Third Parties And Multiple Representations Excluded From Hearing In Section 7 Or 9 IBC Petitions: NCLT Kochi

The bench held that any allegations of fraud, deceit, or fraudulent and malicious initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 65 of the IBC must be presented by the Corporate Debtor through its authorized representative.

It held that the tribunal will not entertain multiple representations in matters of CIRP, as the transaction is solely between the Corporate Debtor and the Financial Creditors.

Brief Facts:

The matter pertained to an Interlocutory Application filed by Mr. Ranjit Karthikeyan (Applicant), a director and shareholder holding 5000 equity shares of Attukal Devi Institute of Medical Sciences Limited, the Respondent 2/Corporate Debtor. Mr. Karthikeyan sought permission from NCLT to intervene. This petition was filed by Ayyappan Nair Raghavan Pillai, the Petitioner/Respondent 1 in the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 which sought the initiation of the Corporate Insolvency Resolution Process (CIRP) against Attukal Devi Institute of Medical Sciences Limited.

The Respondent No. 1, Mr. Pillai, who served as the Chairman and Managing Director of the Corporate Debtor claimed that the Corporate Debtor defaulted on a financial obligation amounting to INR 2,81,56,868/-. He argued that he advanced a total loan of INR 1,52,03,000/- to the Corporate Debtor and sought the initiation of CIRP on this basis.

The Applicant contended that Respondent No. 1 in his capacity as Chairman and Managing Director drove the Corporate Debtor to the brink of bankruptcy through neglect and personal interests. He argued that the new management has since revived the company and Mr. Pillai's actions including attempts to induct his counsel onto the Board were malicious attempts to destabilize the Corporate Debtor. The Applicant also argued that the petition against the Corporate Debtor was filed with ulterior motives involving fraud and deceit and that the claim in the petition was unsubstantiated, inflated, and unsustainable with Mr. Pillai being guilty of grossly suppressing facts.

It was further submitted that Mr. Pillai was elected as the Chairman of the Corporate Debtor at the Second Meeting of the Board of Directors and subsequently as Chairman and Managing Director which granted him total control. He executed documents in his favor and now sought to initiate CIRP with unsubstantiated claims. During the 54th Board Meeting, the Board decided to implement stringent financial policies including freezing all payments to directors in respect of interest on director's advances, freezing any fixed remunerations other than professional fees, and freezing the payment of traveling expenses to the Board of Directors. In the same meeting, Mr. Pillai stepped down from his position as Chairman and Managing Director and Dr. D.M. Vasudevan was appointed as the new Chairman and Managing Director.

The Applicant pointed to several Board resolutions which froze payments to directors for interest on advances and argued that the Corporate Debtor is not obligated to pay interest as per these resolutions.

Observations by the NCLT:

The NCLT examined the issue of whether third parties, including intervenors, have the right to be heard at the stage of admitting a petition under Sections 7 or 9 of the IBC. The NCLT held that only the Corporate Debtor and the Financial Creditor are necessary parties to be heard at this stage. It held that third parties, including intervenors, do not possess the right to be heard during the admission stage of a CIRP. It held that any submissions regarding fraud, deceit, or the fraudulent or malicious initiation of CIRP under Section 65 of the IBC must be made exclusively by the Corporate Debtor through their authorized representative. It held that multiple representations in the matter of CIRP cannot be entertained as the transaction involves only the Corporate Debtor and the Financial Creditors.

The NCLT referred to the decision of NCLAT in Deb Kumar Mujumdar Vs. State Bank of India where it was held that no person has a right to claim a hearing except the Corporate Debtor at the stage of an application filed under Section 7 of the IBC. Further, it was held that no other financial creditor or operational creditor is required to be heard at this stage. It was held that a member or shareholder has no right to intervene to oppose the admission of an application under Section 7.

Therefore, the NCLT reiterated that ordinarily no intervention is permissible at the stage of admission in a petition under Section 7 of the Code. It held that the Director of the Corporate Debtor was not a necessary party in the petition; any submission regarding this can only be made by the Corporate Debtor. Consequently, the application was deemed not maintainable.

Case Title: In the matter of: Attukal Devi Institute of Medical Sciences Limited

Case Number: IA (IBC)/282/KOB/2024 IN CP(IBC)/22/KOB/2024

For the Applicant : Mr. Kuriakose Varghese, Advocate

For the Respondent No.1 : Mr. Bijoy Pulipra, Advocate

For the Respondent No.2 : Mr. Vinay Mathew, Advocate

Date of Judgment: 19th day of July, 2024.

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