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TMI Blog2024 (2) TMI 914X X X X Extracts X X X X X X X X Extracts X X X X ..... eclared NPA or the persons/ entity, which is in control of the management of the Corporate Debtor at the time of submission of Resolution Plan can also be held ineligible under Section 29A, sub-section (c)? - HELD THAT:- The RIPL being 100% subsidiary of the Appellant, it cannot be held that the Appellant was exercising any management or control over the Corporate Debtor through its subsidiary RIPL. By amendment made in Section 29A by Act 26 of 2018 in Section 29A, sub-section (c), the words at the time of submission of resolution plan has an account , declared that ineligibility has to be seen under Section 29A at the time of submission of Resolution Plan. In the present case, date of submission of Resolution Plan by the Appellant is 04.06.2018. The learned Counsel for the Appellant placed reliance on the judgment of the Hon ble Supreme Court in Arcelormittal India Private Limited vs. Satish Kumar Gupta and Ors. [ 2018 (10) TMI 312 - SUPREME COURT ]. In Arcelormittal, the Hon ble Supreme Court had occasion to examine the validity of Section 29A of the IBC - The observations made by the Hon ble Supreme Court in Arcelormittal in paragraph 60, makes it clear that, those who were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate Debtor was given to the Appellant, which is clear from various clauses as noted above. Thus, as per second MoU, the Appellant has to be held to be in control of the management of the Corporate Debtor from the date of execution of the MoU, i.e., 23/28.03.2016 - It is to be noted that it is the Indian Bank, who filed the Application under Section 7, which led to CIRP of the Corporate Debtor. Thus, the Appellant had every opportunity and right to clear the debt of short-term loan, which led to insolvency and the Appellant, who was in management and control of the Corporate Debtor, cannot be heard in saying that it has no opportunity to clear the debt in the proximate time of commencement of CIRP. On the question as to whether the transaction entered on 22.09.2017, under which the Appellant came to have transferred the 100% shareholding to the RIPL, the Adjudicating Authority has considered the issue in detail and recorded that the said transfer was made after the filing of Section 7 Application by the Financial Creditor and was six days before the order was passed initiating the CIRP. The transaction was carried on in cash consideration of Rs.1 lakh, which is despite the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporate Debtor was a company, incorporated for execution of demwe hydro electric project. The Corporate Debtor was incorporated as SPV on 09.07.2007. The Appellant has entered into a Memorandum of Understanding ( MoU ) dated 15.03.2013 with Corporate Debtor and AIPPPL (Athena Infraprojects Private Limited), under which the Appellant undertook to infuse equity capital of 30% into the Corporate Debtor. The Appellant through its 100% subsidiary Regina Infrastructure Pvt. Ltd. ( RIPL ) invested an amount of Rs.235.35 Crores through its 100% subsidiary, i.e. RIPL, which held 21.55% equity in the Corporate Debtor. (ii) The account of the Corporate Debtor was declared NPA on 31.05.2013. (iii) A Joint Lenders Meeting held on 01.10.2015, where it was decided that the Corporate Debtor required financial assistance. On 23/28.03.2016, a MoU was executed between Appellant, Corporate Debtor and other entities of Athena Group, where it was decided that the Appellant shall invest equity share in the Corporate Debtor so as to become 51% shareholder. The MoU contained various terms and conditions and clauses pertaining to investment by the Appellant, management of Corporate Debtor, roles and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s recorded in the minutes of meeting dated 15th June, 2018; d) Pending the disposal of the present application, pass an ex-parte ad interim order restraining the Resolution Professional/ Committee of Creditors from entering into any discussion or negotiations with SPICL; e) Pending the disposal of the present Application, pass orders/ directions injuncting the Resolution Professional/ Committee of Creditors from carrying on with the resolution process any further; f) Pass orders confirming the ad-interim injunction prayed for above, upon return of motion; g) Pass such other order/ orders as it may deem fit and proper. (viii) The RP filed a reply to the A No.237 of 2018, to which a rejoinder was filed by the Appellant. The CoC also filed its reply to the CA filed by the Appellant. (ix) The Adjudicating Authority by the impugned order dated 26.05.2023 concluded that the Appellant is disqualified under Section 29A. Conclusions of the Adjudicating Authority recorded in paragraph 54 to 58 are as follows: 54. As per the Judgement of the Hon'ble Apex Court in ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1, the amendment in Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebtor/ADPL, raises serious doubts about the fairness of the transaction. In the circumstances, there exists sufficient ground for agreeing with the contention of CoC/RP that the transaction was a sham. (v) Even otherwise, on lifting the Corporate Veil of Regina (RIPL), we found that the Applicant/Navayuga (NECL) was exercising control over Regina (RIPL) through the Directors of its Related/Connected Companies even on the date of submission of the Resolution Plan. 56. We have also noted, in paragraph 53 above, from the documents placed on record that the Corporate Debtor was NPA since 31.05.2013. 