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TMI Blog2022 (1) TMI 1286X X X X Extracts X X X X X X X X Extracts X X X X ..... ered as MA 518 of 2020 in Company Petition (IB) No. 4258/2019 under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (in short 'I&B Code'), seeking participation in the CoC[1] of DHFL, rejected by the Adjudicating Authority/NCLT holding that the Appellant is not entitled to attend the meetings of the Committee of Creditors as member of the erstwhile Board of Directors. 1.2. The Appellants are the superseded Directors on the Erstwhile Board of Directors of the Corporate Debtor, i.e. Dewan Housing Finance Corporation Limited ("DHFL"). The Appellants are also personal guarantors for various loans the Corporate Debtor avails. The Corporate Director is a Housing Finance Company regulated under the National Housing Bank Act, 1987(for brevity 'NHB Act') and Reserve Bank of India Act, 1934 ('RBI Act'). On 15 November 2019, the Central Government made Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudication Authority) Rules, 2019 (for brevity 'FSP Rules') that provide CIRP for Financial Service Providers such as DHFL. 1.3. On 20 November 2019, RBI exercised its power under Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presentative, including by video conferencing. b) A direction to the Respondent/Administrator to furnish records and notices of meetings of the COC held so far; c) A direction to the Respondent/Administrator to send advance notice of each meeting of the COC along with the agenda and copies of the documents relevant for such meetings; d) A direction to the Respondent/Administrator not to implement any decision taken at the meetings of the COC held without the presence of the Appellant. (verbatim copy) 1.9. The AA/NCLT rejected the above-said Intervention Application and passed the Impugned Order dated 28 April 2020, which is challenged in this Appeal. 1.10. Company Appeal No. CA 647 of 2021 is filed against the impugned Order dated 7 June 2021 in IA No. 701 of 2021 in Interlocutory Application No. 449 of 2021 in company petition CP/IB/4258/MB/C-II/2019. By the impugned Order, the Adjudicating Authority has rejected the prayer of the Appellant to be provided with a copy of the IA No. 449 of 2021 along with a copy of the Resolution Plan submitted by 2nd Respondent. 1.11. The Appellant contends that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eded before the initiation of CIRP, same had no impact whatsoever on the rights under the Code. 3.2. The learned counsel for the RBI[3] and Piramal[4] submitted that only "suspended" directors had rights under the Insolvency and Bankruptcy Code, 2016, as opposed to the Appellant's who were part of the "superseded" Board of Directors under Section 45 (I-E) of the Reserve Bank of India act, 1934. However, given the context and the scheme of the Code, there is no legal difference between a "superseded" director and a "suspended" Director. 3.3. The Code was made applicable to DHFL under the Financial Service Providers Rules ("FSP rules"). Rule 4 deals with the insolvency of a Financial Service Provider. Rule 5 provides that the entire Code applies mutatis mutandis to a Corporate Debtor under the 'FSP Rules' subject only to modifications provided under Rule 5. Admittedly, there has been no such modification whatsoever. Moreover, once the RBI as the Applicant elected to proceed under the Code, the corporate debtor cannot recourse to the RBI Act to deprive the Appellant of an opportunity to participate in CoC meetings and obtain copies of the relevant documents, under the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s wholly misconceived. The Appellant further emphasised that in the RBI Act, there is no provision on "superseded" Directors being made part of a Board of Directors of the reconstituted by the RBI. As such, legally speaking, a "supersession" under the RBI Act is not necessarily a permanent extinguishment of rights but could be a temporary eclipse. This makes the purported difference between the "suspended" and "superseded" even less significant. 3.8. Therefore, in the absence of any modifications under Rule 5, coupled with the same legal effect of "supersession" and "suspension" under the Code; the purpose, object, text and context of the Code must guide the recognition of the rights of the erstwhile Board of Directors, Guarantors and Shareholders. 3.9. Respondent urged that Kapil Wadhawan was estopped from raising the contention of denying participation in the CoC. However, he did not take any steps after addressing correspondence requesting the same. This argument is wholly misconceived as both Kapil Wadhwan and Dheeraj Wadhwan similarly placed being aggrieved by the Administrator's actions in denying participation to them in the COC. 3.10. The Appellant refers to the Judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.1. The Respondent submitted that on a bare reading of Section 45-IE (4) of the RBI Act, 1934, it is clear that upon exercise of the power under Section 45-IE, the Directors, including the Appellant, vacated their office and all powers stood vested in the Administrator appointed. The vacating of office by the Board of Directors was not temporary and has finality attached to it. RBI's action has not been disputed or challenged in any manner whatsoever, including the Appellant. 