2025 (12) TMI 323 - AT - IBC

Shareholder Lacks Locus Under Section 61 IBC to Challenge Section 7 CIRP Admission Based on Corporate Guarantee

Peninsula Holdings and Investments Pvt. Ltd. Versus JM Financial Credit Solutions Limited and Mr. Rajesh Jhunjhunwala, Interim Resolution Professional (IRP)

NCLAT dismissed the appeal under Section 61 of the IBC as not maintainable, holding that a shareholder or preference shareholder, being merely an investor ... Admission of application filed u/s 7 of IBC by the Appellant, who claims to be a shareholder and preference shareholder of the Corporate Debtor - whether no legally enforceable financial debt or valid guarantee existed? - Adjudicating Authority failed to consider the commercial futility of initiating CIRP against a non-operational Special Purpose Vehicle (SPV) incapable of resolution under the Code. Whether the present Appeal filed under Section 61 of the Code by the Appellant, who claims to be a shareholder and preference shareholder of the Corporate Debtor, is maintainable in law? - HELD THAT:- The issue of whether a shareholder can maintain an appeal under Section 61 of the IBC has been conclusively settled by a three-member Bench of this Appellate Tribunal in Park Energy Pvt. Ltd. v. State Bank of India [2025 (12) TMI 229 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, CHENNAI]. The larger Bench examined conflicting earlier judgments and laid down a uniform principle that the proceedings at the behest of a shareholder, being merely an investor with profit interest, but without administrative control or direct legal injury, are not maintainable under the IBC. The term ‘person aggrieved ’under Section 61 cannot be expanded to include shareholders or investors. Once the Corporate Debtor is admitted into CIRP, Section 17 of the IBC automatically transfers the management and control of the company to the Interim Resolution Professional (IRP). The Board of Directors, and consequently all shareholders, lose their authority over the affairs of the company. The IRP/RP is the protector of the interests of the shareholders in such a situation. Thus, even if the Appellant had prior administrative control, that control ceased upon admission. The mere fact of holding 51% shares or being a “majority owner” does not confer a separate or superior locus under Section 61. The Appellant’s attempt to distinguish Park Energy [2025 (12) TMI 229 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, CHENNAI] on the basis of being a majority shareholder or holding preference shares cannot succeed. It is clear from the admissions by Appellant that both the Appellant and Corporate Debtor are passive investors, incapable of exercising any management or operational control over AOP, contrary to the claims of the Appellant. This was one of the major arguments by appellant for maintainability of their appeal. The Appellant, being a shareholder or a preference shareholder without any contractual debt rights, does not fall within the category of “person aggrieved” under Section 61. It’s interests are adequately represented through the Resolution Professional and the mechanisms provided under the IBC. Allowing such appeals by shareholders would undermine the purpose of the Code by introducing multiplicity and delay. The present appeal is not maintainable, as the Appellant is not a “person aggrieved” under Section 61 of the code. The Appellant’s shareholder status, whether equity or preference, does not confer any locus to challenge the admission of the Corporate Debtor’s insolvency. Whether the impugned order dated 14.07.2025 admitting the Corporate Debtor into CIRP suffers from any legal infirmity? - HELD THAT:- The scope of inquiry at the stage of admission under Section 7 of the IBC is limited, the Adjudicating Authority is required to ascertain only (a) the existence of a financial debt, and (b) occurrence of a default. If both are proved on record, admission is mandatory; no equitable discretion lies to reject a petition on other grounds. This position has been repeatedly emphasized by the Hon’ble Supreme Court in Innoventive Industries Ltd. v. ICICI Bank [2017 (9) TMI 58 - SUPREME COURT] and E.S. Krishnamurthy v. Bharath Hi-Tech Builders Pvt. Ltd. [2021 (12) TMI 683 - SUPREME COURT]. In the present case, it is undisputed that JM Financial Credit Solutions Ltd. extended certain financial facilities to M/s Hem Bhattad (AOP), and that the Corporate Debtor stood as a corporate guarantor for those facilities. The guarantee deed is not denied. Upon default by the AOP in repayment, the liability of the guarantor immediately crystallized. Section 128 of the Indian Contract Act, 1872, makes the liability of a surety coextensive with that of the principal debtor, unless the contract provides otherwise. There is nothing on record to show that the guarantee was conditional or limited. There is no allegation of fraud, collusion, or procedural irregularity in the conduct of the proceedings before the NCLT. The Appellant’s grievance essentially arises from its desire to protect its investment interest in the Corporate Debtor and the underlying AOP, which does not amount to a legal injury under the IBC. Once insolvency is admitted, the management of the Corporate Debtor vests in the IRP, and the Code provides a structured