Aria Hotels And Consultancy Services Private Limited & Anr. vs Asian Hotels (West) Limited & Ors.

Order pronounced in open Court vide separate sheets.

I.A./656/ND/2023 in C.P.(IB)/571/2021 stands dismissed.

The restraint imposed vide the Interim order dated 02.02.2023 stands vacated in all respects.

PER: SH. P.S.N. PRASAD, HON’BLE MEMBER (JUDICIAL)

PER: DR. BINOD KUMAR SINHA, MEMBER (TECHNICAL)

The instant application is jointly filed on behalf of M/s. Aria Hotels and Consultancy Services Private Limited („Applicant No.1‟) and Mr. Sandeep Gupta („Applicant No.2‟) under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 read with Rule 11 of National Company Law Tribunal Rules, 2016, inter alia, seeking the following relief(s):-

The Corporate Insolvency Resolution Process was initiated against M/s. Asian Hotels (West) Limited („Corporate Debtor‟) by this Adjudicating Authority vide order dated 16.09.2022 on an application originally filed by Yes Bank Limited, and later substituted by JM Financial Asset Reconstruction Company Limited. The Corporate Debtor is the owner of a hotel under the brand name 'Hyatt' located in Mumbai and the same has been shut since June 2021. Mr. Sapan Mohan Garg was appointed as the Interim Resolution Professional of the Corporate Debtor and was later confirmed as the Resolution Professional of the Corporate Debtor by the Committee of Creditors („CoC‟) with 100% voting in favor vide CoC‟s resolution dated 08.12.2022. The JM Financial Asset Reconstruction Company Limited had further assigned the debt of the Corporate Debtor to M/s. UV Asset Reconstruction Company Limited („UVARCL‟) vide deed of assignment dated 30.11.2022. The Resolution Professional had revised the list of creditors accordingly and accordingly, the CoC is reconstituted with two members being (i) UV Asset Reconstruction Co. Limited („UVARC‟) having 98.94% voting share in CoC and (ii) M/s. PTC India Financial Services Limited („PTC‟) having 1.16% voting share in CoC of the Corporate Debtor.

M/s. Aria Hotels and Consultancy Services Private Limited („Applicant No.1‟) is a subsidiary of M/s. Asian Hotels (West) Limited („Corporate Debtor‟) wherein the Corporate Debtor holds 99.98% equity shares of the Applicant No.1 Company and Mr. Sandeep Gupta („Applicant No.2‟) is the director and minority shareholder of the Applicant No.1. The Board of Directors of the Applicant No.1 comprises of 4 other directors in addition to Mr. Sandeep Gupta, two of whom are independent directors. Applicant No.1 is a going concern which owns a luxury 5-star hotel in Aerocity, New Delhi under the brand name JW Marriott by way of an operating agreement dated 18.12.2009 executed between the Applicant No.1 and M/s. Marriot Hotels India Private Limited, by virtue of which Marriot is operating the hotel of Applicant Company No.1 while the Applicant Company No.1 receives royalty from Marriot as per terms of the Operating Agreement. Mr. Sapan Mohan Garg, Resolution Professional is the Respondent No.1 and Committee of Creditors of Asian Hotels (West) Limited through its Lead Member M/s. UV Asset Reconstruction Company is the Respondent No.2 in the present application.

Briefly stated facts of the present case as averred by the applicants and relevant for adjudication of the present issue are that the 5^th CoC Meeting of the Corporate Debtor was conducted on 16.01.2023 and the Committee of Creditors passed two resolutions :(i) a resolution bearing Item No. B2 to first change the management of the Applicant No.1 under Section 28(1)(j) of the Code, 2016 and (ii) second resolution, to authorize the Respondent No.1/RP to take all necessary steps/actions that may be required for changing the management of the Applicant No.1 including nominating the directors of the Board of Applicant No.1, calling/convening EoGM of Applicant No.1 on behalf of the Corporate Debtor as a shareholder of Applicant No.1 for the purpose of changing the management of the Applicant No.1.

The Applicants further submitted that the said resolutions give the powers to the Respondent No.2 to take control of the management of the Applicant Company No.1, which by necessary extension and for all practical purposes means that the RP would also take control over the assets of the Subsidiary Company/Applicant No.1. Further, it was submitted that as per the provisions of the Code, 2016 an RP of a Corporate Debtor cannot take control and custody over the assets of the subsidiary of Corporate Debtor being a separate legal entity not subject to CIRP and therefore, the impugned resolutions of the CoC are effectively an attempt to do indirectly what cannot be done directly.

