31 January 2019: The Supreme Court has held that members of the erstwhile/ suspended Board of Directors of a Corporate Debtor, must be given copies of Insolvency Resolution Plan that may be discussed at meetings of the Committee of Creditors (CoC).
The judgment was rendered by a Bench of Justices Rohinton Nariman and Navin Sinha in an appeal filed against a decision of the National Company Law Appellate Tribunal (NCLAT) rejecting prayer to provide all relevant documents including the insolvency resolution plans to members of the suspended Board of Directors of the corporate debtor.
The appellant was a member of the suspended Board of Directors of the Corporate Debtor, Ruchi Soya Industries Limited.
He was given notice and permission to attend the first meeting of the Committee of Creditors (CoC) but was denied participation in the subsequent meetings. He filed an application in the National Company Law Tribunal (NCLT) challenging this.
The NCLT passed an order granting liberty to the appellant to attend CoC meetings but not to insist upon being provided information considered confidential either by the resolution professional or the committee of creditors.
Against this order, the appellant filed an appeal before the NCLAT which recognized the appellant’s right to attend and participate in CoC meetings, but denied the appellant’s prayer to access certain documents, most particularly, the resolution plans. This led to the appeal in Supreme Court.
Arguments by parties
Appearing for the appellant, Senior Advocate Shyam Divan and advocate Arvind Kumar Guptacontended that under Section 24(3), the resolution professional has to give notice of each meeting of the committee of creditors to the members of the suspended Board of Directors. Further, under Regulation 24 of the Regulation framed under the Insolvency and Bankruptcy Code (IBC), the notice of these meetings shall not only contain an agenda of the meetings but shall also contain copies of all documents relevant to the matters to be discussed and issues to be voted upon at the meeting. This necessarily means that access to the resolution plans and other relevant documents under consideration at these meetings must be supplied together with the notice of the meeting to members of suspended Board of Directors.
Senior Advocate Abhishek Manu Singhvi and advocate Raunak Dhillon, appearing on behalf of the resolution professional, relied strongly on Section 30(3) of the Code and Regulation 39(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) which made it clear that resolution plans were only to be given to the committee of creditors for its consideration.
They further argued that the terms “committee” and “participant” are differently defined under the Regulations and that participants are expressly excluded by Regulation 39. They also argued, that if any of the Regulations go beyond the provisions of the Code, they must be struck down as ultra vires, as under Section 30(3) of the Code, the resolution professional is required to present resolution plans only to the committee of creditors.
Respondents also placed heavy reliance on Notes on Clauses to Section 24 which according to them made it clear that the erstwhile members of the Board of Directors are participants in these meetings only so that the committee of creditors and the resolution professional may seek information from them.
The Court proceeded to trace the statutory scheme laid down by the Code and held that though the erstwhile Board of Directors are not members of the committee of creditors, yet, they have a right to participate in each and every meeting held by the committee of creditors, and also have a right to discuss along with members of the committee of creditors all resolution plans that are presented at such meetings under Section 25(2)(i).
In this regard, the Court also referred to the position of the Operational Creditor in the CoC.
“It cannot be denied that operational creditors, who may participate in such meetings but have no right to vote, are vitally interested in such resolution plans, and must be furnished copies of such plans beforehand if they are to participate effectively in the meeting of the committee of creditors.”
This is for the reason that under Section 30(2)(b), repayment of their debts is an important part of the resolution plan qua them on which they must comment. So the first important thing to notice is that even though persons such as operational creditors have no right to vote but are only participants in meetings of the committee of creditors, they certainly have a right to be given a copy of the resolution plans before such meetings are held so that they may effectively comment on the same to safeguard their interest, the Court held.
Addressing the contention of Notes on Clause raised by the respondents, the Court stated that a closer look at the Notes on Clause 24 makes it clear that the third sentence of the Notes on Clause 24 is itself problematic and it is difficult to understand the same.
- First and foremost, it speaks of the resolution professional seeking information. The resolution professional does not seek information at a meeting of the committee of creditors, which is what Section 24 is all about. The resolution professional only seeks information from the erstwhile Board of Directors under Section 29 before preparing an information memorandum, which then includes the financial position of the corporate debtor and information relating to disputes by or against the corporate debtor etc. All this has nothing to do with Section 24 of the Code which deals with meetings of the committee of creditors.
- Secondly, the resolution professional does not prepare a resolution plan as is mentioned in the Notes on Clause 24; he only prepares an information memorandum which is to be given to the resolution applicants who then submit their resolution plans under Section 30 of the Code. The committee of creditors, in turn, gets information so that they can assess the financial position of the corporate debtor from various sources before they meet. It is, therefore, difficult to understand the Notes on Clause 24.
The Court also noted that Regulations also make it clear that members of erstwhile BoD are vitally interested in resolution plans as they affect them.
“A resolution plan which has been approved or rejected by an order of the Adjudicating Authority, has to be sent to “participants” which would include members of the erstwhile Board of Directors – vide Regulation 39(5) of the CIRP Regulations. Obviously, such copy can only be sent to participants because they are vitally interested in the outcome of such resolution plan.”
The Court further noted that every participant is entitled to a notice of every meeting of the committee of creditors. Such notice of meeting must contain an agenda of the meeting, together with the copies of all documents relevant for matters to be discussed and the issues to be voted upon at the meeting by way of Regulation 21(3)(iii). Resolution plans are “matters to be discussed” at such meetings, and the erstwhile Board of Directors are “participants” who will discuss these issues. The expression “documents” is a wide expression which would certainly include resolution plans, the Court ruled.
Based on the above, the Court held that the arguments of the respondents that “committee” and “participant” are used differently and that resolution plans need not be furnished to the erstwhile members of the Board of Directors, must be rejected.
“…combined reading of the Code as well as the Regulations leads to the conclusion that members of the erstwhile Board of Directors, being vitally interested in resolution plans that may be discussed at meetings of the committee of creditors, must be given a copy of such plans as part of “documents” that have to be furnished along with the notice of such meetings.
As a result of the aforesaid discussion, the arguments of the respondents that “committee” and “participant” are used differently, which would lead to the result that resolution plans need not be furnished to the erstwhile members of the Board of Directors, must be rejected.”
The Court, therefore, allowed the appeal and set aside the NCLAT judgment.