Since Shareholders Of Corporate Debtor Do Not Fall Within Definition Of “Aggrieved Party”, Appeal Filed U/S 61 Of IBC Not Maintainable: NCLAT

The NCLAT New Delhi bench of Justice Rakesh Kumar Jain (Judicial Member),Mr. Naresh Salecha (Technical Member) and Mr. Indevar Pandey (Technical Member) affirmed that a shareholder of the company is not the “aggrieved party” as per the provisions of the Code therefore appeal filed by him under section 61 of the Code would not be maintainable.

Brief Facts

This appeal has been filed by Clarion Health Food LLP under section 61 of the Insolvency and Bankruptcy Code, 2016. (in short 'Code') challenging the Impugned Order of Adjudicating Authority passed on 05.09.2023 filed under the provisions of the Section 9 of the Code.

The Appellant M/s. Clarion Health Foods LLP is Limited Liability Partnership firm and is major shareholder holding 63.64% of paid-up share capital of Corporate Debtor M/s. Goli Vada Pav Pvt Ltd./Respondent No.1. The Vista Processed Foods Pvt. Ltd., Operational Creditor/Respondent No.2 filed a Petition before the AA under Section 9 of the Code.

The petition was filed against Respondent No. 1, Goli Vada Pav Pvt Ltd, alleging a default in payment of Rs. 3,56,04,233/-.The petition was filed on 29.01.2023 and registered on 16.02.2023 after detailed hearing the AA admitted the petition and initiated the CIRP process against the CD by order dated 05.09.2023.

The Appellant had filed a Company Petition on 05.01.2023 against the CD before the NCLT under Sections 166, 241, 242, 243, 244, and 447 of the Companies Act, 2013. The aforesaid petition was registered on 08.02.2023 as CP-28/2023.

In the aforesaid Company matter, the Respondent no.1 submitted copy of impugned order dated 05.09.2023, by which AA admitted the application under section 9 of the code against the CD and submitted that on account of admission of CIRP proceedings against the CD the company petition of the Appellant CP-28/2023 needs to be dismissed. The Appellant was not provided an opportunity of representation in the Petition preferred by Operational creditor under section 9.

Contentions

The appellant submitted that in the hearing on 13.06.2023 the Section 9 petition hearing went unopposed, leading to its admission on 05.09.2023. On 16.10.2023, the CD informed the NCLT about the Section 9 petition's admission during the Section 241-242 proceedings.

That as a majority shareholder in the CD, which is a closely held company, he has now filed this appeal before this Hon'ble Tribunal against the NCLT Mumbai's order dated 05.09.2023, which admitted the CD into the CIRP process under Section 9 of the Code. The counsel asserted that there was collusion between the Operational Creditor (OC) and the CD to secure this admission. Notably, the suspended director of the CD has not appealed the impugned order, leaving the Appellant as the party directly affected and thereby justifying its locus to appeal.

That if it had been informed of the insolvency filing, it would have discharged the OC's debt to protect its substantial investment of Rs. 21 crores in the CD and that these circumstances collectively demonstrate its status as an “aggrieved person” under Section 61 of the Code entitling it to file the present appeal.

That in “Ashish Gupta Vs Delagua Health India Pvt. Ltd.” 2022 the majority shareholder had sought intervention in the CIRP proceedings. The same was agitated by the opposite party. The contention of the majority shareholder was that the aforesaid petition was collusive in nature. The Application filed by the majority shareholder was allowed. The Appeal filed against the said order was challenged before this Appellate Tribunal. The Appeal was dismissed with the observation that the interest of the majority shareholders should be protected in CIRP proceedings.

Per contra, the respondents submitted that this Hon'ble Tribunal in its judgement in the matter of Chetan Sharma Vs. Jai Laxmi Solvents (P) Ltd. & Anr. 2017, has held in paragraph 15 of the judgement that it is a settled law that unilateral 'transfer' of liability does not constitute a 'dispute' within the meaning of Section 5(6) of the I&B Code. That the dispute under Section 5(6) of the Code has to be between the Corporate debtor and the Operational Creditor and an inter-se dispute between two groups of shareholders of the Corporate Debtor does not constitute a dispute in reference to Operational Creditors.

That the Appellant herein has preferred the present appeal as an independent shareholder aggrieved by the admission order for the commencement of Corporate Insolvency Resolution Process, however, the Appellant has no locus to file the present Appeal as per established principles of law as decided by Hon'ble Courts.

That the disputes related to shareholder oppression or mismanagement under the Companies Act, 2013 are distinct issues governed by separate statutory provisions and fall outside the purview of the Code. As a special statute, the IBC prevails over the Companies Act pursuant to Section 238, as affirmed by the Hon'ble Supreme Court in Innoventive Industries Ltd. v. ICICI Bank (2018).

Respondent No.2/OC submitted that the appeal is not maintainable and legally barred, as it has been filed by a shareholder of the Corporate Debtor who lacks the requisite locus to do so. The Respondent emphasizes that the Appellant is only a shareholder of the CD.

