14 July 2021
The corporate insolvency resolution process (“CIRP”) was initiated against INCAB Industries Limited (“Corporate Debtor”). The interim resolution professional (“IRP”) invited claims against the Corporate Debtor and subsequently, the CoC was formed. The CoC decided to liquidate the Corporate Debtor and accordingly an application for the same was filed before the NCLT, Calcutta. A group of employees and a trade creditor opposed (“Appellants”) this application and also filed an application to remove the resolution professional (“RP”) contending that he was colluding with the majority of the creditors. However, the NCLT, Calcutta passed a liquidation order.
The Appellants filed an appeal before the NCLAT. The main issues before the NCLAT included: a) whether entities which were made part of CoC are related parties of the Corporate Debtor under the insolvency law and b) whether IRP/RP can constitute CoC without verifying and admitting or rejecting the claims based solely on submission.
On the first issue, the Appellants contended that two entities of CoC, which formed the majority, are related parties of the Corporate Debtor as both were managed and owned by one of the directors i.e., Mr. Goswami of the Corporate Debtor. On the other hand, the liquidator (who was the RP during the resolution process) of the Corporate Debtor contended that Mr. Goswami was appointed as director of the Corporate Debtor only by means of an order passed by the erstwhile Board for Industrial and Financial Reconstruction in 2009. This order was subsequently set aside by the High Court. Therefore, Mr. Goswami was not a director of the Corporate Debtor. It was also contended that Mr. Goswami resigned from his directorship.
The NCLAT referred to the relevant orders and noted from the annual report and master data of the Ministry of Corporate Affairs that Mr. Goswami’s appointment as director of the Corporate Debtor was based on the resolution of the general meeting held in 1999. He was holding the post of additional director. Under the company law, an additional director holds office up to the next general meeting. Since no general meeting took place after 1999, Mr. Goswami continued to be director till his resignation, which was also much after the commencement of insolvency resolution process. Therefore, as per the insolvency law, the two entities in the CoC were related parties.
On the issue of whether an RP can constitute CoC without verifying and admitting or rejecting, the NCLAT noted that under the insolvency law, IRP invites claims. Based on the collation of the claims, IRP must form the CoC from among the financial creditors. IRP must assign the voting share to each creditor based on the financial debts owed to such creditor. Without verification and admission of a claim, the IRP cannot assign the voting share to a creditor, and without assigning a voting share there cannot be a meeting of the CoC. Since the IRP did not verify the claims, the constitution of CoC is invalid. When the constitution of CoC itself is found to be tainted, then the decision of such CoC cannot be validated on the pretext of exercise of commercial wisdom.
Accordingly, the NCLAT set aside the liquidation order and directed appointment of a new IRP for verification and collation of claims and constitution of CoC.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law
al@acuitylaw.co.in
