Constitution Of CoC In Violation Of Section 21(2) Proviso Of IBC Is Nullity In Eyes Of Law, Vitiates Entire CIRP: NCLT

The NCLT Bengaluru Bench of Justices Hon'ble Shri K. Biswal and Hon'ble Shri Manoj Kumar Dubey, held that when the constitution of the Committee of Creditors (CoC) violates the Proviso of Section 21(2) of IBC, 2016, such constitution is nullity in the eyes of Law and vitiates the entire CIRP.

Brief Facts

The Present Interlocutory Application is filed on 23/11/2023 by Mr. Vipin Kumar Sharma through its Power of Attorney Holder Shri Mukesh Sharma ('Applicant') under subs-section (5) of section 60 of the Insolvency and Bankruptcy Code, 2016 r/w first proviso to sub-section (2) of section 21 and section 24 of sub- section 5 sub- the IBC, 2016 and Rule 11 of the NCLT, 2016, by inter alia, seeking to set aside the constitution of Committee of Creditors as the Members of the Committee of Creditors are related parties under Proviso to sub-section(2) of Section 21 of the Code and further seeking for a direction to the Insolvency and Bankruptcy Board of India to investigate collusion between the RP on one hand and the Corporate Debtor.

The Applicant was an erstwhile employee and shareholder of the Corporate Debtor who had initiated various litigations against the Corporate Debtor and its suspended management for recovery of his legitimate dues arising out of his employment and the subsequent breach of contractual obligations by the Corporate Debtor

Thereafter, the Corporate Debtor defaulted on the loan due, on account of which Canara Bank had encashed the guarantees furnished by the Financial Creditor. The Corporate Debtor therefore committed a default of Rs.2,47,59,552/- as on 29.05.2020.

Contentions

The applicant submitted that in terms of the provisions of Section 65 of the IBC, the Applicant states that the CIRP proceedings initiated by Respondent No.2 though the Financial Creditor i.e. Park View developers Ltd. was clearly in collusion with the suspended Directors of the CD and hence is fraudulent and malicious initiation of proceedings.

• It was further submitted that the glaring instance of 'related parties' of the CD becoming members of the Financial Creditors and Respondent No. 6 being a member of CoC is sufficient to make the constitution of CoC illegal and its all decisions taken thereafter.
• The reliance was placed on the judgment of the NCLAT in Jayanta Banerjee Vs. Shashi Agarwal & Anr. (2020) wherein it was held that if the constitution of CoC violates the proviso of section 21(2) of the IBC, the entire constitution of CoC will be tainted and any decision of the cannot be validated on the pretext of exercise of commercial wisdom and all such decisions taken by the CoC are liable to be quashed.
• It was further submitted that the RP has not made any meaningful attempt to even enquire into the allegations of fraud, collusions, involvement of related parties and interrelationships between all the entities involved in the CIRP.

Per contra, the respondents submitted that the decision to commence CIRP was based on legitimate grounds and in accordance with the provisions of the IBC and no elements of Section 65 are attracted.

• It was further submitted that the involvement of Respondent No.4 company in this application is unrelated to the ongoing CIRP proceedings. The Respondent No.4 neither hold a stake in the matter nor is directly involved in the CIRP proceedings concerning the CD. It was further submitted that the Respondent Nos.2, 3 & 4 are not having any sort of connections with the members of COC to make them as related parties in terms of Section 5(24) of the IBC, 2016.
• It was further submitted that Since the Mr. Sunit Suri ceased to be the director of the DC w.e.f. 22.04.2019, much prior to insolvency commencement date, accordingly, Mrs. Nidhi Suri, Respondent No.6 is also not a related party in terms of Section 5(24)(a) of the Code.
• It was further submitted that Respondent No.7 has verified the claim including the compliance of Proviso to Section 21(2) r/w 5(24)(a) of the Code and held that Park View Developers Pvt. Ltd. is not a related party in terms of Section 5(24) of the code and therefore, 38.38% voting shares was allocated to Park View Developers Pvt. Ltd. Further, the threshold criteria under Section 5(24) are 20% shareholding, therefore, Park View Developers Pvt. Ltd., member of the CoC, is not a related party in terms of definition of Section 5(24) of the Code.
• It was further submitted that Respondent No.2 is not a director of Park View Developers Pvt. Ltd. as on commencement of CIRP therefore, he will not be covered under Section 5(24) of the Code and that Respondent No.4 is also not a member of the CoC and that Respondent No.5, Mr. Umesh Hingorani, is neither a director nor a shareholder of the CD.

NCLAT's Analysis

The tribunal at the outset noted that it is seen that the Respondent No.2, is not a Director of the said Financial Creditor at present or anytime in the past. Hence the contention that the Park View Developer is the related party of the Corporate Debtor is not acceptable.

The tribunal further observed that however, on bare perusal of the records it can be see that, neither are the above mentioned Respondents nor the Respondent No.4 i.e Akoni Travels Pvt Ltd are a part of the CoC.

The tribunal analysed section 21 of the IBC and observed that for any party to be considered a related party have to satisfy the various conditions laid down in the Section 5(24). It is clarified that firstly, Section 21 is only for the Financial Creditors that are a part of CoC. Secondly simply because a Director/key managerial person of the Corporate Debtor is also Director of another Company, it cannot be termed to be a case of Section 21, when such Company is not at all a party of CoC. Hence, we do not find any merit in such allegation.

The tribunal further observed that the Respondent No.6, Mrs Nidhi Suri who is a member of CoC, is also the wife of the Respondent No.1, the Director of the Corporate Debtor. This clearly establishes that Respondent No.6 is a related party of Corporate Debtor which is in clear violation of the proviso to Section 21(2 which stipulates that if the financial creditor is a related party of the Corporate Debtor then such person shall not have any right of representation, participation or voting in a meeting of the committee of creditors.

To further fortify the above conclusion, the tribunal placed reliance on the Supreme Court judgment in Phoenix ARC Private Limited v Spade Financial Services Limited & Ors (2020)wherein it was held that “under Proviso to Section 21(2) not only those financial creditors that are related parties presently would be debarred from the CoC; but those former related parties who, under a deliberate act, ceased to be the related party in order to circumvent the disqualification under this Proviso would also be covered under the exclusion granted by this Proviso.”

The tribunal concluded while referring to Jayanta Banerjee (supra) held that when the constitution of the CoC violates the Proviso of Section 21(2) of IBC, 2016, such constitution is nullity in the eyes of Law and vitiates the entire CIRP. This Tribunal holds that the Respondent No.6 as mentioned is a disqualified under the First Proviso to Section 21(2), R/w Section 5(24) of the IBC, 2016.

Accordingly, it was held that the constitution of the CoC is erroneous in the eyes of Law and the direction for reconstitution of the CoC was issued accordingly after exclusion of the related party. Therefore, the prayer instant IA No.851 of 2023 stands disposed of accordingly.

Case Title: Mr. Vipin Kumar Sharma v. Mr. Sunit Suri and Ors.

Case Reference: I.A. No.851 of 2023

Judgment Date: 17/10/2024

Click Here To Read/Download Order