CIRP of Corporate Debtor vitiated if illegally constituted committee of creditors took decisions at every stage of CIRP

Jayanta Banerjee Vs Shashi Agarwal (NCLAT Delhi)

In the instant case, we find that the IRP/RP had formed the Committee of Creditors based on the Financial Creditors’ submission of claims even without verification, despite that one of the financial creditors had explicitly requested to defer the e-voting on the resolution of the 5^th CoC dated 5th December 2019, till the verification of voting percentage and compliance of CIRP process. The IRP/RP has formed the Committee of Creditors without admitting the claims of the Financial Creditors, which violate Regulation 12 (3) of the CIRP Regulations.

We also find that during CIRP, five meetings of the Committee of Creditors took place. Still, till the end of CIRP, IRP did not verify the claims submitted by the Financial Creditors but allotted the voting share to the Financial Creditors, based on the submission of claims. The procedure adopted by the IRP/RP was against the statutory provision of the Code despite the fact that compliance with the statutory requirements of the Code was mandatory.

We have also noticed that the IRP/RP has not prepared the Information In the Minutes of the fourth COC meeting dated 11 November 2019, it is stated that verification of claims is under process, and the amount of claims is to be determined. The Information Memorandum, as specified under Regulation 36, will be ready by 22 November 2019. However, in the fifth CoC meeting, i.e. the last meeting, it was decided that there is no need for an Information Memorandum. It was also decided that there is no requirement of Transaction and Forensic Audit and also no need for publication of Form-G for the invitation of expression of interest. The COC also decided to liquidate the corporate debtor. Therefore, there is no need to prepare Information Memorandum.

Based on the minutes of all the five ‘CoC’ meetings, it is crystal clear that entire CIRP proceedings were conducted & completed even without any valuation of the Corporate Debtor. In all the COC meetings, it was informed that no records are available and suspended directors are not cooperating. The Interim Resolution Professional has constituted the Committee of Creditors even without admitting the claims. The Committee of Creditors has been formed based on claims submitted. In the column of a status report, It is everywhere mentioned that verification of claims is under process. But the said verification process never came to an end, and the committee of creditors resolved to liquidate the corporate debtor ignoring mandatory requirements of determination of fair market value, liquidation value and preparation of information memorandum. There was no publication of Form ^?G^? for inviting expression of interest. One of the Financial Creditors objected to the participation of Financial Creditors, Kamla Mills Ltd and Fasqua Investment Private Limited, as they are related parties. However, this objection was overruled by the Adjudicating Authority while it was issuing directions to the suspended Director to extend cooperation to the IRP for submission of records of the Corporate Debtor.

Based on the above discussion, we are the considered opinion that the Constitution of the Committee of Creditors violates the proviso to Section 21 (2) of the I & B code 2016 read with 12(3) of CIRP Regulations. Therefore, the Constitution of the creditors^? committee is a nullity in the eye of law that vitiates the entire CIRP. Liquidation is like a death knell for the corporate entity/corporate person. Liquidation based on the resolution of the CoC, which consists of related party Financial Creditors having 77.20 % vote share, is a matter of grave concern. Hon^?ble Supreme Court in the case of Phonix ARC (supra) has described the entering of such related party Financial Creditors in the Committee of Creditors as an act of commercial contrivances through which these entities sought to enter the COC, which could affect the other independent Financial Creditors. An order for liquidation of corporate debtor based on the sole decision of related parties Financial Creditors could be fatal for the existence of the corporate debtor, cannot be sustained. It is also pertinent to mention that when the Constitution of the Committee of Creditors itself is found to be tainted, then the decision of that COC cannot be validated on the pretext of exercise of commercial wisdom.

