TaxTMI 
TaxTMI 
2023 (6) TMI 1250
X X X X Extracts X X X X
X X X X Extracts X X X X
....cates For the Respondent No.3 / Resolution Applicant : Mr. Rana Mukherjee, Senior Advocate For Mr. Kawsik Raghu Rajaa, and Mr. Anand Selvam, Advocates For the Appellant : Mr. T.K. Bhaskar, Sr. Advocate For Mr. Pranav G, and Mr. Mayan H Jain, Advocates For the Respondent Nos.1, 4 to 8 : Mr. E. Om Prakash, Senior Advocate For Ms. Madhusmita Bora, Advocate For the Respondent Nos.2 & 3/ Resolution Professional : Mr. Sumant Batra, Sr. Advocate For Ms. Sarvapriya Roy and Mr. K. Moorthy, Advocates For the Respondent No.13 : Mr. Yashraj Singh Deora, Advocate For Mr. Abhishek Singh and Mr. Priyesh Mohan Srivastava, Advocates JUDGMENT [ Per : Shreesha Merla , Member ( Technical ) ] 1. The Present Appeals are filed under Section 61 of the 'Insolvency and Bankruptcy Code, 2016', against the Impugned Orders dated 12/06/2019 and 09/07/2019, passed by the 'Adjudicating Authority'/ 'National Company Law Tribunal, Chennai' in MA/179/2019 and MA/120/2019 in CP/39/IB/2018. The Learned Adjudicating Authority, has dismissed MA/120/2019 filed by the Appellant here in, inter alia, seeking for forensic audit of the 'Books of Accounts' of the Corporate Debtor, and not to approve the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llant herein and we find it relevant to reproduce the same here in: "The Objector viz., Mr. Ravi Shankar Vedam is the shareholder of the Corporate Debtor viz., M/s. Tiffins Barytes Asbestos and Paints Ltd., and is the absolute owner of 35,590 shares and upon his father's intestate demise in April 2013, he and his brother viz., Mr. Sriram Vedam, inherited the 12,938 shares a n d therefore has a substantial interest in the Corporate Debtor. The objector has alleged that the Resolution Professional has not shared the documents with him which is in violation of the Principles of Natural Justice. The decision of the Committee of Creditors is not in accordance with law as the constitution of the committee is invalid. The Resolution Professional and other persons will get illegal benefit from the approval of the Resolution Plan. The Objector has also stated that the pending MAs were to be decided first and then the Resolution Plan should have been taken into consideration. He has questioned the quantity of the material lying on the spot and seeks forensic audit of various transactions in relation to the Corporate Debtor. It is also alleged that the Resolution Plan is discrimi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er than the Resolution of Insolvency; that the SRA is admittedly the Co-Subsidiary of the 1st Respondent; that the RP is duty bound under Regulation 35 A of the 'Corporate Persons Regulations' read with Section 25(2) (j) and Sections 43, 45, 49, 50 & 66 of the Code to form an opinion on whether the Corporate Debtor has been subjected to any of the Transactions covered therein; that the Resolution Professional is duty bound under Sections 20(1) and 20(2) (a) read with Sections 25(1) and 25(2) of the Code to protect and preserve the value of assets of the Corporate Debtor; that in the 3rd meeting of the CoC held on 23/06/2018, the Resolution Professional stated that he have to file a Certificate regarding the Fraudulent Transactions, Preferential Transactions and Undervalued Transactions and that he would be engaging auditors to conduct the Forensic Audit of the Transactions of the Corporate Debtor; on 24/10/2018, in the 5th CoC Meeting, a proposal for conducting the Forensic Audit was placed before the CoC, which was rejected; that the decision by the CoC on 24/10/2018 was taken by 91.90% voting share, out of which 46.20% voting share was by ineligible persons; that the Resolution P....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2018 and thereafter being a member of CoC, was in violation of Section 29A of the Code. It is submitted by Mr. T.K. Bhaskar that Mr. Poobalan was incharge of the day to day affairs of the Corporate Debtor Company and was working hand in glove with the Resolution Professional for their personal benefits and the Resolution Professional was determined to undervalue the Company. The Learned Senior Counsel placed reliance on the following Judgements: a. Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions Private Limited C.A. (AT) (Ins) No. 38 of 2017 (judgment dt. 22.12.2017) (para 29 to 31) b. Sanjay Kewalramani v. Sunil Parmanand Kewalramani & Ors., C.A. (AT) (Ins) No. 57 of 2018 (judgment dt. 12.07.2018) (para 12 & 13) c. Mohinder Singh Gill Vs. Chief Election Commission 1978 AIR 851 d. Committee of Creditors of Essar Steel India v. Sathish Kumar Gupta & Ors. (2020(8) SCC 531) e. Hemant Kanoria v. SREI Infrastructure Finance Limited (IA (IB) No. 75/KB/2022) f. Embassy Property Developments Pvt. Ltd. v. State of Karnataka ((2020) 13 SCC 308) g. Behari Kunj Sahakari Avas Samiti v. State of U.P. ((2008) 12 SCC 306) h. