TaxTMI 
TaxTMI 
2021 (11) TMI 24
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....pondent Nos. 8-11 JUDGMENT Jarat Kumar Jain: J. The Adjudicating Authority (National Company Law Tribunal, Hyderabad) passed an order under Section 10 of IBC on 20.09.2017 for initiating Corporate Insolvency Resolution Process (CIRP) and passed an order of liquidation under Section 33 of IBC on 03.06.2019 against the M/s Nizam Deccan Sugars Ltd. (NDSL) (Corporate Debtor).The Company Appeal (AT) (Ins) No. 745 of 2019 is preferred against the order of liquidation whereas Company Appeal (AT) (Ins) No. 818 of2019 is preferred against the orderof initiating CIRP against the Corporate Debtor NDSL. 2. Background of the Appeals are that the State of Telangana, and Director of Sugar & Cane Commissioner, Hyderabad have filed the Appeal against the order of liquidation against NDSL, Delta Paper Mills Ltd. (DPML) and Financial Creditors of the NDSL. When this Appeal came up for hearing on 24.07.2019 before this Appellate Tribunal, the Appellants requested to allow them to implead Nizam Sugars Ltd as Appellant No. 3 and also allow to challenge the order of initiating CIRP under Section 10 of the IBC. This Tribunal has allowed both the prayers however allowed 10 days' time to file the Appeal....
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....porate Debtor (ii) no affirmative vote of the nominee, director of the NSL was taken prior to/during the passing of the Board Resolution dated 30.03.2017. The shareholders of the Corporate Debtor were not informed prior to passing of the aforesaid Board Resolution nor was any shareholder approval subsequently taken. Such Board Resolution is void ab initio as contrary to the Article of Association of the Corporate Debtor. On the basis of aforesaid Board Resolution VR Chary, the Chief Financial Officer of NDSL had filed the petition u/s 10 of the IBC to initiate CIRP. Ld. Adjudicating Authority vide impugned order dated 20.09.2017 admitted the Petition and initiated CIRP against the Corporate Debtor and Rama Krishna Gupta appointed as Interim Resolution Professional (IRP) and declared moratorium. 7. Thereafter the IRP made a public announcement on 23.09.2017 intimating the commencement of CIRP in the matter of NDSL, inviting the Creditors to submit their claims. In response, Financial Creditors Andhra Bank, Syndicate Bank and UCO Bank have filed their claims and CoC was constituted on 20.10.2017. The first CoC was held on the same day and IRP was appointed as RP. Total 11 CoC meetin....
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.... of the fraud and suppression of material facts perpetrated by the Corporate Debtor in initiating the CIRP against the Corporate Debtor, which led to the impugned order having been passed. The Corporate Debtor played fraud upon the Appellants by not informing them about the necessity of obtaining a special resolution from the shareholders of the Corporate Debtor prior to passing the board resolution dated 30.03.2017, the necessity of obtaining the affirmative vote of the nominee director of the Nizam Sugars Ltd (NSL). The fraud discovered when an Appeal was preferred on 11.07.2019 against the order of liquidation dated 03.06.2019. Therefore, the period that elapsed from passing of the impugned order to be discovery of fraud be excluded for computing the period of limitation. It is stated that this Hon'ble Tribunal acceded to the request vide order dated 24.07.2019 allowed the Appellants to challenge the order of Admission within ten days. In the light of the aforesaid facts and circumstances the delay of 748 days in filing the Appeal may be condoned. 9. The Respondent No. 1 & 2 filed the Reply of the Application for condonation of delay and stated that since inception the Appellan....
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....taining to filing of application under Section 10 IBC was also placed before the shareholders in the AGM.In the present case order of admission made prior to substitution of amendment dated 06.06.2018,therefore,there is no requirement of special resolution of the shareholders of the Corporate Debtor, even without taking consent of the shareholders through a special resolution in an AGM/EGM application under Section 10 IBC can be filed for this proposition cited the decision of this Appellate Tribunal in the case of Umesh Aggarwal Vs. Ricoh India Pvt. Ltd. (2019) 214 Company Cases 490 and Amit Gupta Vs. Yogesh Gupta (2020) 158 SCL 301. 11. The Respondent No. 3 to 7 havealso opposed the application for condonation of delay and the Appeal on the aforesaid grounds taken by the Respondent No. 1 & 2. 12. The Respondent No. 8 to 11 in their Reply opposed the Application and the Appeal on the same grounds which were taken by the Respondent No. 1 & 2. 13. The Respondents resisted the Appeal against the order of liquidation on the ground that the allegations raised in the Appeal are false and frivolous and does not constitute material irregularity as per Regulation 33 & 34 of CIRP Regulat....