We have also noticed that the role of IRP/RP/liquidator was not impartial in the conduct of the corporate insolvency resolution process; therefore, we think it proper to change the Resolution Professional. The above discussions show that the Resolution Professional failed to discharge duties and responsibilities cast on the Resolution Professional under the IBC and Regulations’ provisions. ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’ are related parties that were made part of this CoC and were in a commanding position to rush through the decision to liquidate the Corporate Debtor. Facts show that the Corporate Insolvency Resolution Process was initiated in view of Section 9 of the IBC. The petition was admitted on 7^th August 2019, and the 5^th CoC meeting held on 8^th December 2019, which is within 122 days, decided to liquidate the Corporate Debtor. The CoC had two entities holding the majority of the voting rights of 77.20%. However, their claims were not even admitted and were also related parties and thus, the whole process before CoC has got vitiated. In view of the extraordinary facts of the present matter and the disputes being raised by so many workers through the Appellants, the interest of justice requires certain directions to do justice in the matter. The impugned order dated 7^th February 2020 was passed within 184 days of the petition being admitted on 7^th August, 2019. The Application under Section 33 of the IBC appears to have been filed on 17^th December, 2019. It appears in the interest of justice that the time spent before the Adjudicating Authority when the application under Section 33 of the IBC was filed, till now should be excluded from calculating the period under Section 12 (1), (2) & (3) of the IBC. Parties and Corporate Debtor need not suffer for time spent during this period before Adjudicating Authority and in Appeal, as an effort at Resolution needs to be made.

We further observe that the corporate insolvency process in the instant case is totally in disregard of the provision of the Code and Regulations The formation of the Committee of Creditors in the instant case is a nullity in the eyes of the law. Since the illegally constituted committee of creditors took the decisions at every stage of CIRP. Therefore, the entire corporate insolvency resolution process of the Corporate Debtor is found to be vitiated. Therefore the impugned order of liquidation passed by the Adjudicating Authority deserves to be set aside.

FULL TEXT OF THE NCLAT JUDGMENT/ORDER

These two Appeals emanate from the Common Order dated 7^th February 2020 passed by the Adjudicating Authority/National Company Law Tribunal, Kolkata Bench, Kolkata in C.A. (I.B.) No. 1748/K.B./2019 and C.A. (I.B.) 57/K.B./2020 in C.P. (I.B.) No 1684/K.B./2018, whereby the Adjudicating Authority/ NCLT initiated liquidation proceedings against the Corporate Debtor ‘INCAB Industries Limited’, wherein the Appellant of Appeal No.348 of 2020 was employed until the date of passing the order of liquidation. Parties original status in the Company Petition represents them in these Appeals for the sake of convenience.

Appellants Averment

2. The Corporate Debtor was admitted into the Corporate Insolvency Resolution Process (in short ‘CIRP’), vide order dated 7^th August 2019, and Respondent No. 1 was appointed as Interim Resolution Professional (IRP) of the Corporate Debtor.

3. Under the invitation of claims by the IRP, the Appellant and thousands of other employees who were employed with the Corporate Debtor submitted their claim, along with other Operational Creditors and Financial Creditors.

4. Subsequently, after forming the Committee of Creditors (‘COC’), the resolution was adopted on 5^th December 2019 to liquidate the Corporate Debtor, thereby sabotaging the chances of revival of the Corporate Debtor and pushing the Corporate Debtor employee’s into an abyss with an uncertain future.

5. The liquidation order came into the Appellant’s knowledge when the Application under Section 33 of the Insolvency and Bankruptcy Code, 2016, the Respondent filed C.A.(I.B.) No. 17/K.B./2019 before the Adjudicating Authority/NCLT Kolkata Bench. The Appellant intervened in the said matter and filed its opposition in the same. The Appellant also filed an Application under Section 60 (5) of the Insolvency and Bankruptcy Code 2016 being C.A. (I.B.) No. 57/K.B./2024 to remove the Respondent as the Resolution Professional working connivance with the majority of the creditors of the Corporate Debtor.

6. The Committee of Creditors (from now on referred to as CoC) also consist of ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’, both were managed and owned by one of the Directors of the Corporate Debtor, Mr Ramesh Ghamandiram Gowani, resigned from the management of the Corporate Debtor after the initiation of the Corporate Insolvency Resolution Process.