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Nandita Vedan, before the Hon'ble Adjudicating Authority; that the CoC in their 5th Meeting rejected the Audit Report of the Statutory Auditor and has discussed the same elaborately; the Government of Karnataka challenged the direction issued by the Adjudicating Authority before the Hon'ble High Court of Karnataka in W.P. No. 41029 of 2019 and obtained an Order of Stay, against which 'Special Leave Petitions' ("SLPs") were preferred and the Hon'ble Supreme Court in SLP Nos. 22596/2019, 22684/2019 and in 22724/2019 stayed the Order passed by the Hon'ble High Court of Karnataka. The Resolution Professional has appointed 2 registered valuers under Regulation 35 to determine the Liquidation Value. 10. The Learned Senior Counsel for R2 (Resolution Professional) contended that there was no material irregularity in the conduct and exercise of powers by the Resolution Professional and that the revised Form (H) in terms of the Orders passed in MA/573/2018, dated 27/03/2019 were taken on record by the Adjudicating Authority and the question on reconstitution of the CoC does not arise, since 270 days time has already expired as on 07/03/2019 and the Order in MA/573/2018, was passed on 27....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 'Joint Memo of Compromise', before the Learned Judicial Magistrate, Bellari in CC No. 1687/2014. 14. It is submitted that in CP/39/IB/CB/2018, it was stated before the Adjudicating Authority by the Financial Creditor, who had filed the Section 7 Application, that the Corporate Debtor had given a cheque to the Financial Creditor for an amount of Rs. 8,82,68,439/-, on 03/04/2014, which was dishonoured due to lack of funds. Therefore, CC No. 1687/2014 was filed by the Financial Creditor before the Learned Judicial First Class Magistrate, Bellari, under Section 138 of the 'Negotiable Instruments Act, 1881' and a 'Joint Memorandum of Compromise' as mentioned in the MoU was filed before the Court in CC No. 1687/2014, based on which the Company was acquitted of the offence. The Learned Senior Counsel Mr. E. Om Prakash, contended that the Corporate Debtor had raised all the issues through its Managing Director and also preferred an Appeal, which was dismissed by this Tribunal. 15. It is also brought to our Notice that when 'EOI' was published, the Appellant had approached the Resolution Professional, stating that he was intending submitting a Resolution Plan, and stepped in when th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ho are Agents of the Shareholders, shifts to the Creditors to preserve the value of the Enterprise for maximising the returns for Creditors. The Legislature in its wisdom, has curtailed the 'Rights of the Shareholders' based on the established 'Principles of Creditors' in the control framework. The Court provides the 'shareholders' right to file a 'Claim' only in the Liquidation Process as 'stakeholders' and the advances of stakeholders as stated in Regulation 2(k) includes shareholders only because unlike 'CIRP', in Liquidation, distribution to stakeholders is in accordance with the waterfall mechanism. Shareholders are excluded from representation, participation or voting in the CoC and are represented in the CoC only through the Directors and can speak only through the Directors. 19. The Learned Counsel for the Appellant relied on the Judgment of the Hon'ble Supreme Court in the matter of 'Vijaykumar Jain Vs. Standard Chartered Bank', reported in [(2019) 20 SCC 455], in support of his Submission that 'shareholder' has 'locus' as he is an 'affected Party' and hence can challenge the Resolution Plan, and drew our attention to Para 20 of the afore noted Judgment, which reads as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor. Explanation 1. - For removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors. Explanation 2. - For the purpose of this clause, it is hereby declared that on and from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the provisions of this clause shall also apply to the corporate insolvency resolution process of a corporate debtor- (i) where a resolution plan has not been approved or rejected by the Adjudicating Authority; (ii) where an appeal has been preferred under section 61 or section 62 or such an appeal is not time barred under any provision of law for the time being in force; or (iii) where a legal proceeding has been initiated in any court against the decision of the Adjudicating ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve Creditors Proceedings and all Creditors, pool their Security Interest, in a common manner and the same is distributed as provided for, under Section 30(4) of the Code, subsequent to the approval of the 'plan' by the CoC. The Provisions of the Code does not provide for the shareholders to seek 'representation', 'participation', or otherwise and to agitate their views only through the Directors. 