2021 (8) TMI 206 - Tri - Insolvency and Bankruptcy

Inclusion of Respondent No. 2 in the Stakeholders' Consultation Committee as the representative of the shareholders of the Corporate Debtor - Whether the nomination of Respondent No. 2 as representative of Shareholders in class made by the Respondent No. 1/Liquidator is in order and is in terms of the provision of Regulation 31A (3) read with Regulation 31A (4) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016? - HELD THAT - Whereas on the one hand, the Respondent No. 1/Liquidator has assumed that the 'shareholders' (have) failed to nominate their representative, on the other hand he has duly noted that the Applicant has the nomination support of 03 out of total 05 shareholders. The plea taken by the Liquidator that no nomination was made as the other 2 shareholders having 75% shareholding had not nominated the applicant as their representative does not merit consideration since the Applicant has been the nominee of 03 out of total 05 shareholders (and which was duly communicated by the Applicant vide his email dated 10.02.2021 to the Liquidator) and the other 02 shareholders did not participate in the nomination process directly or indirectly. Further, the Regulation 31A(3) does not prescribe any criteria for nomination in terms of value of shareholding. That from perusal of the Regulation 31A(3), which reads as The liquidator may facilitate the stakeholders of each class to nominate their representatives for inclusion in the consultation committee , we observe that the said Regulation is silent on both the criteria as well as process of nomination of a Representative. However, the Regulation 31A(3) has bestowed a duty on the Liquidator to facilitate the stakeholders of each class to nominate their representatives for inclusion in the SCC. Since the Applicant has been nominated by the majority i.e., 3 out of 5 Shareholders as the Representative of the Shareholders-in-class, which was duly communicated by the Applicant to the Respondent No. 1, the question of applicability of the provision under Regulation 31A(4) did not arise. Therefore, we hold that the nomination of the Respondent No. 2 as to represent Shareholders-in-class in the Stakeholders Consultation Committee of the Corporate Debtor made by the Respondent No. 1/Liquidator is not valid in terms of the provision of Regulation 31A (3) read with Regulation 31A (4) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. The nomination of Respondent No. 2 to the Stakeholders Consultation Committee of the Corporate Debtor, made by the Respondent No. 1/Liquidator in terms of Regulation 31A(4) of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, is set aside and the Liquidator is directed to accept the nomination of the Applicant as the Representative of Shareholders-in-class for the purpose of constitution of the Stakeholders Consultation Committee (SCC) of the Corporate Debtor. Application allowed.

Summary

Issues Involved:
1. Validity of the inclusion of Respondent No. 2 in the Stakeholders' Consultation Committee (SCC) as the representative of shareholders.
2. Criteria and process of nomination of representatives for the SCC under Regulation 31A(3) and 31A(4) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
3. Alleged conflict of interest involving Respondent No. 2.

Detailed Analysis:

1. Validity of the inclusion of Respondent No. 2 in the SCC:
The Applicant, an Ex-Director and shareholder holding 8.33% of the Corporate Debtor's (CD) share capital, challenged the inclusion of Respondent No. 2 in the SCC. The Applicant argued that Respondent No. 2 was erroneously included as the representative of shareholders by the Liquidator (Respondent No. 1), despite the Applicant being nominated by a majority (60%) of shareholders. The Applicant contended that the Liquidator ignored this majority nomination and instead selected a non-participative shareholder, relying on Regulation 31A(4).

2. Criteria and process of nomination under Regulation 31A(3) and 31A(4):
The Tribunal examined Regulation 31A(3) and 31A(4) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Regulation 31A(3) allows the Liquidator to facilitate stakeholder nominations for inclusion in the SCC, while Regulation 31A(4) applies if stakeholders fail to nominate their representatives, in which case the stakeholder with the highest claim amount is included.

The Liquidator argued that since only 3 out of 5 shareholders nominated the Applicant, and these represented only 24.99% of the shareholding, the nomination was not valid. The Liquidator assumed that all shareholders must unanimously nominate a representative, failing which the stakeholder with the highest shareholding (Respondent No. 2) would be included under Regulation 31A(4).

The Tribunal found this interpretation incorrect, noting that Regulation 31A(3) does not prescribe criteria for nomination based on the value of shareholding. The Applicant's nomination by a majority of shareholders (3 out of 5) was valid, and the Liquidator's application of Regulation 31A(4) was unwarranted.

3. Alleged conflict of interest involving Respondent No. 2:
The Applicant highlighted a conflict of interest, noting that Respondent No. 2 was involved in pending arbitration proceedings against the CD and had previously exited the CD in violation of the shareholders' agreement, contributing to the CD's insolvency. The Liquidator dismissed this concern, stating that conflict of interest is irrelevant for SCC inclusion, as the SCC's scope is limited to advising the Liquidator on matters related to sale under Regulation 32.

Judgment:
The Tribunal concluded that the Liquidator's decision to include Respondent No. 2 in the SCC was invalid. The nomination of the Applicant by a majority of shareholders was valid, and the Liquidator should have accepted it. The Tribunal set aside the Liquidator's nomination of Respondent No. 2 and directed the Liquidator to accept the Applicant's nomination as the representative of shareholders in the SCC.

The Tribunal also advised the Insolvency and Bankruptcy Board of India (IBBI) to issue clear guidelines on the criteria and process of nomination under Regulation 31A(3) to avoid future ambiguities.

Order:
The application was allowed, and the Liquidator was directed to reconstitute the SCC by including the Applicant as the representative of shareholders. The IBBI was advised to notify clear guidelines regarding the nomination process under Regulation 31A(3).