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....ancial Services Ltd. & Anr. CA(AT) (Ins) No. 630 of 2018 decided on 01.02.2019. 17. On the other hand, Ld. Counsel for appearing on behalf of the Respondent No. 1 & 2 submitted that the Board resolution dated 30.03.2017 passed in the presence of Mr. Bhadru Malloth, nominee director of NSL. Therefore, it cannot be said that the resolution was passed without consent of the director nominated by NSL. It is submitted that in Section 10 of the IBC was amended w.e.f 06.06.2018 in which the provision was inserted that the special resolution passed by shareholders of the Corporate Debtor may approvefiling of the Application under Section 10 of the IBC. Such amendment is subsequent to initiation of CIRP. Therefore, this amendment is not applicable to the present case. It is also submitted that after passing of the resolution the authorized person has filed the Application under section 10 of the IBC and the Appellants have not raised any objection before the Adjudicating Authority that the Application under Section 10 of the IBC is not maintainable, therefore, at a belated stage when the liquidation is ordered by the Adjudicating Authority, such objection cannot be entertained. 18. Ld. Co....
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....involves public money and the Financial Creditors being a public financial institutions have a right to recover their legit dues. There is no dispute on the claim amount filed by the Financial Creditor and the same has been admitted by the RP of the Corporate Debtor. 21. Lastly, it is submitted that in the event of any fraud committed by the private management of the Corporate Debtor as alleged by the Appellants, the same is the internal matter of the Corporate Debtor and the private management,Financial Creditors have no role to play in any of it. 22. After hearing Ld. Counsel for the parties, we have gone through the record and the citations. 23. Firstly we would like to analyse the ratio of the Judgments cited by the Ld. Counsels for the parties. In the case of Gaja Trustee Company Pvt. Ltd. (Supra), this Appellate Tribunal after elaborate discussion held that the decision ofliquidation, dissolutionor winding up of the Company should be taken strictly as per the provisions of AoA. If any resolution for liquidation or winding up of the company is passed ignoring the provisions of AoA then such resolution cannot be a basis of initiation of CIRP under Section 10 of the IBC. 24.....
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....of Gaja Trustee (Supra) this Appellate Tribunal had referred to the Articles of Association of the Corporate Debtor in that matter and in that context considered the said Appeal and found that no decision had been taken by the shareholders in their Extraordinary General Body meeting and the Application under Section 10 of the IBC was filed by person authorized by the Board of Directors which was not maintainable. Whereas in the case of Amit Gupta (Supra) the Appellant Amit Gupta himself is a holder of 93.30 % of shareholding of the Corporate Debtor and the remaining shares with Shayam Lal Gupta and which is apparent from the proposed resolution plan. Therefore, it is observed that, the Appellant holding 93.30% can hardly claim that decision of AGM/EGM is or was necessary. Thus, the Appeal was rejected. 26. With the aforesaid, we can say that the Judgments which are relied upon by the Ld. Counsel for the Respondents are not helpful to them and the ratio of the Judgment in Gaja Trustee (Supra) holds thefield. 27. Now, we would like to refer the relevant paragraphs of the Judgment of Gaja Trustee (Supra)which are as under:- "27. Article 9.1 which also relate to "Affirmative Vote M....
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....d define the powers of its officers. They also establish a contract between the Company and the members and between the members inter se. the contract governs the ordinary rights and obligations incidental to membership in the Company. In the absence of any provisions contained in the Indian Companies Act which prohibit a Company from forfeiting a share for failure on the part of the member to carry out an undertaking or an engagement the Articles of a Company which provide that in certain events membership rights of the shareholder including his right to the share will be forfeited are binding. The Articles of Association of the Exchange expressly provide that in the event of the member failing to carry out the engagement and in the conditions specified therein his share shall stand forfeited. Articles 22, 24, 26, 27 and 29 of the Exchange relating to forfeiture of shares in certain events are therefore valid." 35. The Hon'ble Supreme Court in "Life Insurance Corporation of India V/s. Escorts Ltd. and Others. ─ (1986) 1 SCC 264" held: "A Company is, in some respects, an institution like as State functioning under its 'basis Constitution' consisting of the Compani....