57. The Section 29A(c) of IBC, 2016 has three essential conditions that viz, (a) the account of the Corporate Debtor must be NPA, (b) such account must be under the management or control of such persons (Resolution Applicant) or of whom such person is a Promoter, and (c) at least a period of one year has elapsed from the date of such classification till the date of commencement of CIR process of the Corporate Debtor. 58. In the instant case, we have found that all the three ingredients of the Section 29A(c) are met i.e., (a) the account of the Corporate Debtor/ADPL was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % in the Corporate Debtor. Process for approval by the Lenders remained pending and equity share of 51% could not be invested by the Appellant, hence, the Appellant cannot be said to have acquired management and control of the Corporate Debtor. The MoU dated 23/28.03.2016 was a conditional/ contingent contract, which conditions/ contingencies were never satisfied. The learned Counsel for the Appellant has specially relied on Clause 1.9 of MoU dated 23/28.03.2016 to support his submission. The rights contemplated in the MoU were to be given in future in consideration of Appellant s performing its obligation and to pass on the management and control, the investment was a must. The definitive Shareholders Agreement, as per Clause 1.8 had to be entered into, which was not done. Subsequent emails exchanged between Corporate Debtor, REC and Appellant, do not show any control over the Corporate Debtor of the Appellant. The emails were exchanged for the purposes of sharing information for appraisal process of the project and the Appellant was to submit all information/ documents to REC for timely completion of the process. The Adjudicating Authority erred in relying on the correspondence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and control over the Corporate Debtor even before further infusion of the funds by the Appellant. As per MoU, NEC was to arrange all future fund requirements to meet the Debt Equity Ratio for implementation of the project. Clauses of First and Second MoU dated 23/28.03.2016 when read together, clearly indicate that the Appellant was given control and management of the Corporate Debtor, which disqualify the Appellant under Section 29A(c). All relevant correspondence between the parties and the emails sent by the Appellant, reflects control over all functions of the Corporate Debtor, including policy decision which were placed before the Adjudicating Authority, which have been rightly relied by the Adjudicating Authority for coming to the conclusions that Appellant is in control and management of the Corporate Debtor. The Appellant is a substantial shareholder in the Corporate Debtor through RIPL. 6. The learned Counsel for the CoC, refuting the submissions of the Appellant, submits that the Appellant who is vested with rights exercisable under an arrangement/ agreement is a Promoter. The Appellant is a Promoter by virtue of MoU dated 23/28.03.2016. There is specific clauses in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission of Resolution Plan can also be held ineligible under Section 29A, sub-section (c)? (II) Whether as per Second MoU dated 23/28.03.2016 entered between the Appellant, Corporate Debtor and Athena Group, the Appellant can be held to be in control and management of the Corporate Debtor with effect from the date of execution of the MoU? (III) Whether transfer of 100% of shareholding by the Appellant in its subsidiary RIPL on 22.09.2017 was a sham transaction? (IV) Whether the Adjudicating Authority committed error in holding Appellant, disqualified, to submit the Resolution Plan under Section 29A (c) of the IBC? Question No. (I) 10. The first question needs to be answered is with regard to the scope and ambit of Section 29A (c). Section 29A was inserted in the Code by Act 8 of 2018 w.e.f. 23.11.2017. The Statement of Object of the Act 8 of 2018, which is relevant to throw light on the purpose of object of enactment is as follows: The provisions for insolvency resolution and liquidation of a corporate person in the Code did not restrict or bar any person from submitting a resolution plan or participating in the acquisition process of the assets of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of this clause, where a resolution applicant has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset and such account was acquired pursuant to a prior resolution plan approved under this Code, then, the provisions of this clause shall not apply to such resolution applicant for a period of three years from the date of approval of such resolution plan by the Adjudicating Authority under this Code; 12. The submission, which has been advanced by the Appellant is that the expression an account of the Corporate Debtor, under the management or control for such person or such person is a promoter, classified as Non-Performing Asset , disqualifies only those persons or promoters, who cause/ led or were responsible for Corporate Debtor s account to be declared as NPA. The submission is that Corporate Debtor s account was declared NPA on 31.05.2013, on which date, neither the Appellant was Promoter, nor it has management and control of the Corporate Debtor. It is submitted the basis of disqualification of the Appellant is the Second MoU dated 