7. We have heard the arguments of the Learned Counsel for the parties and perused the record. The following issue arises in these appeals for our consideration.

1. Whether ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’ who were made part of CoC are related parties in terms of proviso to Section 21(2) of the Insolvency and Bankruptcy Code 2016?

2. Whether assignment of debt in violation of Section 5 of the SARFAESI Act 2002 and Factoring Regulation Act 2011 is valid?

3. Whether IRP/RP can constitute CoC based on submission of claims only, without verifying and admitting or rejecting the claims?

Point No.1.

Whether ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’ who was made part of CoC are related parties in terms of proviso to Section 2 1(2) of the Insolvency and Bankruptcy court 2016?

Appellants Submission

7(a) The Impugned Order passed under Section 33 of the Insolvency and Bankruptcy Code 2016 is based on the Committee of Creditors’ resolution in its 5^th COC meeting. The majority of CoC members (in terms of voting rights) passed the resolution for liquidation. They are none other than related parties of the Corporate Debtor. These two Financial Creditors together constitute the majority of Financial Creditors with a vote share of 77.20%.

7(b). Under Section 5(24)(a) of the Code, a ^??related party^??, in relation to the  corporate debtor, means a director or partner of the corporate debtor or a  relative of a director or Companies Act. A related party about the Corporate Debtor (public company) includes ^??a Director of the Corporate Debtor holding more than 2% of the shares capital. Sub-section (f) of 5(24) states that “a body corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of the individual.”

7(c) Given the provisions above, it is found that ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’ (both members of COC) were related party as Mr Ramesh Ghamandiram Gowani had a substantial shareholding of 99.74% in the Financial Creditor Kamla Mills Ltd and is also a Director and Shareholder of the Financial Creditor ‘Fasqua Investment Private Limited’. He was the Director of the Corporate Debtor ‘Incab Industries Ltd’ till the commencement of the CIRP. After that, he resigned from the Directorship of the corporate debtor.

7(d) The Appellant’s contention is further substantiated with the support of master data of the Corporate Debtor, which reflects that Mr Gowani was the Director of the Corporate Debtor till 28^th November 2019. (Copy of master data at Volume 3^rd, page 555 of appeal paper book).

7(e) The master data of’ Fasqua Investment Private Limited’ reflect that Mr Gowani was both a Director and Shareholder. (Copy of master data at volume II, page 244)

7(f) The shareholding pattern of ‘Kamla Mills Private Limited’ reflects that Mr Gowani was both a Director and Shareholder. (Copy of shareholding pattern, Vol. III, Appeal Paper book, Page-488).

7(g). The locus of the majority of Financial Creditors in the ‘COC’, namely ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited’, both of which were managed and owned by one of the directors of the Corporate debtor, is also questionable on account of unlawful assignment of debt which is contrary to law.

7(h) The Corporate Debtor was operational and could have been revived if a premature liquidation order had not been passed.

7(i) The liquidator is working ‘hand in gloves’ with the ‘COC’ to Liquidate the Corporate Debtor and, as such, acted in a manner dehors the provision of the Insolvency and Bankruptcy Code, 2016.

7(j). The Appellant contends that the documents filed with the Appeal could indicate that Mr Gowani held the position as Director of the Corporate Debtor till 20^th November 2019, which is much after the commencement of the CIR process. This suggests that Mr Gowani was the Director of the Corporate Debtor as on the insolvency commencement date. The same Mr Gowani, i.e. a ‘CoC’ Member, is also a Director and Shareholder of the ‘Fasqua Investment Private Limited’. Thus, at the very threshold, the Constitution of ‘CoC’ is liable to be declared as invalid and is liable to be set aside in terms of proviso to Section 21(2) of the Insolvency and Bankruptcy Code, 2016, which makes it vividly clear that the Financial Creditor, if it is a related party to the Corporate Debtor, shall not have the right of representation, participation, or voting in  meeting the Committee of Creditors.

