Can't Interfere With COC'S Decision Not To Pay Suspended Directors For Their Services During CIRP: NCLT Ahmedabad

Background Facts

Indian Overseas Bank had filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC"), seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against AMW Autocomponent Ltd. ("Corporate Debtor"). The Corporate Debtor was admitted into CIRP on 01.09.2020. Mr. Avil Menezes was appointed as Interim Resolution Professional and later confirmed as Resolution Professional.

Mr. Babubhai Shrimali, Mr. Rakesh Jagetiya and Mr. Dinesh Bahadur Singh (collectively "Applicants") are suspended directors of the Corporate Debtor.

After initiation of CIRP, on request of Resolution Professional, the Applicants had rendered service as Directors, Legal & Administrative Head, CFO and Head of Operations in the Corporate Debtor. They were assured by the Resolution Professional that salaries during the period of CIRP would be paid. The Committee of Creditors ("CoC") in its meetings discussed on the salaries of the Applicants but did not come to any conclusion. Therefore, the Applicants had resigned from their respective posts on by notice on 28.10.2020.

The payment to all other employees pending CIRP was made and only the salaries of Applicants was refused by the CoC. The Applicants filed an application before the Adjudicating Authority seeking direction to the Resolution Professional to release the lawful dues towards salary during the CIRP period.

Contentions Of Resolution Professional

It was argued that the Applicants being the directors are the related party of the Corporate Debtor and any payment to them would fall under related party transactions as per Section 28(f) of IBC. Therefore, the Resolution Professional is bound under Section 28 of IBC to take approval of CoC. The Applicants extended support in management of the Corporate Debtor during the CIRP as required under the IBC. However, the CoC did not approve the said related party transaction on the ground of it being exorbitant as the Corporate Debtor was under severe financial distress.

Decision Of NCLT

The Bench observed that as the term 'related party transaction' is not defined under IBC. Therefore, Section 188 of the Companies Act, 2013 was referred, which states that Related Party Transactions includes any contract or arrangement with a related party with respect to availing of any services. Thus, availing of services from the Applicants would amount to related party transactions.

It was further observed that IBC empowers the CoC to take commercial decision as to whether related party transactions should be undertaken or not during the CIRP. Accordingly, the Resolution Professional in various CoC meetings had placed a resolution for payment of salary to the Applicants but the CoC in its commercial decision has rejected the resolution.

Reliance was placed on the Supreme Court judgment in Vallal RCK Vs. M/s Siva Industries and Holdings Ltd. & Ors (Civil Appeal No. 1811- 1812 of 2022), wherein it has been held that "the commercial wisdom of the CoC has been given paramount status without any judicial intervention for ensuring completion of the stated processes within the timelines prescribed by the IBC".

The Bench opined that the decision of COC should not be interfered with and the question of reversing the decision cannot be considered. Moreover, the Applicants being the promoters and persons associated with the management of the Corporate Debtor are statutorily obligated to extend all assistance to the Resolution Professional in managing the affairs of the Corporate Debtor. The application was rejected.

Case Title: Overseas Bank v AMW Autocomponent Ltd.

Case No.: CP (IB) 185/AHM/2018

Counsel For the Applicant: Ms. Prachiti Shah, Advocate.

Counsel For the Respondent: Mr. Rahul Sarda, Adv. For CoC Mr. Prafful Goyal, Adv. For RP

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