process for all stakeholders, including shareholders, to lodge their claims or participate through statutory mechanisms. The Appellant cannot, therefore, substitute itself for the Corporate Debtor or the IRP and contest the admission. The impugned order dated 14.07.2025 admitting ‘Hem Infrastructure and Property Developers Pvt. Ltd.’ into CIRP under Section 7 of the IBC was passed in conformity with statutory requirements. The Adjudicating Authority correctly concluded that (i) a financial debt existed by virtue of a valid corporate guarantee, and (ii) default had occurred. The Appellant’s arguments regarding the AOP’s role, alleged passive participation, or business equities are irrelevant in the context of Section 7 adjudication. Hence, the impugned order suffers from no legal infirmity, procedural defect, or misapplication of law. The challenge to the same is devoid of merit. Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether an appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 is maintainable at the instance of a shareholder and preference shareholder of the corporate debtor as a 'person aggrieved'. (2) Whether the order admitting the corporate debtor into corporate insolvency resolution process under Section 7 of the Insolvency and Bankruptcy Code, 2016, on the basis of a corporate guarantee, suffers from any legal infirmity. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Maintainability of appeal by shareholder / preference shareholder as 'person aggrieved' under Section 61 of the Insolvency and Bankruptcy Code, 2016 Legal framework (as discussed) (a) Section 61 of the Insolvency and Bankruptcy Code, 2016 restricts the right of appeal to a 'person aggrieved' by an order of the Adjudicating Authority. (b) Section 17 of the Insolvency and Bankruptcy Code, 2016 vests management and control of the corporate debtor in the interim resolution professional upon admission of CIRP, displacing the board and shareholders' control. (c) Section 43 of the Companies Act, 2013 defines equity share capital and preference share capital and clarifies that preference shares are part of the company's share capital, with preferential rights to dividend and capital repayment, not per se creditor rights. Interpretation and reasoning (d) The Tribunal noted from the pleadings and the stay application that the appellant has consistently described itself as a shareholder and 'passive investor' with no independent business, revenue, employees, or assets, and that the corporate debtor itself is a non-operational SPV holding a passive interest in an AOP. On these admitted facts, neither the appellant nor the corporate debtor exercises operational or managerial control over the AOP. (e) The Tribunal relied on the larger Bench decision which holds that proceedings or appeals at the behest of shareholders, whose interest is merely reflective of the company's interest and who suffer only derivative loss, are not maintainable under the Insolvency and Bankruptcy Code. Shareholders, even if affected commercially, are not 'persons aggrieved' unless a direct legal right is impacted; their interests are to be represented through the insolvency framework, particularly the interim resolution professional / resolution professional. (f) As to the plea based on preference shareholding, the Tribunal examined Section 43 of the Companies Act, 2013 and reiterated that preference shares are part of share capital and do not make the holder a creditor of the company, unless there is a specific contractual stipulation converting such investment into a debt obligation with a repayment / buy-back mechanism having the 'commercial effect of borrowing'. No such contractual document or clause was produced in this case. (g) The Tribunal distinguished earlier precedent where preference shareholders were treated as financial creditors, noting that such treatment was based on specific share subscription / shareholders' agreements containing assured IRR and buy-back obligations. It further referred to subsequent decisions clarifying that this treatment was exceptional and cannot be extended to simple preference shareholding without explicit debt-creating terms. (h) The Tribunal observed that the appellant had not pleaded anywhere in the appeal that it is a creditor of the corporate debtor or that its preference shares constitute 'financial debt'. The entire appeal was founded on shareholder status; an attempt at the stage of arguments to change the appellant's capacity from shareholder to creditor was held to be impermissible and contrary to settled principles that new cases cannot be built beyond the pleadings. (i) The Tribunal emphasized that the right of appeal under Section 61 is a statutory right, to be exercised strictly within its scope. A shareholder's diminution in investment value or loss of control on account of CIRP is a consequence of the Code and does not constitute a direct legal injury for purposes of appellate locus standi. (j) It was further held that even assuming prior control, upon admission into CIRP, Section 17 extinguishes such control and vests management in the interim resolution professional; shareholders, including majority shareholders, cannot claim a distinct appellate status under Section 61 on that basis. Conclusions (k) The appellant has approached