It was further submitted that there is no material on record that reflects any reason for the replacement of current management of the Applicant No.1 as the Applicant No.1 is a solvent and profit making company. The Applicant No.1 has been audited by its own lenders on regular basis and each time the lender appointed auditor has certified that there is no mismanagement or irregularity in the running of the Applicant No.1. Also, it was submitted that any substantial change in the management of the Applicant No.1 would trigger an event of Default in the loan agreements of the Applicant No.1, which may lead to a situation of the insolvency of the Applicant No.1 itself which would be harmful for all the entities.

The Respondent No.1, i.e., Mr. Sapan Mohan Garg, Resolution Professional of Corporate Debtor and Respondent No.2 i.e., Committee of Creditors of Asian Hotels (West) Limited through its Lead Member UV Asset Reconstruction Company had filed their respective replies to the present applications. Since the submissions made by both the Respondents are identical, the same are dealt with together.

The Respondents submitted that the present interlocutory application is not maintainable as the same has been filed without proper authorization of the Applicant No.1 Company. It was submitted that the present application has been executed by one Ms. Nupur Garg, Company Secretary of Applicant No.1 on the mere basis of an unstamped authorization letter dated 08.01.2018, executed by Applicant No.2 unsupported by the Board Resolution. Further, it was submitted that the CoC of the Corporate Debtor in its 6^th CoC Meeting had resolved that removal of Applicant No.2 as director of Applicant No.1 is not proposed. Therefore, the locus of Applicant No.1 itself is under cloud. It was submitted that none of the directors, who are proposed to be removed from the Board of the Applicant No.1 have challenged the decision of the CoC of the Corporate Debtor.

The Respondents further submitted that applicants have placed on record, minutes of CoC meetings and such other documents relating to CIRP of Corporate Debtor that are confidential in nature and could not legally have been with Applicant No.1. The possession of confidential minutes demonstrates the illegal conduct of Applicants and mala fide intentions behind the present application.

The Respondents submitted that the Respondent No.1 in his capacity as the Resolution Professional of the Corporate Debtor being in control and custody of the assets of the Corporate Debtor has also the control and custody over the shares held by the Corporate Debtor in Applicant No.1 as per Section 18(f)(v) of the Code, 2016. Consequently, the Respondent No.1 is proposing to take actions in accordance with law to preserve the value of investments of the Corporate Debtor made in the Applicant No.1 in compliance of the duty entrusted to the Respondent No.1 as per the provisions of Section 25 of the Code, 2016.

The Respondents submitted that a holding Company, by virtue of its definition as stipulated in Section 2(47) of the Companies Act, 2013, controls the composition of the Board of Directors of its Subsidiary Company. Further, under Section 152 of the Companies Act, 2013 the shareholders of a company, (in the present case the Respondent No.1) can appoint directors at the General Meeting of the Company. Further, under Section 169 of the Companies Act, 2013, the shareholders by ordinary resolution can remove a director after following the due process under the Companies Act, 2013.It was further submitted that the Insolvency and Bankruptcy Code, 2016 and specifically the provisions of moratorium under the Section 14 Code, 2016 are for protecting the rights of the Corporate Debtor and not for taking away the rights and benefits of the Corporate Debtor.

The Respondents specifically submitted that under Section 28(1)(j) of the Code, 2016, a Resolution Professional can change the management of a subsidiary only with consent of the CoC. Hence, the Code itself envisages that the Resolution Professional (on behalf of the Corporate Debtor) can change the management of a subsidiary company with the only mandatory requirement of the CoC‟s approval. To support the submission, reliance is placed on Hon‟ble NCLAT in Amit Goel v. Piyush Colonizers Ltd., Comp. App. (AT) (Ins) No. 981/2023 dated 07.08.2023

It is submitted on behalf of the Respondents that the CoC of the Corporate Debtor in its commercial wisdom in the 5^th meeting of the CoC, had resolved to change the management of Applicant No.1 and in the 6th meeting of the CoC, it was decided that while Applicant No. 2 will continue as a director, steps will be taken for appointment of certain other directors and removal of certain other current directors and the said resolutions were approved with 100% voting. Further, the decision of the CoC are the internal decisions of the Corporate Debtor in its capacity as the Shareholder of Applicant No.1 Company and pursuant to such decisions, the necessary steps as per provisions of the Companies Act, 2013 are to be taken for appointment or removal of the directors of the Applicant No.1 Company. To support its contention, reliance is placed on the Judgement of the Hon‟ble Supreme Court in LIC of India v. Escorts Limited [(1986) 1 SCC 264] and the Hon‟ble High Cort of Bombay Judgement in Invesco IN Developing Market Fund v. Zee Entertainment Enterprises Limited and Anr. [(2022) 232 Comp Cas 20].

The Respondents further submitted that the Operating Agreement dated 18.12.2009 and Common Loan Agreement filed by the Applicants with the present Application are partial and incomplete, thus cannot be relied upon or referred to at all as there is no clarity on what constitutes default under the said documents.