23/28.03.2016, which admitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a Director cannot apply and a person who is prohibited under the SEBI Act cannot apply. So these are statutory disqualifications. And there is also a disqualification in clause (c) with regard to those who are corporate debtors and who as on the date of the application making a bid do not operationalise the account by paying the interest itself i.e. you cannot say that I have an NPA. I am not making the account operational. The accounts will continue to be NPAs and yet I am going to apply for this. Effectively this clause will mean that those who are in management and on account of whom this insolvent or non-performing asset has arisen will now try and say, I do not discharge any of the outstanding debts in terms of making the accounts operational and yet I would like to apply and set the enterprise back at a discount value, for this is not the object of this particular Act. So Clause 5 has been brought in with that purpose in mind. (emphasis supplied) 13. The observations made by the Hon ble Supreme Court in Arcelormittal in paragraph 60, makes it clear that, those who were at a reasonably proximate point of time before the submission of Resolution Plan were in con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in paragraph 60 as extracted above has used the expression the affairs of the persons referred to in Section 29A are so arranged, as to avoid paying off the debt of the non-performing asset concerned, such persons must be held to be ineligible to submit a resolution plan, . Thus, persons in the management and control of the affairs of the Corporate Debtor, who led the Corporate Debtor to slip into NPA and persons, who are in the management and control of the affairs of the Corporate Debtor in the close proximate of time, before the submission of Resolution Plan, who failed to pay the debt of the Corporate Debtor, are also ineligible. We, thus, are satisfied that narrow interpretation of Section 29A (c) put by learned Counsel for the Appellant, cannot be accepted. Thus, the submission of the Appellant that since the Appellant was not in control and management of the Corporate Debtor admittedly on 31.05.2013, when the Corporate Debtor s account declared as NPA, he cannot be held to be ineligible under Section 29A, cannot be accepted. The relevant date for examining the ineligibility is the date of submission of Resolution Plan. We, thus, answer Question No.(I) in fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was the date of signing of the MoU and was not dependent on 51% equity investment by the Appellant. The learned Counsel for the RP has referred to various correspondences and letters written by the Appellant subsequent to 23/28.03.2016. It is submitted that learned Counsel for the Appellant is selectively reading the clauses of MoU and if the MoU is read as a whole the intendment of the parties will be clear that management and control was handed over w.e.f. effective date. It is submitted that in the Corporate Debtor, the Appellant has already invested Rs.236 Crores through its wholly owned subsidiary RIPL and the action of the Appellant transferring 100% shareholding in RIPL, six days before the initiation of CIRP was a sham transaction, just to get rid of its shareholding in the RIPL, which transaction has rightly been held as sham by the Adjudicating Authority relying on all relevant materials on record. 18. We have noticed that the Appellant has invested Rs.236 Crores in the Corporate Debtor in pursuance of MoU dated 15.03.2013, through its wholly owned subsidiary RIPL. The Appellant through its wholly owned subsidiary have 21.55% equity share in the Corporate Debtor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MoU provides as follows : 1.8. The Parties have arrived at revised business understanding with respect to investment in ADPL and implementation of the Project. Accordingly, in supersession of the Old Moa, the Parties have agreed that NECL shall be holding 51% (fifty one percent) equity share capital of ADPL at the time of COD and are entering into this binding MOU, to record the principal terms of their renewed understanding in relation to operations of the business of ADPL and implementation of the Project. Subsequently, this MoU would be converted into a shareholders agreement and/or any such other agreements ( Definitive Agreements ), which would govern their respective rights and obligations as joint venture partners and shareholders of ADPL and the manner in which the rights and obligations of Parties shall be discharged. 21. A perusal of the above clause indicates that two principal agreements between the parties have been recorded i.e. - (i) parties have agreed that NECL shall be holding 51% equity share capital of ADPL; and (ii) are entering into its binding MOU, to record the principal terms of their renewed understanding in relation to operations of the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall have right to nominate its directors on the board of directors of ADPL ( Board ) and NEC nominated directors shall form the majority of reconstituted Board. 3.3 From the Effective Date, all matters listed in Annexure A of the MOU shall require the affirmative vote of the NEC nominee directors in the board meeting(s) of ADPL and shall require the affirmative vote of the NEC representatives in the shareholder s meeting(s) of ADPL as the case may be to be passed successfully. 