible protective device (deterrent/indemnity), not a talisman to deny access where statutory duty to furnish exists. Interpretation and reasoning - Majority: The RP had issued notice which made preconditions explicit; absence of confidentiality undertaking justified withholding certain sensitive documents until compliant. Subsequent provision of minutes and documents upon receipt of the undertaking (25.07.2024 and 29.07.2024) remedied any delay; applicant's invocation was aimed at delay. The contents of the notice and Reg 21(2) removed scope for post-factum revalidation at a concluded meeting. Interpretation and reasoning - Dissent: Non-furnishing of essential documents prior to the meeting was a serious lacuna. The RP should have secured confidentiality undertakings proactively or expressly stated in the notice that documents would not be supplied absent undertakings. The RP's failure to ensure pre-meeting compliance with the statutory duty to circulate relevant documents undermined fairness and transparency; such failures are rectifiable but require remedial action that preserves stakeholders' participation - setting aside meeting minutes and re-running process with proper supply of documents is appropriate. Ratio vs. Obiter: Dissent treats the mandatory furnishing requirement of Reg 21(3)(iii) and Vijay Kumar Jain as determinative - ratio in the dissent. Majority treats strict notice language and timing as dispositive - ratio in the majority. Conclusion: Majority upholds RP's conduct as lawful and curative once undertaking was produced; dissent finds failure to provide documents before the meeting fatal and orders re-run of CIRP from 20th meeting stage. Issue 3 - Validity of subsequent CoC meetings held while interlocutory application challenging earlier meeting was pending Legal framework: No provision prohibits continuation of CIRP or further CoC meetings merely because an interlocutory application is pending unless the Adjudicating Authority has stayed further proceedings. Interpretation and reasoning - Both views: The majority observed that pendency of IA did not per se bar the RP from convening 21st and 22nd meetings in absence of any order to the contrary; the subsequent meetings cannot be invalidated merely because a challenge to an earlier meeting is pending. The dissent did not treat pendency alone as vitiating but focused on underlying substantive procedural defects in the 20th meeting which required remediation prior to advanced steps; on that basis the dissent set aside subsequent outcomes to restore process integrity. Ratio vs. Obiter: Majority's statement that pendency of an IA does not automatically stay further CoC meetings is ratio on that narrow point. Dissent's remedy flows from finding of substantive procedural breach rather than pendency per se. Conclusion: Majority - subsequent meetings valid absent stay. Dissent - subsequent actions tainted by prior procedural breach; restart from 20th meeting advisable. Issue 4 - Impleadment of Successful Resolution Applicant (SRA) and Dominus Litis principle Legal framework: Principles of party-representation and Dominus Litis - appellant chooses parties; impleadment requires application. Rights of SRA crystallize post-approval of plan. Interpretation and reasoning: Appellate Tribunal majority held SRA was not necessary at interlocutory stage where plan was not yet approved and no vested rights had crystallized; absence of impleadment meant SRA need not be heard in appeals contesting CoC meeting procedures prior to plan approval. Dissent did not require SRA's joinder for merits determination. Ratio vs. Obiter: Holding that SRA need not be impleaded at pre-approval interlocutory stage is ratio on party-necessity question. Conclusion: SRA not a necessary party to interlocutory challenges to CoC procedural issues prior to plan approval absent impleadment. Issue 5 - Costs Legal framework: Adjudicating Authority's power to impose costs for obstructive/dilatory conduct; appellate discretion to modify. Interpretation and reasoning: Majority accepted dismissal of appeal but found the Adjudicating Authority's imposition of Rs.5,00,000 as excessive and reduced it to Rs.2,00,000. Dissent set aside the costs imposed by Adjudicating Authority entirely, finding no justification that the appellant deliberately sought to stall CIRP. Ratio vs. Obiter: Reduction of costs by appellate forum is ratio in majority; setting aside costs is ratio in dissent based on merits finding. Conclusion: Split outcome on costs - majority reduced penalty; dissent would have set aside the cost order. Overall conclusions 1. The Bench was divided. The majority (per Justice Sharad Kumar Sharma) concluded that the RP acted within the regulatory framework by requiring advance written authorisation and confidentiality undertaking as prescribed in the meeting notice and CIRP Regulations; the representative's exclusion was lawful, the alleged defects were not rectifiable at the meeting, subsequent sharing of documents remedied information grievances, the challenges were dismissed for lack of merit, and appellate modification reduced costs to Rs.2,00,000. 2. The dissenting Member (Justice Jatindranath Swain) held that the RP's mid-meeting exclusion and failure to ensure pre-meeting circulation of documents contravened the Code/Regulations as interpreted in Vijay Kumar Jain, that the defects were rectifiable (or the meeting could have been adjourned), and that procedural unfairness required quashing the impugned orders and the minutes of the 20th CoC meeting and restarting the CIRP from that stage with provision of resolution plans and relevant documents; the dissent also set aside the costs imposed by the Adjudicating Authority.