26. The High Court of Delhi in the matter of 'ICP Investments (Mauritius Ltd.) Vs. Uppal Housing Pvt. Ltd. & Ors.' reported in [(2019) SCC Online Del 12371] has held as follows: "20. It is felt that once the affairs of the Umang are taken over by an IRP, the Directors of Umang can no longer be blamed for not taking the requisite steps to seek redress for the wrong if any done to Umang, and a derivative action by plaintiff, as a majority shareholder, for the benefit of Umang would not be maintainable. The plaintiff now has to approach the IRP for taking action against Uppal and it is me IRP who has to, if finds any merit in the grievance of the plaintiff, take appropriate remedy on behalf of Umang. Moreover, if the plaintiff remains dissatisfied with the decision of IRP, has rem....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... derivative action, enshrined in Section 216A of the Companies Act, 2006 of that country, is one where there exist directors who are capable of taking action to vindicate the company's right i.e. they remain in active management. It was held that whilst a company is a going concern, it is normally for the Board of Directors to authorize legal proceedings, as the power to manage is usually vested in the Board; however when a company enters into liquidation, the board is effectively functus officio and the liquidator is in the driver seat and the directors have no power to react to any notice, whether to prosecute, defend or discontinue an action on the company's behalf. 22. I must however note that the aforesaid cases involved a company which was at the stage of liquidation, as distinct from Umang in the present case, against which only the insolvency process has begun. However, considering the duties and role of the IRP under the IBC as discussed hereinabove, the principle in each of the aforesaid cases i.e. of the management of the company, on whose fraud/mismanagement a derivative action becomes maintainable, being no longer in power/control, and consequently a d....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for the Appellant has strenuously argued that had the Transaction Audit been carried out, the Resolution Plan would not have been approved. It is not in dispute that the Appellant is one of the largest shareholders of the Corporate Debtor and not having raised these issues earlier, at the later stage, contends that other shareholders and Directors have indulged in 'Fraudulent Transactions'. We find force in the Contention of the Learned Senior Counsel Mr. E. Om Prakash, that these issues were never raised earlier, no action was taken and that there are other remedies in Law for any of these grievances. 31. The Hon'ble Supreme Court in the matter of 'Arunkumar Jagatramka V. Jindal Steel & Power Ltd. & Anr.', reported in [(2021) 7 SCC 474] in Para 95 has observed as follows: " 95. At this juncture, it is important to remember that the explicit recognition of the schemes under Section 230 into the liquidation process under the IBC was through the judicial intervention of Nclat in Y. Shivram Prasad [Y. Shivram Prasad v. S. Dhanapal, 2019 SCC OnLine NCLAT 172]. Since the efficacy of this arrangement is not challenged before us in this case, we cannot comment on its merits. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Learned Counsel for the Appellant strenuously contended that in the matter of 'Embassy Property Developments Private Limited Vs. State of Karnataka & Ors.' reported in [(2020) 13 SCC 308], this Tribunal has been granted the jurisdiction to enquire into the matter of fraud in insolvency proceedings. Referring to the assertions of the Appellant that serious allegations of fraud have not been dealt with by the Adjudicating Authority, the record shows that the 5th CoC Meeting on 24/10/2018, deliberated on the financial statements, rejected the draft audit report and decided to appoint another auditor to conduct the Corporate Debtor. The CoC has rejected the conduction of a forensic audit by a vote of an overwhelming majority of 91.9% . In the 6th CoC meeting held on 15/12/2018, 'Chartered Accountants' were appointed to complete the audit of the Corporate Debtor. 