In Rejoinder filed on behalf of the Applicants, wherein the submissions of the Respondents are rebutted, it was submitted that the present application has been instituted on behalf of Applicant No.1 Company by its Company Secretary and it is a settled position of law that as per Order 29 Rule 1 of the Civil Procedure Code, 1908 an officer of a Company such as a Company Secretary is entitled to file pleadings on behalf of the Company. Further, the applicant had placed on record the Board Resolution dated 09.08.2014 pursuant to which the power to execute authorisation letter dated 08.01.2018 was delegated. Also, it was submitted that the Applicant No.2 as an Executive Whole time Director of the Applicant No.1 is vitally interested in the continued success and operations of the Applicant No.1 and therefore, irrespective of the fact whether the Applicant No.2 has been proposed to be removed or not, the Applicant No.2 has locus to file the present application.

The Applicants submitted that it is a common ground that explanation to Section 18(1)(f) clarifies that the assets of the subsidiary of a Corporate Debtor cannot be made subject matter of the insolvency process of a Corporate Debtor and the Resolution Professional is not permitted to take control and custody of the assets of the Subsidiary of the Corporate Debtor. Further, it was submitted that the term „control and custody‟ do not only mean a physical lock and key but will also include constructive custody and constructive control.

The Applicants also submitted that out of the directors proposed to be appointed by the CoC, pursuant to the 6th CoC Meeting, two of the proposed directors are independent directors who do not have any background in the hospitality sector whereas the third proposed director, though a veteran in hospitality sector is involved in certain criminal proceedings.

Further, it is specifically submitted by the Applicants that the Respondent No.1 being the Resolution Professional of the Corporate Debtor is not the owner of the shares of the Applicant No.1, and the shares of the Applicant No.1 continued to be in the ownership of the Corporate Debtor and in law the Resolution Professional not permitted to take beneficial ownership of the assets of the Corporate Debtor. The actions to be done by the RP during the course of CIRP need to have a particular insolvency purpose and the Resolution Professional is not the same as Board of Directors and cannot be equated to Board of Directors. To support their contention, the Applicants have placed reliance on Balakrishan Gupta and Others v. Swadeshi Polytex Ltd. and Another (1985) 2 SCC 167; paras 17-20)

This Adjudicating Authority has carefully heard the arguments advanced by Learned Counsels for the parties and minutely perused the averments made in the application, reply, rejoinder and written submissions filed by the parties. The relevant documents annexed with the respective submissions have also been meticulously perused. In view of the facts and averments made on behalf of the parties, the issue which arises for this Adjudicating Authority‟s consideration is: Whether the provisions of the Insolvency and Bankruptcy Code, 2016, enables the Committee of Creditors to take decision with regard to change in management of the Subsidiary Company of the Corporate Debtor?

Before adjudicating the issue as identified above, we have carefully gone through the relevant statutory provisions more particularly Section 18 and 28 of the Insolvency and Bankruptcy Code, 2016 including the notes on clauses. The relevant provision are reproduced herein below for ready reference:-

A combined reading of Section 18(1)(f)(v) of the Code, 2016 with Section 28(1)(j) of the IB Code, 2016, provides that when the Interim Resolution Professional takes control and custody of the assets over which the Corporate Debtor has ownership rights, the IRP has to take into consideration the shares held in the subsidiary of the Corporate Debtor, as per the mandate of section 18 (1)(f)(v) of the I & B Code. Furthermore, the explanation to section 18 of the Code specifically excludes the „assets of the subsidiary company‟ (both Indian and foreign) from the meaning of „assets of the Corporate Debtor.‟ Accordingly, it is clear that the Code, demarcates the assets and liabilities of the holding company and its subsidiary in the process of CIRP. Under Section 28 of the Code, 2016 a resolution professional can only take certain actions with the committee of creditors‟ prior approval only. Section 28(1)(a) to (m) of the Code, provides an elaborate list that require prior approval of the committee of creditors by a vote of sixty-six per cent of the voting shares which include matters like interim finance, creation of security interest over the assets of corporate debtor, change of capital structure or making change in management of the Corporate Debtor or its subsidiaries, etc.

This Adjudicating Authority is of the view that while the assets of the Applicant No.1 Company do not form part of assets of the Corporate Debtor, there cannot be a dispute that the investments of the Corporate Debtor in the shares of the Applicant No.1 form part of the „assets‟ of the Corporate Debtor which can be taken into control and custody by the Respondent No.1 in his capacity as the Resolution Professional of the Corporate Debtor. Furthermore, in view of the safeguard provided under Section 28(1)(j) of the Code, the Resolution Professional/ Respondent No.1 can change the management of the Corporate Debtor‟s Subsidiary i.e., M/s. Aria Hotels and Consultancy Services Private Limited („Applicant No.1‟) only with the committee of creditors‟ prior Approval.