8. Respondent No. 1/Liquidator’s reply regarding the inclusion of ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited in the Committee of Creditors.

a. Respondent No. 1/Liquidator contends that Mr Ramesh Gowani claims to be a Director of the Corporate Debtor in terms of the Telefax Communication, dated 4^th May 2009, passed by the BIFR in case No. 390 of 1999. In terms of the said order of the BIFR, while approving the Corporate Debtor’s change in Directors, Mr Ramesh Gahmandiram Gowani was appointed as an Additional Director of the Corporate Debtor.

b. Hon’ble High Court of Delhi, in Writ Petition (Civil) No. 3358/20 12, passed an order dated 29^th April 2013, set aside the said Telefax Communication of BIFR dated 4^th May 2009. Since the said Telefax Communication was set aside by the Hon’ble High Court, therefore, Mr Gowani cannot be said to have been appointed and/or continued as such.

c. That even if for the sake of arguments, the stand was taken by the Appellant that Mr Ramesh G. Gowani was appointed and continued as an Additional Director of the Corporate Debtor, is taken as correct, in terms of Section 260 of the Companies Act, 1956, such Director could hold office only till the conclusion of the next Annual General Meeting, which could have been held up to 30^th September In case the meeting was not held on that date or thereafter, such directors would be deemed to have vacated the office after that.

d. Hence, Mr Gowani more or less stood on the footing of a special officer appointed by BIFR. He resigned in 2019 as a preventive.

Therefore, it could not be interpreted as a continuation as a Director up to the resignation. His resignation was only to correct the Ministry of Corporate Affairs records, which could not be updated as no AGM held for the last 20 years. Therefore, such resignation was a corrective measure and could not be interpreted as a continuation as Director.

9. Discussion on the objection regarding the inclusion of ‘Kamla Mills Private Limited’ and ‘Fasqua Investment Private Limited in the  Committee of Creditors.

a. The term ‘related party’ relating to the Corporate Debtor is defined in Section 5(24) of the Insolvency and Bankruptcy Code 2016. Given sub-section (5) of Section 24 of the Code, a related party of the Corporate Debtor shall not have any right of representation, participation or voting in a meeting of the Committee of Creditors.

b. Section 21 of the Insolvency and Bankruptcy Code 2016 reads as under;

“Sec 21. Committee of creditors;

(1) The interim resolution professional shall, after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.

(2) The committee of creditors shall comprise all financial creditors of the corporate debtor:

Provided that a financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub­section (6-A) or sub-section (5) of Section 24, if it is a related party of the corporate debtor,] shall not have any right of representation,  participation or voting in a meeting of the committee of creditors.

(emphasis supplied)

10. Hon’ble Supreme Court in case of Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475 : (2021) 2 SCC (Civ) 1: 2021 SCC OnLine SC 51 at page 520 has held ;

“61. The definition of the expression “related party” in Section 5(24) is exhaustive, since the expression is defined to “mean” what is set out in sub-clauses (a) to (m). The expression “related party” is defined in Section 5(24) as follows:

“5. (24) “related party”, in relation to a corporate debtor, means—

(a) a Director or partner of the corporate debtor or a relative of a Director or partner of the corporate debtor;

(b) a key managerial personnel of the corporate debtor or a relative of a key managerial personnel of the corporate debtor;

(c) a limited liability partnership or a partnership firm in which a Director, partner, or manager of the corporate debtor or his relative is a partner;

(d) a private company in which a Director, partner or manager of the corporate debtor is a Director and holds along with his relatives, more than two per cent of its share capital;

(e) a public company in which a Director, partner or manager of the corporate debtor is a Director and holds along with relatives, more than two per cent of its paid-up share capital;

(f) anybody corporate whose Board of Directors, Managing Director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a Director, partner or manager of the corporate debtor;