the Tribunal purely as a shareholder (including preference shareholder) of the corporate debtor and as a passive investor without operational control. (l) The appellant has not demonstrated any direct legal injury caused by the admission order beyond reflective loss to its investment; its rights are adequately safeguarded within the CIRP framework through the insolvency professional and statutory mechanisms. (m) Preference shareholding, in the absence of a proved contractual obligation creating financial debt, does not confer creditor status or bring the appellant within the ambit of 'person aggrieved' under Section 61. (n) In light of the binding larger Bench authority and subsequent clarifications, the appeal at the instance of the appellant is not maintainable in law. (o) The appellant is held not to be a 'person aggrieved' under Section 61 of the Insolvency and Bankruptcy Code, 2016, and thus lacks locus to challenge the admission order. Issue 2: Validity of the order admitting the corporate debtor into CIRP on the basis of corporate guarantee Legal framework (as discussed) (p) Under Section 7 of the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority, at the stage of admission, is required to ascertain only: (i) existence of a financial debt, and (ii) occurrence of default. Upon satisfaction of these conditions, admission is mandatory. (q) Section 5(8)(i) of the Insolvency and Bankruptcy Code, 2016 includes within 'financial debt' any liability in respect of a guarantee or indemnity for money borrowed against payment of interest. (r) Section 128 of the Indian Contract Act, 1872 provides that the liability of a surety is co-extensive with that of the principal debtor unless otherwise contracted. Interpretation and reasoning (s) It was undisputed that the financial creditor extended loan facilities to an AOP and that the corporate debtor executed corporate guarantees securing those facilities. The occurrence of default by the AOP was also not in dispute. (t) The Tribunal held that on default by the AOP, the liability of the corporate guarantor crystallized and, by virtue of Section 128 of the Indian Contract Act, 1872, became co-extensive with that of the principal debtor, there being no material to show any limitation or condition attached to the guarantee. (u) The Tribunal rejected the contention that absence of direct disbursal of funds to the corporate debtor negated the existence of 'financial debt', reiterating that a corporate guarantee securing a financial facility constitutes financial debt of the guarantor under Section 5(8)(i) of the Insolvency and Bankruptcy Code, 2016. (v) The plea that the corporate debtor was only a 'passive conduit' or 'non-operational SPV' was held irrelevant to the enforceability of the guarantee. Once a corporate person voluntarily executes a guarantee, it assumes an independent and enforceable financial obligation under the Code, irrespective of its operational activity. (w) The Tribunal further held that the financial creditor is legally entitled to proceed under Section 7 either against the principal borrower or against the corporate guarantor, or both, at its discretion, and is not required first to exhaust remedies against the principal borrower. The creditor's choice to target the guarantor cannot be impeached by the guarantor or its shareholders. (x) The Tribunal found that the Adjudicating Authority had considered the loan documents, guarantee deeds, default and recall notices, and was satisfied as to existence of financial debt and default. There was no allegation or material indicating fraud, collusion, or procedural irregularity in the proceedings before the Adjudicating Authority. (y) The arguments raised by the appellant regarding the commercial futility of CIRP against a non-operational SPV, the internal structure of the AOP, or the creditor's business choices were held to fall outside the limited scope of Section 7 adjudication, which does not permit consideration of equitable or commercial factors once debt and default are established. (z) Disputes as to inter se rights, restructuring, or recovery from underlying assets were held to be matters for consideration within the CIRP, under the supervision of the resolution professional and the committee of creditors, and not grounds to refuse or set aside admission. Conclusions (aa) There existed a financial debt owed by the corporate debtor to the financial creditor by virtue of valid corporate guarantees securing the financial facilities extended to the AOP. (bb) Default in repayment by the AOP triggered the co-extensive liability of the corporate debtor as guarantor, establishing default for purposes of Section 7. (cc) The Adjudicating Authority correctly confined itself to verifying existence of financial debt and default and, upon being satisfied, was bound to admit the petition; it was neither required nor permitted to consider commercial futility arguments or insist on prior proceedings against the AOP. (dd) The impugned admission order was found to be in conformity with statutory requirements, supported by documentary evidence, and free from legal infirmity, perversity, or procedural irregularity. (ee) The challenge to the admission of CIRP against the corporate debtor is devoid of merit and the order of admission stands affirmed.