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....ould be the division of powers between the Federal and the State Legislature under a Federal Constitution." As already noticed, the only effective way the members in general meeting can exercise their control over the Directorate in a democratic manner is to alter the articles so as to restrict the powers of the Directors for the future or to dismiss the Directorate and appoint others in their place. The holders of the majority of the stock of a corporation have the power to appoint, by election, Directors of their choice and the power to regulate them by a resolution for their removal. And, an injunction cannot be granted to restrain the holding of a general meeting to remove a director and appoint another." 36. In view of the aforesaid decision of the Hon'ble Supreme Court and other Hon'ble Courts, we hold that the Article 1.1.3; 9.1 and 9.2 are binding on all the 'shareholders' as also on the 'Board of Directors' as also on 'the Company'. We have already held that the 'Board of Directors' of a Company is not empowered to file an application under Section 10 for its own liquidation or dissolution or 'Corporate Insolvency Resolution Process'. For the said reason, the application....
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....sals already approved in the Annual Budget and business and investment plan; g. ... h.... i....... j...... k....... l....... m.... n. Doing of anything that would result in NDSL coming under the control of any other company or person; o. p. q. s. t. u. Dissolution or voluntary liquidation of NDSL. 30. It is apparent that Sale or disposal of any material assets of NDSL, in excess of such sum or value as may be determined by affirmative vote of 4 directors, other than sales or disposals already approved in the Annual Budget and business and investment plan, all transactions regarding building and land, including the lease, purchase, sale and mortgage of these assets, doing of anything that would result in NDSL coming under the control of any other company or person, dissolution or voluntary liquidation NDSL and any material change in the business of NDSL, such matters shall be taken only by affirmative vote of three or more directors but there must be included in the qualified majority at least one director nominated by NSL. 31. Clause 108 of AoA provides how to resolve the deadlock exist on any matter between the Directors. Clause 108 of AoA is as under:....
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....ation with NCLT before the expiry of 180 days. In accordance with the above stated provisions, the boards of directors of the company is requested to take note of the same and pass the following resolution to make an application to the NCLT. After due deliberations, the board of directors have passed the following resolutions. Resolved Thatpursuant to the provisions of the Insolvency and Bankruptcy Code of India (IBC), 2016 and other applicable provisions, if any and subject to the approval of such other authorities as may be required, the board has taken note of the repealing of board for industrial and financial reconstruction (BIFR) w.e.f 1st December, 2016 and thereby the consent of board of directors of the company be and is hereby accorded to file an application before the NCLT for the purpose of seeking the Insolvency Resolution Process." 33. The Hon'ble Supreme Court in the case of "John Tinson & Co. Pvt. Ltd. &Ors. V/s. Surjeet Malhan (Mrs) & Anr."- (1997) 9 SCC 651 held that it is now a well settled position that AoA of a pvt. Company is a contract between the parties. Hon'ble Supreme Court in the case of Naresh Chandra Sanyal V/s. Calcutta Stock Exchange Associati....
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....n the Appeal against the order of liquidation came up for hearing on 24.07.2019, before this Appellate Tribunal the Appellants requested to allow them to challenge the order of admission. This Tribunal allowed the Appellants to file the Appeal within 10 days then on 07.08.2019 the Appellants have filed CA (AT) (Ins) No. 818 of 2019 against the order of admission. Apparently, the Appeal has been filed with a delay of 748 days. 39. For condonation of delay the Appellants have taken two grounds (i) The Appellants were not aware of the fraud and suppression of the material facts perpetrated by the Corporate Debtor in filing the application under Section 10 of IBC. Therefore, when the fraud discovered the Appeal was preferred. Hence, the period that lapsed from passing of the impugned order to discovery of the fraud we excluded for computing the period of limitation. (ii) This Hon'ble Tribunal vide order dated 24.07.2019 allowed the Appellants to challenge the order of admission within ten days. Pursuant to the order the Appeal has been filed. Thus, the appeal is within limitation. 40. Learned Counsel for the Respondents pointed that the Appellants were fully aware of passing of the....
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....y a court before it became invalid must therefore be rejected." 45. Thus, the Appeal is time barred such defence is not maintainable. Issue No. (iii) Whether material irregularity committed by RP in conducting the CIRP of the Corporate Debtor.? 46. Learned Senior Counsel for the Appellants submitted that the private management of Corporate Debtor interested to sale the assets of the Corporate Debtor, to achieve this object the RP and the private management of the Corporate Debtor are hand in glow in managing the CIRP of the Corporate Debtor. The RP decided to publish EOI in newspapers with the minimal subscription base and circulation. Such publication is in direct contravention of regulation 36-A of CIRP regulations which mandates that the publication must be in newspapers having a wide circulation. In such manner only limited prospective resolution applicants could participate in the process of resolution. The Adjudicating Authority initiated the CIRP on 20.09.2017 shortly, therefore, on 23.01.2018 the private management of the Corporate Debtor made a representation to the COC for permission to sell 161 acres of land of the Corporate Debtor. Pursuant to the permission granted....