NCLAT's Analysis

The tribunal, at the outset, noted that the disputes related to shareholder oppression or mismanagement under the Companies Act, 2013 are distinct issues governed by separate statutory provisions and fall outside the purview of the Code. As a special statute, the IBC prevails over the Companies Act pursuant to Section 238, which has been affirmed by the Hon'ble Supreme Court in Innoventive Industries Ltd. v. ICICI Bank (2018), which held that the resolution process under the IBC takes precedence over any conflicting laws.

The tribunal came to the conclusion that the contention of appellant regarding resolution of Company Petition under Section 241 & 242 of Companies Act, 2013 before the CIRP petition does not hold water.

The tribunal further noted that the Respondent No.2/Operational Creditor issued its demand notice under Section 8 of IBC on 15.10.2022 and issued a subsequent corrigendum notice on 29.10.2022. The same was replied by the CD on 04.11.2022. It is only thereafter in January 2023 that the appellant filed proceedings under Section 241 & 242 of Companies Act, 2013 against the CD. The Respondent No.2 filed the petition under Section 9 on 29.01.2023. We also notice that it is the same Bench of NCLT which was hearing both Company Petition as well as CIRP petition.

The NCLT has passed the order after hearing both the parties and it's an order complying with relevant provisions of the code. The debt and default are on record and there was no pleading of pre-existing dispute in this case,the tribunal noted.

The tribunal while referring to its own decision in Chetan Sharma Vs. Jai Laxmi Solvents (P) Ltd. & Anr. 2017 noted that the dispute under Section 5(6) of Code has to be between the Corporate Debtor and Operational Creditor not a dispute between two groups of shareholders. This Hon'ble Tribunal has further held that even in case of any fraud played by one of the shareholders against one or other shareholders or ex-shareholders of Corporate Debtor, while the aggrieved may take appropriate steps against the shareholder, the same does not absolve Corporate Debtor of its payment to Operational Creditors.

Based on the above, the tribunal came to the conclusion that the contention of Appellant about pre-existing dispute between Appellant and CD has no effect on CIRP proceedings which has been admitted in compliance with provisions of the Code.

In his verbal submission the counsel for appellant has also raised the issue of fraud/ collusion between Director of CD and Respondent No.2 for the first time. However, this argument is not part of the original pleadings, and under settled law, arguments outside the pleadings cannot be considered, the tribunal noted.

Whether Shareholder is an aggrieved person for his appeal under section 61 to be maintainable

The tribunal referred to the relevant provisions of the IBC to understand the term aggrieved person and noted that Section 3 (23) of the Code defines 'person' which includes an 'individual'. This Section does not specifically mention shareholder however 'individual' is a wider term and can include 'shareholder'. Section 6 of the Code prescribed as to who can initiate 'Corporate Insolvency Resolution Process'. It includes a 'Financial Creditor' or an 'Operational Creditor' or the 'Corporate Debtor' itself. This definition is restrictive and includes only 'Creditors' both 'Financial Creditors' & 'Operational Creditors' and the 'Corporate Debtor'.

This tribunal in Nirej Vadakkedathu Patel & Ors. v. Sunstar Hotel and Estates Pvt. Ltd. & Anr,2023 has observed that the 'Appellants' even as “shareholders” cannot be aggrieved merely by the admission of the 'Corporate Debtor' into 'Corporate Insolvency Resolution Process'. Such objection may render the object of I & B Code, 2016 illusory since any shareholder of any 'Corporate Debtor' against which Insolvency proceedings have been initiated can then seek to maintain a derivative action and sabotage a valid 'Corporate Insolvency Resolution Process' initiated by the Adjudicating Authority, the tribunal noted.

The tribunal further observed that equity shareholders are investors in the company and they are owners of the company to the extent of their proportionate shareholding. They provide risk capital to the company, accordingly when a company is liquidated, they have the last priority in the liquidation state after all other stakeholders are paid.

If the company is admitted in CIRP, then it also reflects the failure of BoD on behalf of Equity Shareholders to hold the management accountable and hence they should be prepared to bear the loss of the capital. This structure is the primary reason due to which the equity shareholders have not been allowed to initiate the CIRP process. As soon as the CIRP petition is admitted and IRP is appointed, the functions of the BoD are taken over by IRP. As a representative of Shareholders erstwhile Directors of CD are allowed to intervene and file appeals under Section 61, but the individual or even majority shareholders are not allowed to pursue derivative action, the tribunal noted.

The tribunal concluded that in view of the discussion above, we are of the view that the appellant being a shareholder of the company is not the “aggrieved party” as per the provisions of the Code. The appellant has no locus to file this appeal and the same is not maintainable. Accordingly, the appeal was dismissed.

Case Title: Clarion Health Food LLP Versus Goli Vada Pav Pvt. Ltd. and Anr.

Case Reference: Company Appeal (AT) (Ins.) No. 1522 of 2023

Judgment Date: 20/11/2024

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