4.2. The Respondent further submitted that on 03 December 2019, when Company Petition No. 4258 of 2019 was admitted by the Adjudicating Authority for initiation of CIRP, there was no Board of the Corporate Debtor existing, as the Directors of the erstwhile Board of CD (including the Appellant) had already vacated their offices and their powers having stood vested in the Administrator under Section 45-IE of RBI Act on 20 November 2019. Therefore, there is no question permitting the Appellants to participate in the CoC meetings. However, the action of RBI in the supersession of the erstwhile Board of CD had resulted in the vacation of office of Directors of the erstwhile Board, that too much before the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the stipulated timelines. At this stage, any delay in the process on account of the present Appeal will cause severe prejudice and derail the CIRP, thereby affecting the interest of DHFL's Stakeholders. Therefore, the Adjudicating Authority has correctly passed the Order after considering all the relevant factors and applying the precise position of law as emanating from the RBI Act and Code. Therefore, the Appeal ought to be dismissed. 4.6. Heard the arguments of the Learned Counsel for the parties and perused the records. The points that arise for our consideration in these Appeals are as under; 1. Is there a difference between the 'supersession of Directors' under the RBI Act and the 'suspension of Directors' under the Code? 2. Whether a 'Superseded director', who had vacated office on supersession of Board under RBI Act, is entitled to the notice of CoC meeting and has the right to participate in the meeting of the CoC? 5. Analysis 5.1. Kapil Wadhwan and Dheeraj Wadhwan (the Appellants in CA (AT) (Ins) No's 647/2021 and 785/2021) are the promoters, major shareholders, erstwhile directors and guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to participate in the CIRP. 5.6. For the present Appeal, it is relevant to take note of Section 45-IE of the RBI Act, which is as follows: [45-IE. Supersession of Board of directors of non-banking financial Company (other than Government Company).-(1) Where the Bank is satisfied that in the public interest or to prevent the affairs of a non-banking financial company being conducted in a manner detrimental to the interest of the depositors or creditors, or of the non-banking financial company (other than Government Company), or for securing the proper management of such Company or for financial stability, it is necessary so to do, the Bank may, for reasons to be recorded in writing, by Order, supersede the Board of Directors of such Company for a period not exceeding five years as may be specified in the Order, which may be extended from time to time, so, however, that the total period shall not exceed five years. (2) The Bank may, on supersession of the Board of Directors of the non-banking financial Company under sub-section (1), appoint a suitable person as the Administrator for such period as it may determine. (3) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n exercise of the said power by the RBI[5], the Board of Directors vacates their office. In other words, the vacating of office of the said Board of Directors has finality attached to it. The Appellant's contention that Section 45-IE of the RBI Act does not bar the said directors who have vacated their offices from becoming directors of the Company when the Board is reconstituted cannot and does not alter the precise position that the supersession of the directors and their vacation of office is final and that their appointment, if at all, at a subsequent stage (and if fulfilling criteria of being fit and proper) is a fresh/new appointment and not a continuation of the original offices as Directors of the Company. 5.8. On 28 November 2019, the RBI exercised its power under Section 45-IE (2) of the RBI Act and superseded the Board of Directors of DHFL. This was done as the business of DHFL has been conducted in a manner that was detrimental to the interest of the depositors DHFL's creditors, which led to a severe deterioration in DHFL's financial position. Given the above, the then Board of Directors of DHFL vacated their respective offices on 20 November 2019. In other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) members of the suspended Board of Directors or the partners of the corporate persons, as the case may be; (c) operational creditors or their representatives if the amount of their aggregate dues is not less than ten per cent of the debt." 5.13. On a bare reading of Section 24(3)(b) of the Code, it is clear that the notice of each meeting of the Committee of Creditors is required to be given