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....pellant State of Telangana and an additional period of 81 days is provided for completion of CIRP. The State of Telangana could have revived the Corporate Debtor by finding or through submitting a resolution plan. 48. Learned Senior Counsel for the Appellant further submitted that the RP conducted CIRP against the interest of the Corporate Debtor. The CIRP cost have been consistently paid by the private management of the Corporate debtor. Such cost should have been paid by the financial creditors as per the regulation no. 3 & 5 of the 1st Schedule of code of conduct for Insolvency Professionals to the IBBI (Insolvency Professional Regulations) 2016. It is also pointed out that as per the valuers appointed by the RP, even the distress sale value of the Corporate debtor is more than the dues owed by the Corporate debtor to all its creditors. The liquidation of the Corporate debtor would benefit nobody except the private management of the Corporate debtor and would be detrimental to thousands of farmers relying on the Corporate debtor for their livelihood. In light of the aforesaid submission, it is prayed that the liquidation order ought to be set aside. 49. Per Contra, Ld. Counsel....
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....ng them to attend the meeting. The Appellants during the CoC meetings or before the Adjudicating Authority never raised any objection in this regard. 51. Ld. Counsel for the Respondent No. 1 & 2 further submitted that the Regulation 36-A which provides that the publication of Form-G in one English and one in regional language newspaper with wide circulation such amendment was inserted with effect from 04.07.2018. Whereas, in the present case the publication in the newspapers was made on 16.05.2018. Regulation 36-A did not mandate the publication of invitation of Resolution Plan either in Form-G or otherwise in newspapers. It is only the amended Regulation 36A which came into effect from 04.07.2018 that requires the publication of Form-G in the newspapers. Therefore, the publication in the newspaper made by the RP in the case on hand on 16.05.2018 was statutorily not required and hence, the Appellants cannot take advantage of the amendment that came later, to attack advertisement. 52. Ld. Counsel for the Respondent No. 1 & 2 also submitted that the Appellants made false allegationswithout any basis that the RP by acting inconcert with the private management to liquidate the assets....
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....the IBC is inevitable. Since, there is no resolution plan, the members of CoC unanimously passed the resolution to liquidate the Corporate Debtor and authorized RP to file an Application for liquidation. Thereafter, the RP received letter from Director of Sugar &Cane Commissioner, Hyderabad vide G.O. MS No. 28 dated 06.09.2018 the State Government is not authorized to file the resolution plan to revive Corporate Debtor due to dissolution of first Legislative Assembly. In such circumstances, the RP filed the Application before the Adjudicating Authority for liquidation of Corporate Debtor Company. 55. Thus, all the false and frivolous allegation raised in this Appeal does not constitute material irregularity and the same is made without any basis. The Appeal is not maintainable and liable to be dismissed. 56. Ld. Counsel appearing on behalf of the Respondent No. 3 to 7 supports the arguments advanced by the Ld. Counsel for the Respondent No. 1& 2. 57. After hearing Ld. Counsels for the parties, we have carefully examined the record. 58. Firstly we have considered whether the RP deliberately published EOI in newspapers with the minimal subscription base and circulation, in contra....
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....d on record the letter of RP dated 18.11.2017 which is reply of the Appellants letter dated 01.11.2017 and 13.11.2017. In the aforesaid letter the RP informed the Appellants that the CIRP is a time bound process to be completed within 180 days and if no resolution plan is forthcoming within such period the Corporate Debtor Company will step into liquidation (Letter is at Pg. 530 to 532 Reply of R1 Volume III). 61. With the aforesaid, it cannot be said that the Appellants were unaware with the CIRP and the RP approached the Appellants at a belated stage for revival of Corporate Debtor. 62. The Appellants have not placed on record any communication to show that they have directed the RP to seek exclusion to time consumed under I.A. No. 213 of 2018 to enable filing of resolution plan. Admittedly, no resolution plan was submitted by the Appellants to the RP within/after expiry of CIRP period. 63. With the aforesaid discussion, we are unable to convince with the arguments of Ld. Counsel for the Appellants that the RP committed material irregularity while conducting the CIRP of the Corporate Debtor and the RP has not made any attempt for resolution of the Corporate Debtor and actively....