Shareholders Have No Locus To Challenge The Initiation Of CIRP Against Corporate Debtor: NCLAT Chennai

Background Facts

M/s McDowell Holdings Limited (“Corporate Debtor”) is a company promoted by Mr. Vijay Mallya and was initially known as United Golden Beverages Limited. The Corporate Debtor had availed Inter Corporate Deposit (‘ICD’) from Zuari Fertilisers and Chemicals Limited which was later merged with Zurai Agro Chemical Limited (ZACL). On 17.06.2019, the Corporate Debtor entered into a settlement agreement with ZACL and Mangalore Chemicals and Fertilizers Limited, as per which the Corporate Debtor was obliged to repay a sum of Rs. 10,60,56,810/- along with interest being outstanding ICD.

M/s Sunstar Hotels and Estates Pvt. Ltd. (“Financial Creditor”) entered into an agreement with ZACL, to discharge the entire liability of the Corporate Debtor. Therefore, the Financial Creditor entered into the shoes of ZACL by way of right of subrogation for Recovery of Dues from the Corporate Debtor.

The Financial Creditor filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor over a default of Rs. 16,80,66,348/-.

The Shareholders of the Corporate Debtor (Mr. Nirej Vadakkedathu Paul and 8 others) filed an application seeking intervention in the Section 7 petition. On 08.04.2022 the Adjudicating Authority admitted Section 7 petition and initiated CIRP against the Corporate Debtor. On the same day the intervention application was dismissed.

The Shareholders/intervenors filed an appeal before NCLAT challenging the order dated 08.04.2022.

The Shareholders argued that the Financial Creditor was attempting to grab the Corporate Debtor, whose investment in form of shares in other companies have been valued more than Rs. 1000 crores. The Financial Creditor is acting on behalf of the Ex-Promoter Mr. Vijay Mallya and trying to take over the company at the behest of Ex-Promoter. The Section 7 petition was a collusive act of the Financial Creditor and the Corporate Debtor, who in guise of assignment of debts along with alleged default got admitted into CIRP solely to defraud various stakeholders.

NCLAT Verdict

The Bench observed that when a Section 7 petition is filed against a Corporate Debtor and debt and default are established by the Adjudicating Authority, then there is no law permitting the shareholder of the Corporate Debtor to challenge the latter’s admission into CIRP.

The Bench held that Shareholders of the Corporate Debtor do not have any Locus to challenge the admission of Corporate Debtor into CIRP. Accordingly, the appeal was dismissed and initiation of CIRP against the Corporate Debtor was upheld.

Case Title: Nirej Vadakkedathu Paul v Sunstar Hotels and Estates Private Limited

Case No.: Company Appeal (AT) (CH) (Ins.) No. 142 of 2022.

Counsel for Appellant: Mr. P.H. Arvindh Pandian, Senior Advocate For Mr. Athiban Vijay, Advocates.

Counsel for Respondent: Mr. P.S. Raman, Senior Advocate For Mr. Parthasarathy and Mr. Rahul Balaji, Advocates for R-1. Mr. Rishi Srinivas, Advocate for R-2.

Click Here To Read/ Download Order