to the 'suspended' Board of Directors. The word 'suspended' used in Section 24(3)(b) of the Code is clearly and directly relatable to the words 'suspended' in Section 17(1)(b) of the Code. In other words, it is those directors whose powers stand 'suspended' under Section 17(1)(b) of the Code by appointment of the Interim Resolution Professional that is entitled to receive notice of the meetings of the Committee of Creditors under Section 24(b) of the Code. In the present case, it is an admitted position that with effect from 20 November 2019, upon the RBI exercising powers under Section 45-IE of the RBI Act, the Board of Directors of DHFL stood superseded and had vacated o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fice under Section 45-IE has finality, attached to it. Accordingly, any appointment of such a person as a Director on the 'reconstituted' Board of Directors under Section 45-IE(7) of the RBI Act the period of supersession is over, is a new appointment (which will undoubtedly be required to satisfy all legal requirements, including of being a 'fit and proper person' at that stage) and is not a continuation of the original appointment as Director, but a fresh/new appointment. 5.16. However, such a further appointment may be possible when the Board of Directors is reconstituted. Therefore, it cannot take away from the supersession under Section 45-IE(2) of the RBI Act, when ordered by the RBI, has attained finality. Therefore, those directors who were already removed and dismissed are deemed to have vacated office under the RBI Act w.e.f the date of supersession of the Board. 5.17. The Appellant has relied on the decision of the Hon'ble Supreme Court in Vijay Kumar Jain vs Standard Chartered Bank to contend that the word 'erstwhile' or 'former' directors used in the said judgment would mean that Directors who have vacated office under Section 45-I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Learned Senior Counsel about the applicability of the doctrine of election in this case. Appellant contends that RBI as the Applicant elected to proceed under the Code, the Administrator cannot take recourse to the RBI Act to deprive the Appellant of an opportunity to participate in CoC meetings and obtain copies of relevant documents. 5.22. Relevant CIRP Rules is given for ready reference: "Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. 4. General modifications.- For the purposes of these rules, in all the provisions relating to insolvency and liquidation proceedings under the Code,- (i) for the expression "corporate debtor" wherever they occur, shall mean "financial service provider"; and (ii) for the expressions "insolvency professional", "interim resolution professional", "resolution professional" or "liquidator", wherever they occur, shall mean "administrator". 5. Corporate Insolvency Resolution Process of financial servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors are those Directors who have been removed or deemed to have demitted office and who are not holding the position of Director on the CIRP commencement date, cannot be considered a Director Simpliciter to benefit from participating in the meeting of CoC. Section 45-IE (4)(a) of the RBI Act provides that upon making an order of supersession of the Board of Directors of a non-banking financial company, Director shall from the supersession of the Board of Directors vacate their offices. Section 45-IE of the RBI Act empowers the RBI for the supersession of the Board of Directors of a non-banking financial company. After vacation or removal from the office of the Director, the said person cannot claim their entitlement to participate in the CoC of the Corporate Debtor. A removed Director from the Board of Directors cannot interfere in the Company's affairs per contra a suspended Director always remains on the Board. Given the law laid down by Hon'ble Supreme Court Vijay Kumar Jain' case, it is clear that Director Simpliciter can participate in the CoC of the Corporate Debtor. However, the person who is not in the office and deemed to have vacated the office under the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liberately deals with confidentiality provisions requiring all parties involved in the resolution process to keep the Information provided therein confidential. Further, the Appellant submitting that the Resolution Plan may become public after its approval by the learned tribunal does not justify overriding the confidentiality provisions. Allowing such parties to receive a copy of the Resolution Plan would not only jeopardise the revival and Resolution in the form of successful implementation of the Resolution Plan for the corporate debtor but also set a dangerous precedent where any party would seek a copy of the Resolution Plan that the COC has already approved. 