34. The minutes of the 10th CoC meeting held on 27/02/2019 shows that two sets of voting were conducted by the RP are with all CoC Members and are without the Members whose 'Membership status' is disputed and both sets had approved the Resolution Plan by a Majority. Therefore, we see no grounds to hold that had the Applic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tended in getting involved in the decision making on the commercial viability of disposing off assets etc., which clearly falls in the domain of the CoC, whose decision is final. Even with regard to distribution of assets of a Company, under Liquidation, as per Section 53(h), Equity shareholders have been placed at the bottom of the list of Priorities. Regulation 38 (1A) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 notes that 'a Resolution Plan shall include a statement as to how it has to be dealt with the interest of all stakeholders, including Financial Creditors and Operational Creditors of the Corporate Debtor'. The necessary and requisite condition was that the Resolution Plan has been adhered to by the 'Successful Resolution Applicant' and approved by the Adjudicating Authority. It is significant to mention that the Appellant/ Shareholder of the Corporate Debtor has challenged the decision of the Adjudicating Authority approving the Resolution Plan, at a belated stage. At this juncture, we find it relevant to place reliance on the Judgment of the Hon'ble Apex Court in the matter of 'Kalparaj Dharamshi v. Kotak Investment Advisors Ltd.' repo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1st Voting set is as follows : Financial Creditor Voting % EPDPL VITPL Indian Overseas Bank AASAAN Global Trade Jayashree Agencies Palak HR Udhayaman Investments Sujathaa Mehta 28.80 % 2.50 % 7.60 % 3.80 % 55.50 % 1.70 % Favour Against Favour Against Favour Against Against Against Against Against Against Against Total 100 % Votes in Favour Votes Against 91.90% 8.10% - 100.00% The Results of the 2nd Voting is as follows : Financial Creditor Voting % EPDPL VITPL Indian Overseas Bank 6.80 % Favour Against AASAAN Global Trade 0.60% Against Against Jayashree Agencies 22.80% (e-voting) JSW Steels 22.80 % Against Against Palak HR 0.90 % Against Against Mr. Poobalan 7.30% Favour Against Udhayaman Investments 13.10% Favour Against D & D Enterprises 24.30% Favour Against DP Exports 19.10% Favour Against ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... clear, that this Court, in unequivocal terms, held, that the appeal is a creature of statute and that the statute has not invested jurisdiction and authority either with NCLT or NCLAT, to review the commercial decision exercised by CoC of approving the resolution plan or rejecting the same. 166. The position is clarified by the following observations in para 59 of the judgment in K. Sashidhar [K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150 : (2019) 4 SCC (Civ) 222] , which reads thus : (SCC p. 187) "59. In our view, neither the adjudicating authority (NCLT) nor the appellate authority (Nclat) has been endowed with the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors and that too on the specious ground that it is only an opinion of the minority financial creditors." 167. This Court in Essar Steel India Ltd. Committee of Creditors [Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531 : (2021) 2 SCC (Civ) 443] after reproducing certain paragraphs in K. Sashidhar [K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150 : (2019) 4 SCC (Civ) 222] observed thus : (Essar Steel India cas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the creditors rather than assess the resolution plan on the basis of quantitative analysis. Such is the scheme of the Code. Section 31(1) of the Code lays down in clear terms that for final approval of a resolution plan, the adjudicating authority has to be satisfied that the requirement of sub-section (2) of Section 30 of the Code has been complied with. The proviso to Section 31(1) of the Code stipulates the other point on which an adjudicating authority has to be satisfied. That factor is that the resolution plan has provisions for its implementation. The scope of interference by the adjudicating authority in limited judicial review has been laid down in Essar Steel [Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531 : (2021) 2 SCC (Civ) 443] , the relevant passage (para 54) of which we have reproduced in earlier part of this judgment. The case of MSL in their appeal is that they want to run the company and infuse more funds. In such circumstances, we do not think the appellate authority ought to have interfered with the order of the adjudicating authority in directing the successful resolution applicant to enhance their fund inflow upfront.....