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2023 (3) TMI 747 - AT - Insolvency and BankruptcyApproval of Resolution Plan - illegal constitution of the CoC by including related parties - Appellant HIL has thus claimed that the Impugned Order was passed by the Adjudicating Authority without considering the information regarding the presence of related parties in the CoC and fraudulent initiation of CIRP placed by HIL on record, whereas the order approving the resolution plan should have been passed with complete satisfaction of the Adjudicating Authority as required under section 31, read with section 30(2) of the IBC. Was the financial loan claimed in default of payment in the application under section 7 of IBC filed by the financial creditor Nandakini Contractors Pvt. Ltd., a loan that could qualify as financial debt under IBC and appropriate for initiation of CIRP against the corporate debtor? - Was the admission of section 7 application and consequent initiation of CIRP against the corporate debtor in accordance with the legal requirements and provisions of the IBC? - HELD THAT - While the financial creditor Nandakini has claimed a financial debt, evidently there is no document included in the Form 1 application in proof of any loan agreement and/or disbursement of the said loan. A purported proof of the disbursement of the said loan has been filed by the corporate debtor in the form of its balance sheet, but notably there is no balance sheet or ledger account of the financial creditor for the same financial year showing such a loan. We further find that no document or record regarding entries in the banker books in accordance with the Bankers Book Evidence Act, 1891, which are required to be furnished by the financial creditor along with Form 1 application under section 7 was filed by the Nandakini - The financial creditor did not either submit any document or record regarding the financial loan and/or its disbursement, but only relied on letters ostensibly sent by the financial creditor demanding repayment of the alleged loan and two letters dated 9.2.2019 and 22.2.2019 which was found convincing and worthy of satisfaction by the Adjudicating Authority. The letter dated 22.2.2019 has been considered as admission of loan and default of repayment by the Adjudicating Authority. In the absence of any document evidencing the loan agreement placed on record by the financial creditor, the only indirect proof of purported loan is contained in the letters dated 15.4.2018 and 9.2.2019 sent by the financial creditor to the corporate debtor, wherein no specific amount of dues either in principal or interest payable to the financial creditor is mentioned - the admission order under section 7 of IBC passed by the Adjudicating Authority stands on shaky foundation. The section 7 application was submitted by Nandakini Contractors fraudulently in collusion with the corporate debtor to seek an admission order for CIRP of the corporate debtor, and such an admission order was given by the Adjudicating Authority without proper and adequate scrutiny of the contents of the section 7 application and without examination of material therein. Was the constitution of CoC with the inclusion of a number of financial creditors vitiated as they were related parties closely connected with the CD, and were the approvals and resolutions passed in the meetings of CoC vitiated and bad in law? - HELD THAT - An important issue that has been raised by the Appellants is about piercing the corporate veil to be able to understand the actions and role of various companies that have shown stake in the CIRP - as corporate debtor, applicant financial creditor, members of CoC and the successful resolution applicant. Their connections with each other and consequently their role in filing of the section 7 application and in the CIRP would then become apparent - Section 2(27) of The Companies Act, 2013 states that control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner . The inter-connections between the corporate debtor, financial creditor Nandakini, members of the CoC and the holding companies of the Successful Resolution Applicant through common directors sitting on the board of more than one company, different levels of shareholdings and common registered addresses and working-email IDs thus adds strength to the argument that they belong to the same group of companies working towards common objective insofar as the CIRP in the instant case goes - looking at the events in this case from the lens of the nature, involvement and conduct of the companies, we find the inference inescapable that these companies were acting in concert and being guided and led by a controlling mind as part of a fraudulent project to defraud the creditors of the corporate debtor by misusing the instrumentality of the IBC, completely against its objectives and spirit and such actions, which are infringing the provisions of the IBC cannot be condoned or overlooked. The constitution of CoC with related parties of the corporate debtor participating in the CoC as a majority, is also vitiated. Consequently, we find force in the submission of the Appellants HIL and HIW Workers Union that the corporate debtor is influencing decisions in the CoC and through members of the CoC, who have shareholding and through the CoC. The decisions, therefore, that are taken in the CoC meetings are coloured and are infringement of second proviso of section 21(2). Was the Successful Resolution Applicant Regus Impex Private Limited disqualified to submit a resolution plan for the corporate debtor? - HELD THAT - The Constitution of the Committee of Creditors violates the proviso to Section 21(2) of the I B Code 2016 read with 12(3) of CIRP Regulations. Therefore, the Constitution of the creditors' committee is a nullity in the eye of law that vitiates the entire CIRP. Liquidation is like a death knell for the corporate entity/corporate person. Liquidation based on the resolution of the CoC, which consists of related party Financial Creditors having 77.20% vote share, is a matter of grave concern - It is also pertinent to mention that when the Constitution of the Committee of Creditors itself is found to be tainted, then the decisions of that COC cannot be validated on any pretext even it is about exercise of commercial wisdom. In the present case, as the initiation of CIRP itself has been found to be tainted and faulty, and in addition, the subsequently constituted CoC is also found to include parties that are connected with each other and acting in concert with the corporate debtor and other parties, we are of the opinion that the interest of justice would be served if the admission order under section 7 passed by the Adjudicating Authority is quashed. We, therefore, set aside the said admission order which would lead to all the other actions including CIRP as non est and null and void - Thus, beginning with the initiation of CIRP to the constitution of CoC, its various decisions and resolutions and the denial of opportunities to the workers to submit their claims (although such a request was not made explicitly and also there was a delay when the HIW Workers Union contacted the RP for copies of Section 7 application and pleadings therein), we are of the view that all these proceedings are fraudulent and also reek of malice and are, therefore found to be bad in law. Appeal disposed off.