3.4 From the Effective Date, NEC shall have the right to appoint or replace the Key Managerial Personnel like Managing Director and Chief Financial Officer of ADPL. 3.5 Subject to the provisions of the Companies Act, 2013, from the Effective Date, the presence of at least 2 (two) Directors nominated by NEC shall be mandatory for form requisite quorum for all board meeting(s). 3.5 All the general meetings of the shareholder of ADPL and the Board of ADPL shall be governed by the provisions of this MOU. From the Effective Date, the presence of at least 1 (one) NEC representative shall be mandatory to form the requisite quorum for any meeting of shareholders of ADPL. 3.6 The dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the MOU was binding on all the parties. Clause 8.5 is as follows: 8.5. Binding : this MOU is binding in nature. 29. It is well settled that a document is to be read as a whole to find out its intention and purpose. The MoU became effective from the date of execution as per the clauses as quoted above. Annexure to the MoU clearly contemplated the matters, which required Affirmative votes or approvals of the NEC. Annexure of the MoU is as follows: ANNEXURE Matters requiring an Affirmative votes/ approvals of NEC nominee Directors and their representatives in Board Meeting(s) and Shareholders meeting(s) 1. Reconstitution of the existing Project Management Committee ( PMC ) and change in its delegated roles, responsibilities and authorities. 2. Review of all existing delegation of authorities, contracts, arrangements, management personnel, employees and any other aspect related to execution of the Project and any additions and modifications therein. 3. Appointment of re-appointment of Chief Financial Officer of ADPL ( CFO ). 4. In absence of CFO, delegation of financial powers typically exercised by a CFO to any other person. 30. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Indian Bank. It is to be noted that it is the Indian Bank, who filed the Application under Section 7, which led to CIRP of the Corporate Debtor. Thus, the Appellant had every opportunity and right to clear the debt of short-term loan, which led to insolvency and the Appellant, who was in management and control of the Corporate Debtor, cannot be heard in saying that it has no opportunity to clear the debt in the proximate time of commencement of CIRP. 34. The Adjudicating Authority after considering all relevant materials has come to the conclusion in paragraph 55 to 58, which we have already quoted in paragraph 2(ix) of this judgment. 35. On the question as to whether the transaction entered on 22.09.2017, under which the Appellant came to have transferred the 100% shareholding to the RIPL, the Adjudicating Authority has considered the issue in detail and recorded that the said transfer was made after the filing of Section 7 Application by the Financial Creditor and was six days before the order was passed initiating the CIRP. The transaction was carried on in cash consideration of Rs.1 lakh, which is despite the fact that the Appellant had given loan of Rs.328 Crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us. 36. The shareholding was transferred to only two persons, i.e., Mr. K. Vijaybhaskar and C. Vijay Kumar, who were all Directors and Officials of NEC and C. Vijay Kumar was also related. The Adjudicating Authority after considering all materials including the Balance Sheets/ Financial Statements etc. of RIPL has come to the finding that transaction dated 22.09.2017 was a sham transaction. All relevant materials were considered by the Adjudicating Authority and in paragraph 50 has held the following: 50. Thus, we have examined the transaction of shares in Regina (RIPL) from both angles. Not only, we did not find any reason to differ with the contention of RP/CoC that the transaction was a sham, but also even for the sake of argument, while assuming the transaction to be genuine, we found that the Applicant/NECL was exercising control over Regina (RIPL) through the Directors of its Related/ Connected Companies. Hence, we find no merit in the contention raised by the Applicant/NECL that after the sale of its shareholding, it was not in a position to control Regina (RIPL) hence, it cannot ADPL/Corporate Debtor. 37. We fully concur with the view of the Adjudicating A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersons 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 . This definition is an inclusive one and not exhaustive and it has two distinct and separate features : (i) the right to appoint majority of Directors or, (ii) the ability to control the management or policy decisions by various means referred to in the definition. This control of management or policy decisions could be by virtue of shareholding or management rights or shareholders agreement or voting agreements or in any other manner. This definition appears to be similar to the one as given in Black's Law Dictionary (Eighth Edn.) at p. 353 where this term has been defined as under: Control The direct or indirect power to direct the management and policies of a person or entity, whether through ownership of voting securities, by contract, or otherwise; the power or authority to manage, direct, or oversee. Control, according to the definition, is a proactive and not a reactive power. It is a power by which an acquirer can command the target company to do what he want ..... X X X X Extracts X X X X X X X X Extracts X X X X
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