(g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions or instructions of a Director, partner or manager of the corporate debtor;

(h) any person on whose advice, directions or instructions, a Director, partner or manager of the corporate debtor is accustomed to act;

(i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;

(j) any person who controls more than twenty per cent of voting rights in the corporate debtor on account of ownership or a voting agreement;

(k) any person in whom the corporate debtor controls more than twenty per cent of voting rights on account of ownership or a voting agreement;

(l) any person who can control the composition of the Board of Directors or corresponding governing body of the corporate debtor;

(m) any person who is associated with the corporate debtor on account of—

i. participation in policy-making processes of the corporate debtor; or

ii. having more than two Directors in common between the corporate debtor and such person; or

iii. interchange of managerial personnel between the corporate debtor and such person; or

iv. provision of essential technical information to, or from, the corporate debtor;”

The expression “related party” is defined in Section 5(24) in relation to a corporate debtor. Section 5(24-A) provides a corresponding definition in relation to an individual.

62. The definition describes a commutative relationship, meaning that X can be a related party of Y, if either X is related to Y, or Y is related to X. The definition of “related party” under the IBC is significantly broad. The intention of the legislature in adopting such a broad definition was to capture all kinds of interrelationships between the financial creditor and the corporate debtor [Richa Saraf, “Concept of Related Party: Interpretation by Letter or Spirit of the IBC?”, (India Corp Law, 11-8-2018) available at <https://indiacorplaw. in/20 18/ 08/concept-related-party – interpretation-letter-spirit-ibc. html>.]

63. The term “related party” has also been defined by Parliament in the Companies Act, 2013 for all corporations. The definition of the expression has also been expanded for listed entities by the Securities Exchange Board of India by amendment to the Equity Listing Agreement to include elements mentioned under applicable accounting standards. However, in the present case, we are assessing its definition only under the IBC, which is exhaustive. The purpose of defining the term separately under different statutes is not to  avoid inconsistency but because the purpose of each of them is different. Hence, while understanding the meaning of “related party” in the context of the IBC, it is important to keep in mind that it was defined to ensure that those entities which are related to the corporate debtor can be identified clearly, since their presence can often negatively affect the insolvency process.****

64. An issue of interpretation in relation to the first proviso of Section 2 1(2) is whether the disqualification under the proviso would attach to a financial creditor only in praesenti, or if the disqualification also extends to those financial creditors who were related to the corporate debtor at the time of acquiring the debt.****

103. Thus, it has been clarified that the exclusion under the first proviso to Section 2 1(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate As such, the financial creditor who in praesenti is not a related party, would not be debarred from being a member of the CoC. However, in case where the related party financial creditor divests itself of its shareholding or ceases to become a related party in a business capacity with the sole intention of participating in the CoC and sabotage the CIRP, by diluting the vote share of other creditors or otherwise, it would be in keeping with the object and purpose of the first proviso to Section 2 1(2), to consider the former related party creditor, as one debarred under the first proviso.

104. Hence, while the default rule under the first proviso to Section 2 1(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 2 1(2), should also be considered as being covered by the exclusion thereunder. Mr Kaul has argued, correctly in our opinion, that if this interpretation is not given to the first proviso of Section 21(2), then a related party financial creditor can devise a mechanism to remove its label of a “related party” before the corporate debtor undergoes CIRP, so as to be able to enter the CoC and influence its decision making at the cost of other financial creditors.”

(verbatim copy)
(emphasis supplied)

11. Hon^?ble Supreme Court has dealt with the issue of related Party in relation to the Corporate Debtor and has laid down the rationale for excluding the related Party from the Committee of Creditors. Hon^?ble Supreme Court has further propounded that the default rule under the 1^st proviso to Section 21(2) of the I&B Code 2016 is that only those Financial Creditors related parties in praesenti would be debarred from the ^?CoC^?. But bar under 1st proviso to Section 21(2) denying the right of representation, participation or voting in a meeting of the Committee of Creditors who are related Party may even apply to a party who in the present is not related, but in the past was a related party, if divesting was intending to be part of CoC.