5.31. It is important to mention that CIRP Regulation 36(4) imposes a duty on the RP to share the Information Memorandum with the members of CoC after an undertaking of confidentiality of Information. However, the Appellants are not a member of CoC, and they have been removed from the erstwhile Board of DHFL and have vacated the office before initiation of CIRP of the Corporate Debtor. Therefore, they are not entitled to participate in the CoC meetings or share the documents. 5.32. Regulation 36 is quoted below for read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem; (j) [* * *] (k) [* * *] (l) other Information, which the Resolution professional deems relevant to the committee. (3) A member of the committee may request the Resolution professional for further Information of the nature described in this Regulation and the Resolution professional shall provide such Information to all members within reasonable time if such Information has a bearing on the resolution plan. [(4) The Resolution professional shall share the information memorandum after receiving an undertaking from a member of the committee [* * *] to the effect that such member or resolution applicant shall maintain confidentiality of the Information and shall not use such Information to cause an undue gain or undue loss to itself or any other person and comply with the requirements under sub-section (2) of Section 29.]" 5.33. The Appellants adverted to the observations of the Hon'ble Supreme Court in Paragraphs 14, 16, 17, 19.5, 20-23 & 25 in the case of Vijay Kumar Jain v. Standard Chartered Bank, MANU/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Committee of Creditors, yet, they would certainly have a right to be given a copy of the resolution plans before such meetings are held so that they may effectively comment on the same to safeguard their interest. 17. However, it was argued before us that the Notes on Clauses to Section 24 make it clear that the erstwhile members of the Board of Directors are participants in these meetings only so that the Committee of Creditors and the Resolution professional may seek Information from them. The Notes on Clauses, heavily relied upon by the learned counsel for the respondents, read as follows: "Clause 24 prescribes the modalities for the meeting of the Committee of Creditors. The meetings are conducted by the Resolution professional and may be attended by the members of the Board of Directors or partners of the corporate debtor. This gives an opportunity for the Committee of Creditors and the Resolution professional to seek Information that they may require to assess the financial position of the corporate debtor and prepare a resolution plan." (emphasis supplied) &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all stakeholders, and under sub-regulation (3)(a), a resolution plan shall demonstrate that it addresses the cause of default. This Regulation also, therefore, recognises the vital interest of the erstwhile Board of Directors in a resolution plan together with the cause of default. It is here that the erstwhile Directors can represent to the Committee of Creditors that the cause of default is not due to the erstwhile management, but due to other factors which may be beyond their control, which have led to non-payment of the debt. Therefore, a combined reading of the Code as well as the Regulations leads to the conclusion that members of the erstwhile Board of Directors, being vitally interested in resolution plans that may be discussed at meetings of the Committee of Creditors, must be given a copy of such plans as part of "documents" that have to be furnished along with the notice of such meetings. 22. As a result of the aforesaid discussion, the arguments of the respondents that "committee" and "participant" are used differently, which would lead to the result that resolution plans need not be furnished to the erstwhile members of the Board of Directors, must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant in each of these cases will then convene a meeting of the CoC within two weeks thereafter, which will include the appellants as participants. The CoC will then deliberate on the resolution plans afresh and either reject them or approve of them with the requisite majority, after which, the further procedure detailed in the Code and the Regulations will be followed. For all these reasons, we are of the view that the petition and Appeal must be allowed and the NCLAT judgment [Vijay Kumar Jain v. Standard Chartered Bank Ltd.,] set aside." (emphasis supplied) 5.34. The above-mentioned case law is not applicable in the present case as Superseded Directors are those Directors who have been removed or deemed to have demitted office and who were not holding the position of Director on the CIRP commencement date, cannot be considered a Director Simpliciter to benefit from participating in the meeting of CoC. Section 45-IE (4)(a) of the RBI Act provides that upon making an order of supersession of the Board of Directors of a non-banking financial company, Director shall from the supersession of the Board of Directors vacate their offices. After vacation or remo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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