IBC| Ineligibility Of Resolution Applicant As Per S.164(2)(b) Companies Act Can't Be Presumed Unless Competent Authority Declares Disqualification: Supreme Court

The Bench comprising of Justice Dinesh Maheshwari and Justice Vikram Nath, while adjudicating an appeal filed in M.K. Rajagopalan v Dr. Periasamy Palani Gounder & Anr., has held that there is no concept of ‘deemed disqualification’ under Section 164(2)(b) of the Companies Act, 2013.

BACKGROUND FACTS

The Tourism Finance Corporation of India Limited filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against Appu Hotels Limited (“Corporate Debtor”). The National Company Law Tribunal (“NCLT”) admitted the Corporate Debtor into CIRP on 05.05.2020. The Resolution Plan submitted by Mr. M.K. Rajagopalan (“Successful Resolution Applicant/SRA”) for the Corporate Debtor was approved by the Committee of Creditors (“CoC”) and thereafter by the NCLT.

Further, the Successful Resolution Applicant/SRA is the Director of a company named International Aviation Academy Private Limited (“Company”). The said Company had collected share application money pending allotment and did not refund the same.

The approval of Resolution Plan was challenged before the National Company Law Appellate Tribunal (“NCLAT”) on various grounds. On 17.02.2022, the NCLAT rejected the resolution plan so approved by the CoC and the NCLT. The matter was remanded to CoC, with direction to the Resolution Professional to proceed with CIRP from the stage of publication of Form ‘G’, while inviting Expression of Interest afresh as per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”).

The NCLAT declared the SRA ineligible in terms of Section 88 of the Indian Trusts Act, 1882 and disqualified in terms of Section 164(2)(b) of the Companies Act, 2013 to submit a resolution plan for the Corporate Debtor.

While placing reliance on Section 164(2)(b) of the Companies Act, 2013, the NCLAT held that the default by the Company would disqualify the SRA from acting as a director, thus rendering and him ineligible to submit a resolution plan. The NCLAT bench further placed reliance on Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 and made a declaration that SRA was disqualified to act as a Director in terms of Section 164(2)(b) of the Companies Act.

The SRA filed an appeal before the Supreme Court against the NCLAT’s order, challenging the same on various grounds.

ISSUE

Whether the SRA is ineligible to submit a resolution plan in terms of Section 29-A(e) of IBC for being disqualified to act as a director under Section 164(2)(b) of the Companies Act, 2013?

SUPREME COURT VERDICT

The Section 164 of the Companies Act, 2013 specifies conditions under which a person shall be disqualified to hold the post of a Director in a Company. Section 164(2)(b) states a person who is or has been the Director of a company, which has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debenture etc., shall not be eligible for re-appointment or appointment as a Director in any other company for a period of 5 years.

No disqualification of resolution applicant in view of Section 164(2)(b) of the Companies Act, unless a categorical order disqualifying him/her as director is passed by the competent authority

On the issue of whether the disqualification under 164(2)(b) of the Companies Act can be assumed in absence of a categorical order of competent authority, the Bench observed as under:

“Even if there had been any possibility of the resolution applicant incurring such a disqualification in terms of Section 164(2)(b) of the Companies Act, because of alleged default of another company, in which he is a director, to refund the share application money, the same would essentially be a matter of consideration of the registrar of companies. Unless a categorical finding was recorded in the competent forum as regards any such default and unless specific order disqualifying the resolution applicant as director because of such default came into existence, it could not have been taken by way of any process of assumption that the appellant-resolution applicant was disqualified to act as a director and thereby, was ineligible to submit a resolution plan.”

It was held no disqualification under Section 164(2)(b) could be assumed unless there is a categorical order of disqualification passed by the competent authority to that effect.

No deemed disqualification under Section 164(2)(b) of the Companies Act 2013

It was observed that the DIN status of the SRA was “active compliant”. Therefore, he could not have been treated as ineligible. The declaration made by NCLAT disqualifying the resolution applicant in terms of Section 164(2)(b) has been regarded as too far stretched.

“Although, we do not agree with the submissions on behalf of appellant that such an issue of eligibility could not have been raised before NCLAT for the first time because the question of eligibility of the resolution applicant goes to the root of the matter but, we do agree with the other part of the submission in this regard that there is no concept of deemed disqualification under Section 164(2)(b) of the Companies Act. Hence, in our view, the Appellate Tribunal had not been right in holding the resolution applicant ineligible by virtue of Section 164(2)(b) of the Companies Act.”

The Bench held that the SRA could not be declared ineligible to submit a resolution plan in view of Section 164(2)(b). However, the Bench has held that the Resolution Plan could not have been otherwise approved by the NCLT on twin reasons, (i) ineligibility of Successful Resolution Applicant in view of Section 88 of the Indian Trust Act; and (ii) the failure of Resolution Applicant to place the revised resolution plan before the CoC prior to seeking approval of the NCLT. On the remaining issues, the NCLAT’s order has been set aside by the Bench.

The appeal has been partly allowed.

Case Title: M.K. Rajagopalan v Dr. Periasamy Palani Gounder

Citation: 2023 LiveLaw (SC) 403

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