12. The Appellant contends that the corporate debtor was operational and could have been revived had the premature liquidation order not passed. It is submitted that IRP/RP should have made every effort to run the Corporate Debtor as a going concern. The liquidation should have been the last resort in the CIR process. However, the Company was sent into liquidation in the instant case without even publishing the Information Memorandum. The fact that the Company was a going concern could be reflected from the facts that the Pune plant of the Corporate Debtor was in production till the year 2016, which could be clear from the Custom Returns filed by the Corporate Debtor before the Central Board of Excise and Customs. (Copy of the Customs Return is at Vol.III pages 482 for 486).

13. The Appellant contends that the liquidator worked ^?hand in gloves^? with the ^?COC^? to liquidate the Corporate Debtor. During the 3^{rd ?}COC^? meeting, dated 18^th October 2019, the IRP, who is also liquidator, was informed by one of the Members of the ‘COC’, namely ‘Pegasus Assets Reconstruction Private Limited’, that Mr Gowani, who was, in fact, the Director of the Fasqua Investment Private Limited and also the majority Shareholder of the Kamla Mills Ltd was a related party of the Corporate Debtor that is a clear violation of the explanation to Section 21 (2) of the Code. (Ref; Minutes of 3^rd COC meeting dated 18^th October 2019 is at volume 1^st, pages 110 to 111 of Appeal Paper book.) The IRP/RP ignored the concerns raised by Pegasus Assets Reconstruction Company Private Limited & informed the COC that he would take necessary steps to prepare the Information Memorandum by 22^nd November, specified under Regulation 36 of the IBBI (Insolvency Resolution for Corporate Persons) Regulation, 2016. (Ref; 4^th ‘CoC’ meeting minutes dated 11^th November 2019 is Vol.1. Pages 119-120).

14. The Appellant further contends that the Adjudicating Authority, by its order dated 20^th November 2019, passed the direction upon the suspended management to cooperate with the R.P. Despite such an order, the R.P. made no progress in preparing the Information Memorandum and stated that there was a resolution of the ‘CoC’ for an order of liquidation, and no Information Memorandum was required. It is pertinent to mention that the resolution was passed by the ‘CoC’ much after the date of expiry of timelines for issuing the Information Memorandum, and nothing prevented the R.P. from carrying out his duties. (Ref CoC minutes of the meeting, dated 5th December 2019, volume I, page 125). This is a flagrant violation of Regulation 36 Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

15. The Learned Counsel for the Appellant further submitted that the R.P. chose to ignore his basic duties, and instead, his actions and inactions jeopardised the livelihood of 1000’s workers. The Appellant also relied on the Hon’ble Supreme Court judgement in the Committee of Creditors, Essar Steel India Ltd versus Satish Kumar Gupta Manu/SC/ 1577/20 19.

Respondent number 1 / liquidator’s submission& Discussion

16. Respondent No. 1 contends that as an IRP/RP, despite non-availability of documents and non-cooperation, had prepared an information memorandum having information to the extent available as stated in the 4th ‘COC’ meeting. Still, the same is incomplete as all information stipulated by the Regulations was not available. However, the same would be made available on the receipt of the non-disclosure agreement.

17. Respondent No. 1 /Liquidator states that he had proposed and appointed the valuer in the 4^th ‘COC’ meeting and proposed two registered valuers to determine the fair value and liquidation value under Regulation 35 CIRP regulations. In the 4^th COC meeting, he circulated the quotation for valuation of assets of the Corporate Debtor he received by email from three Registered Valuers. After careful deliberation on the same concluded that the ‘CoC’ would confirm the names of the valuation professional after having consultations among themselves within two days. After that, in the 5^th CoC meeting, at the time of discussion for status/steps taken, the CoC members present proposed and discussed for liquidation of the corporate debtor. After that, the Adjudicating Authority allowed Application u/s 33 of the Code, and he was appointed as liquidator of the Corporate Debtor.

