2023 (6) TMI 1250 - AT - Insolvency and Bankruptcy

Locus Standi of shareholder of the Corporate Debtor to challenge the Resolution Plan - Seeking for forensic audit of the Books of Accounts of the Corporate Debtor, and not to approve the Resolution Plan till the disposal of the Application - CIRP proceedings (proceedings in rem) - HELD THAT - In an Insolvency process, when an insolvency of Debtor is imminent, the fiduciary duty of the Directors and Managers, who are Agents of the Shareholders, shifts to the Creditors to preserve the value of the Enterprise for maximising the returns for Creditors. The Legislature in its wisdom, has curtailed the Rights of the Shareholders based on the established Principles of Creditors in the control framework. The Court provides the shareholders right to file a Claim only in the Liquidation Process as stakeholders and the advances of stakeholders as stated in Regulation 2(k) includes shareholders only because unlike CIRP, in Liquidation, distribution to stakeholders is in accordance with the waterfall mechanism. Shareholders are excluded from representation, participation or voting in the CoC and are represented in the CoC only through the Directors and can speak only through the Directors. This Tribunal, is of the considered view that once the CIRP is triggered, the Management of the affairs of the Corporate Debtor lies with the Interim Resolution Professional and the shareholders do not have a Right to file any claim in the CIRP but can only do so in the Liquidation Process. It is seen from the provisions of the Code that the Shareholders are excluded from representation, participation or voting in the CoC and are represented in the CoC only through the Directors - The CIRP proceedings are proceedings in rem, to the extent that once a Petition filed by a Financial Creditor/ Operational Creditor against the Corporate Debtor is admitted, it becomes a collective Creditors Proceedings and all Creditors, pool their Security Interest, in a common manner and the same is distributed as provided for, under Section 30(4) of the Code, subsequent to the approval of the plan by the CoC. The Provisions of the Code does not provide for the shareholders to seek representation, participation, or otherwise and to agitate their views only through the Directors. Keeping in view, the scope and intent of the Legislature, and that the I B Code, 2016 is a distinct shift from Debtor in Possession to Creditor in Control Insolvency System, where the Shareholders have a limited role and are only confined to co-operate with the Resolution Professional as specified under Section 19 of the Code, are entitled to receive the Liquidation value of its equity, if any, in accordance with Section 53 of the Code, it is concluded that a Shareholder has no locus standi to challenge the Resolution Plan. The Learned Counsel for the Appellant has strenuously argued that had the Transaction Audit been carried out, the Resolution Plan would not have been approved. It is not in dispute that the Appellant is one of the largest shareholders of the Corporate Debtor and not having raised these issues earlier, at the later stage, contends that other shareholders and Directors have indulged in Fraudulent Transactions - there are force in the Contention of the Learned Senior Counsel Mr. E. Om Prakash, that these issues were never raised earlier, no action was taken and that there are other remedies in Law for any of these grievances. The discretion of the Tribunals, is circumscribed by Section 31 limited to scrutiny of the Resolution Plan, if it is in violation of Section 30 of the I B Code, 2016. The Hon ble Apex Court, in the matter of EBIX SINGAPORE PRIVATE LIMITED VERSUS COMMITTEE OF CREDITORS OF EDUCOMP SOLUTIONS LIMITED ANR., KUNDAN CARE PRODUCTS LIMITED VERSUS MR AMIT GUPTA AND ORS. AND SEROCO LIGHTING INDUSTRIES PRIVATE LIMITED VERSUS RAVI KAPOOR RP FOR ARYA FILAMENTS PRIVATE LIMTIED ORS. 2021 (9) TMI 672 - SUPREME COURT has clearly laid down that subsequent to the approval of the Resolution Plan of the CoC and before the approval by the Adjudicating Authority, no modifications / alterations can be called for as IBC is a time bound process. This Tribunal finds no infirmity in the Order of the Learned Adjudicating Authority in the Approval of the Plan or in the rejection of application - appeal dismissed.

Summary

Issues Involved:
1. Locus Standi of Shareholders in Challenging Resolution Plan
2. Validity of the Resolution Plan Approval Process
3. Request for Forensic Audit
4. Material Irregularity in Conduct of Resolution Professional
5. Admission of CIRP and Related Party Transactions

Summary:

1. Locus Standi of Shareholders in Challenging Resolution Plan:
The Tribunal adjudicated whether a shareholder of the Corporate Debtor has the locus standi to challenge the Resolution Plan. It was held that shareholders do not have a right to file any claim in the Corporate Insolvency Resolution Process (CIRP) and can only do so in the liquidation process. The Tribunal emphasized that the Code does not envisage any representative capacity for shareholders in CIRP and they are excluded from representation, participation, or voting in the Committee of Creditors (CoC).

2. Validity of the Resolution Plan Approval Process:
The Tribunal upheld the Adjudicating Authority's decision approving the Resolution Plan, noting that the plan was compliant with Section 30(2) of the Insolvency and Bankruptcy Code, 2016. It was observed that the commercial wisdom of the CoC, which approved the Resolution Plan with a 96.45% voting share, should not be interfered with unless there is a material irregularity.

3. Request for Forensic Audit:
The Appellant's request for a forensic audit was dismissed by the Adjudicating Authority. The Tribunal noted that the CoC, by an overwhelming majority of 91.9%, had rejected the proposal for a forensic audit. It was concluded that the issues raised by the Appellant regarding fraudulent transactions were never raised earlier and there are other legal remedies available for such grievances.

4. Material Irregularity in Conduct of Resolution Professional:
The Tribunal found no material irregularity in the conduct of the Resolution Professional. It was noted that the Resolution Professional had adhered to the provisions of the law and the CoC had approved the Resolution Plan after due consideration. The Tribunal emphasized that the commercial wisdom of the CoC should be given paramount importance.

5. Admission of CIRP and Related Party Transactions:
The Tribunal confirmed the finality of the Admission Order of CIRP, which was previously challenged and dismissed. It was also noted that the Adjudicating Authority had determined that Mr. Poobalan was not related to the Corporate Debtor in any way other than as an agency. The Tribunal dismissed the Appellant's contention regarding the related party transactions and found no grounds to interfere with the approval of the Resolution Plan.

Conclusion:
Both appeals were dismissed, and the connected pending interlocutory applications were closed. The Tribunal upheld the Adjudicating Authority's approval of the Resolution Plan, emphasizing the limited role of shareholders in CIRP and the importance of the commercial wisdom of the CoC.