Issues Involved:
1. Qualification of the financial loan as 'financial debt' under IBC. 2. Legality of the admission of the section 7 application and initiation of CIRP. 3. Constitution of CoC with 'related parties' and the validity of decisions taken. 4. Actions taken by the Resolution Professional and allegations of prejudice. 5. Eligibility of the Successful Resolution Applicant to submit a resolution plan. Detailed Analysis: 1. Qualification of the Financial Loan as 'Financial Debt' under IBC: - Issue: Whether the loan claimed by Nandakini Contractors Pvt. Ltd. qualifies as 'financial debt' under IBC. - Analysis: The financial creditor Nandakini did not submit any document or record regarding the financial loan and/or its disbursement, relying only on letters demanding repayment and confirmation of debt by the corporate debtor. The section 7 application lacked any supporting loan agreement or proof of disbursement, which are essential under the IBC. - Conclusion: The loan claimed does not qualify as 'financial debt' due to the absence of requisite documentation and proof, making the section 7 application and subsequent CIRP initiation legally untenable. 2. Legality of the Admission of Section 7 Application and Initiation of CIRP: - Issue: Whether the admission of the section 7 application and initiation of CIRP were in accordance with the legal requirements of IBC. - Analysis: The section 7 application was admitted without proper scrutiny of the loan agreement and disbursement proof. The Adjudicating Authority's expedited handling of the case, especially in light of the joint request for an urgent hearing by the corporate debtor and financial creditor, indicates possible collusion. - Conclusion: The admission of the section 7 application and initiation of CIRP were not in accordance with legal requirements, suggesting fraudulent and collusive actions between the corporate debtor and financial creditor. 3. Constitution of CoC with 'Related Parties' and Validity of Decisions Taken: - Issue: Whether the CoC was vitiated by the inclusion of 'related parties' and if the decisions taken by the CoC are valid. - Analysis: The CoC included several companies that were 'related parties' to the corporate debtor, as evidenced by common directors, shareholdings, and interconnected business interests. This inclusion violated the provisions of IBC, rendering the CoC's decisions legally void. - Conclusion: The constitution of the CoC was illegal due to the inclusion of 'related parties,' making all decisions and resolutions passed by the CoC null and void. 4. Actions Taken by the Resolution Professional and Allegations of Prejudice: - Issue: Whether the actions taken by the Resolution Professional were in accordance with IBC provisions and free from allegations of prejudice. - Analysis: The RP failed to comply with the Adjudicating Authority's order to provide proof of debts and did not adequately address the workers' claims. The RP's actions displayed a lack of impartiality and due diligence, raising questions about possible collusion and dereliction of duty. - Conclusion: The RP's actions were found wanting and not in compliance with IBC provisions, indicating a prejudiced and partisan approach. 5. Eligibility of the Successful Resolution Applicant to Submit a Resolution Plan: - Issue: Whether the Successful Resolution Applicant, Regus Impex Private Limited, was disqualified to submit a resolution plan. - Analysis: The SRA was closely connected with the corporate debtor and CoC members through common directors and shareholdings, making it a 'related party.' This connection disqualified the SRA under IBC provisions. - Conclusion: The SRA was ineligible to submit a resolution plan due to its status as a 'related party.' Final Directions: 1. The initiation of CIRP and the admission order under section 7 are set aside, leading to the abatement of CIRP and quashing the approval of the resolution plan. 2. A penalty of Rs. Fifty Lakhs each is imposed on Nandakini Contractors Pvt. Ltd. and Hirakud Industrial Works Ltd. under section 65 of IBC. 3. The amount paid by the SRA to the financial creditor is to be refunded within one month. 4. Any payments made or third-party rights created as a result of the approved resolution plan are to be reverted within one month. 5. The IBBI is directed to investigate the conduct of the RP for possible collusion and dereliction of duty. 6. The HIW Workers' Union is at liberty to pursue payment of workers' dues by the corporate debtor.
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