18. Respondent No. 1 further contends that the Appellant, an erstwhile workman of the Corporate Debtor and Operational Creditor, has no locus to institute the Appeal and question the Creditors’ Committee’s commercial wisdom to liquidate the Corporate Debtor.

19. Respondent No. 1 states that in the notice of the ‘CoC’ meeting sent to ‘COC’ members, there was no agenda about the Corporate Debtor liquidation. The members suo-moto took up the issue of liquidation of the Corporate None of the members presents either physically or through video conferencing opposed discussion regarding the corporate debtors liquidation. As per the discussion in the ‘COC’ meeting, members exercised their right to vote on resolutions through e-voting.

20. Respondent No. 1 further contends that with effect from 16th August 2019, Section 33 (2) of the Insolvency and Bankruptcy Code2016 have been The explanation has been added to the said Section 33 (2) in terms of which the Committee of Creditors may decide to liquidate the Corporate Debtor, any time after its Constitution of CoC under Sub-section (1) of Section 21 but before the confirmation of the Resolution Plan, including any time before the preparation of the Information Memorandum.

21. The decision to liquidate the Corporate Debtor was taken with a majority of the entire Committee of Creditors except for Pegasus Assets Reconstruction Company with a vote share of 7.9%. The rests of the members voted for and in favour of the liquidation of the Corporate Debtor. The said resolution was passed with an overwhelming majority of 90.83%.

22. The Adjudicating Authority made the following observation in the impugned order;

“71. The other challenge is that M/S Kamla Mills Ltd and Fasqua investment Private Limited related parties of the corporate debtor because Mr Ramesh G Gowani was a common director in all these entities. This plea is also devoid of merits for the reason that in our order dated 19th November 2019, it has been held that he has never been a director of the Company and which order has been attained finality. In addition to that, section 260 of the Companies Act 1956, now cited by the applicant’s, in fact, further support our order. As per this provision, read with the circular issued by MCA, Mr Ramesh G Gowani is deemed to have vacated the office on 29th September 1999, in the event, he was found to be additional Director validly appointed. Further, as far as the aspect of resignation on 20th November 2019 is concerned, in our considered view, it is of no consequence as it has already been established that he was never the Director or be deemed to have vacated much before. We further find force in the contention made of of Mr Gowani that such action was taken as a precautionary measure and to update the MCA records, which were pending for updation since 1999 as no meetings of shareholders, i.e. AGM or EGM, have taken place since then.”

(Verbatim copy)

23. In the above order, the Adjudicating Authority mentions that in the order dated 19^th November 2019, it has been held that Mr Ramesh G Gowani has never been a Director of the Company and that order has attained finality.

It is pertinent to mention that IRP/RP filed an Application under Section 19(2) of the Insolvency and Bankruptcy Code 2016 for directions to the respondents to give access to the books of account and other statutory records of the Corporate Debtor, provide all information and handover possession of all assets to resolution professional for a smooth implementation of CIRP. The adjudicating authority, while disposing of the said Application C.A. 1453/K.B./2019, made observations;

“3. When the matter came up for hearing, representative of one Respondent, i.e. Ramesh Ghamandiram Gowani appeared and pleaded that such person was not a director of the corporate debtor, hence it should not be impleded in the  said petition. In support of such claim it was mentioned that the corporate debtor had earlier been subject to proceedings before the BIFR in 1999. In 2008, the additional directors were appointed, which were confirmed by the BIFR on 4th May 2009. In addition to these three directors, Mr Ramesh Ghamandiram Gowani was also appointed as nominee director of the Company Mrs Kamla Mills Ltd. Who is one of the financial creditors of the Company holding 46% of the total debt. However, Hon’ble Delhi High Court in writ petition number 3358/2012 and writ petition number 3999/2012 set aside the order of the BIFR dated 4th May 2009 and restored the position as existing prior to that date.

