2018 (8) TMI 1037 - AT - Insolvency and Bankruptcy

Corporate insolvency resolution process - Corporate Debtor - locus standi of the person - personal guaranter - Held that - Adjudicating Authority is only to satisfy that the default has occurred and that the Corporate Debtor is entitled to point out that the default has not been occurred in the sense that the debt is not due. No other person has a right to be heard at the stage admission of the application under Section 7 and 9 of the I&B Code including the shareholders or the personal guarantor etc.. With regard to a personal guarantor of Corporate Debtor , insolvency resolution or bankruptcy can be filed but before the same Adjudicating Authority (National Company Law Tribunal) where application against Corporate Debtor is pending in terms of subsection (2) of Section 60. In such case personal guarantor may claim his right of hearing, which is filed against personal guarantor and he may also address the Adjudicating Authority, if it is corporate insolvency resolution process pending against the Corporate Debtor . The Adjudicating Authority having failed to notice the aforesaid provision - Now it is only the Corporate Debtor is to be heard, who is represented through the Board of Directors and the Financial Creditor and no other person such as shareholders or the personal guarantor . However, after the order of admission or rejection is passed, it is always open to the aggrieved person to move in appeal.

Summary

Issues:
1. Impleadment of shareholders and personal guarantors as party-respondents in insolvency proceedings.
2. Whether shareholders and personal guarantors are necessary parties in corporate insolvency resolution process.
3. Interpretation of Section 7 of the Insolvency and Bankruptcy Code, 2016.
4. Application of the observations made by the Hon'ble Supreme Court in "Innoventive Industries Ltd. Vs. ICICI Bank and Ors., - (2018) 1 SCC 407".
5. Provisions under Section 60(2)(3) of the Insolvency and Bankruptcy Code.

Analysis:

1. The appeal before the National Company Law Appellate Tribunal involved an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, by Axis Bank Limited for the initiation of insolvency proceedings against 'Lotus Three Developments Limited'. An impleadment application was filed by Respondent Nos. 1 and 2 to be included as party-respondents, which was granted by the Adjudicating Authority.

2. The Appellate Tribunal initially expressed the view that shareholders are not necessary parties in insolvency proceedings as the Corporate Debtor is represented through its Board of Directors. However, the respondents claimed to be both shareholders and personal guarantors of the Corporate Debtor, arguing for their inclusion as party-respondents.

3. The Tribunal emphasized that the insolvency resolution process is not an adversary litigation, recovery proceeding, or a pending case for decision on merit. The Adjudicating Authority's role is to ascertain the completeness of the application under Section 7 and allow time for rectification of defects before rejection.

4. Referring to the Supreme Court's decision in "Innoventive Industries Ltd. Vs. ICICI Bank and Ors., - (2018) 1 SCC 407", the Tribunal highlighted the criteria for a financial creditor to trigger the process under Section 7. It clarified that only the Corporate Debtor and the Financial Creditor have the right to be heard at the stage of admission under Sections 7 and 9, excluding other parties like shareholders or personal guarantors.

5. Section 60(2)(3) of the Insolvency and Bankruptcy Code was cited to explain that insolvency proceedings against a personal guarantor of a Corporate Debtor should be filed before the same Adjudicating Authority where the application against the Corporate Debtor is pending. This provision allows the personal guarantor to claim a right of hearing in such cases.

In conclusion, the Tribunal set aside the order for impleadment of shareholders and personal guarantors, directing the Adjudicating Authority to decide the case in line with the Supreme Court's observations within two weeks. It reiterated that only the Corporate Debtor and the Financial Creditor are to be heard in the corporate insolvency resolution process, with the option for aggrieved parties to appeal after the admission or rejection of the application.