It transpires that the CoC of the Corporate Debtor in its 5th CoC Meeting held on 16.01.2023 had proposed the Agenda B2 for authorizing the Resolution Professional/Respondent No.1 to change the Management of M/s. Aria Hotels and Consultancy Services Private Limited („Applicant No.1‟) and the CoC after deliberations and consideration approved the said resolution with 100% voting in favor. The relevant extract of the Resolution B2 is reproduced below:-

During the argument, the Respondents submitted that the investment of the Corporate Debtor in the Applicant No.1 is in jeopardy as the Applicant No.1 had losses of Rs.77.77 crores as on 31.03.2022 whereas the applicants had submitted that a holistic assessment of the Applicant No.1‟s financial performance would show that the Applicant No.1 is fundamentally a healthy and viable business and that the investments of the Corporate Debtor are secured. At this juncture, this Adjudicating Authority is not inclined to delve into the present argument as regard to the financial health of the Applicant No.1 or CoC‟s rationale/intention for change of the management of the Applicant Company No.1 as it is a trite position that CoC in its commercial wisdom had full liberty to deliberate and take actions on all the matters related to the insolvency of the Corporate Debtor, so long as the provisions of the Code and CIRP Regulations are met.

A brief sketch of the discussions of the Committee of Creditors in the CoC Meeting as observed by this Adjudicating Authority from the documents is as follows:-

On a judicious appraisal of various facts and events, this Adjudicating Authority is of the considered view that the CoC had deliberations over the issue to authorize the Resolution Professional to change the management of the Applicant Company No.1 in terms of Section 28(1)(j) of the Code, 2016. Section 28(1)(j) of the Code, 2016, vested the Committee of Creditors with power to make any changes in the management of the Corporate Debtor or its subsidiary and the RP was duly authorized to take further steps with the prior approval of the Committee of Creditors and the said provisions was fully complied with as is reflected in the CoC‟s resolutions referred to above.

In fact, the Hon‟ble NCLAT its Judgement in Amit Goel vs. Piyush Colonizers Ltd & Anr. [Company Appeal (AT)(Ins)/981/2023; Judgement dated 07.08.2023] has held as under:-

Having regard to the aforesaid discussion and the judgments relied upon, this Adjudication Authority is of the view that the legislature by virtue of Section 28(1)(j) of the Code, 2016 has consciously entrusted the Committee of Creditors with the power to take decision as to the change in the management of the Corporate Debtor or its subsidiary and in the instant case, the Committee of Creditors in its commercial wisdom had unanimously resolved to authorize the Resolution Professional to change the management of the Applicant No.1 Company. Accordingly, the Agenda Item No. 5 i.e., “To discuss on the steps to be taken for preserving the value of the investments of the Corporate Debtor in M/s. Aria Hotels and Consultancy Services Private Limited („ARIA‟) Holding 99.98% Shareholding, Subsidiary Company of CD” and Item No.B2 i.e., “To authorize the Resolution Professional to change the management of M/s. Aria Hotels and Consultancy Services Private Limited („ARIA‟), Subsidiary Company of Corporate Debtor”, in terms of Section 28(1)(j) of the Code, as discussed and passed by the CoC in its 5^th CoC Meeting held on 16.01.2023 do not suffer from any illegality and are valid in the eyes of law.

This Adjudicating Authority as a matter of abundant precaution directs the Resolution Professional/Respondent No.1 to follow all the procedures as prescribed in the law and other applicable Secretarial Standards as required to give effect to the decision taken under Item No. B2 as approved in the 5^th CoC Meeting of the Corporate Debtor.

However, the Respondents are expected to take all the precautions and to act judiciously so as to ensure that no „Event of Default‟ or „Default‟ is committed by the Applicant No.1 Company as per the covenants of the Operating Agreement dated 18.12.2009 as well as Loan Agreement dated 06.02.2021, so that, there is no adverse impact on either the Operating Agreement dated 18.12.2009 executed between the Applicant Company No.1 and Marriott Hotels as well as Loan Agreement dated 06.02.2021 executed between the Bankers of the Applicant Company No.1 and the Applicant Company No.1. Further, this will ensure that the investment of the Corporate Debtor in its Subsidiary Company i.e., Applicant Company No.1 is protected as per law.

Resultantly, the present Interlocutory Application i.e., I.A./656/ND/2023 in C.P.(IB)/571/2021 is against the principle of established law, therefore the same stands dismissed with no order as to cost.

The restraint imposed on the Respondents vide the Interim order dated 02.02.2023 passed by this Adjudicating Authority in I.A./ 656/ND/2023 stands vacated in all respects.