4.*

5. We have considered the submissions made by the learned counsel for the resolution professional as well as Respondent namely Ramesh Ghamandiram Gowani. Before proceeding further it is, in our considered view, necessary to decide the issue whether such Respondent is a director of the Company or not because Cooperation/support for implementing CIRP in a smooth and timely manner depends upon the active support from the erstwhile directors of the corporate debtor. Copy of Hon’ble Delhi High Court order dated 29th April 2013 in writ petitions( civil) number 3358 of 2012, which refers to the writ petition (civil) number 3999/2018, has been placed on record. In the said petition, telefax communication dated 4th May 2009 of the BIFR has been set aside. Said telefax communication refers to the case No. 390 of 1999. As per the communication, three directors namely (a) Mr Mahendra Shah (P) Y R Kori (c) Kersi A maria have been appointed as additional directors of the corporate debtor. In the said telefax, representative of Kamla Mills Ltd has also been appointed as a nominee director. The said telefax has been set aside, hence, this Respondent cannot be said to have remained a director or to have been appointed as Director and/or continued as such. Accordingly, we hold that Mr Ramesh Ghamandiram Gowani is not a director of the corporate debtor company and he should not be impeded as Respondent in the said petition filed under section 19 (2). Accordingly, this petition stands modified in terms of our this order.

6. Having stated so, we direct the respondents/directors and officers of the Company to provide all necessary documents, information and handover the possession of the assets of the corporate debtor to resolution professional so that CIRP can be completed smoothly and in timely manner .”

(verbatim copy)

24. We find that the Adjudicating Authority’s observation is based on its earlier order dated 19th November 2019 about ‘Kamla Mills Ltd’ and ‘Fasqua Investment Private Limited’ being not related parties to the corporate debtor, has attained finality. However, the Adjudicating Authority failed to notice that his earlier order contains a stray observation about the Directorship of Mr Ramesh G Gowani in the corporate debtor company. Because it was not an issue in C.A., 1453/K.B./2019 filed under Section 19(2) of the Code. The said Application was filed U/S 19(2) of I & B code 2016 by IRP/RP, only on a limited issue involving direction to extend cooperation to the IRP. But it appears that the Adjudicating Authority, instead of deciding the main issue to extend cooperation by the suspended directors of the corporate debtor to the IRP, has travelled beyond the scope of Section 19 (2) of the Code and decided that Mr Ramesh Ghamandiram Gowani is not a director of the corporate debtor company and that he should not be impleaded as Respondent in the said petition. The appellants or other parties likely to be affected by such order were not a party to such decision. Their right to question the status of Mr Ramesh Ghamandiram Gowani cannot be taken away. Therefore, such a finding could not be treated as has attained the finality.

25. While passing the above-mentioned order, the Adjudicating Authority has placed reliance on the Hon’ble Delhi High Court order dated 29th April 2013 in Writ Petition (Civil) No. 3358 of 2012, which refers to the Writ Petition (Civil) No. 3999 of 2018. In the said petition, telefax communication dated 4th May 2009 of the BIFR has been set aside. As per the communication, three directors, namely (a) Mr Mahendra Shah (b) Y R Kori (c) Kersi Amaria, had been appointed as additional directors of the corporate debtor. A representative of Kamla Mills Ltd had also been appointed as a nominee director by the said telefax. The Adjudicating Authority has further observed that since the said telefax order of BIFR has been set aside, this Respondent cannot be said to have remained a director or have been appointed as Director and/or continued.

26. In the circumstances, it is necessary to go through the telefax communication dated 4th May 2009 and the order of the Hon’ble High Court in Writ Petition No. 3358 of 2012, dated 29^th April 2013. The copy of the telefax message is annexed with the reply of respondent number 2 as Annexure R 1. The Xerox copy of the telefax communication ( Annexure R- 1)is as under;