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Judgment
(Per Hon’ble Mr. Justice M. Satyanarayana Murthy):
Aggrieved by the order passed by National Company Law Tribunal at New Delhi Branch-VI in I.A. No. 4116(ND) of 2021 in CP(IB) No. 2260(ND) of 2019 dated 14th December, 2021, the Petitioner therein filed the present Appeal under Section 61 of Insolvency and Bankruptcy Code, 2016 (in short IBC) challenging the order referred above, whereby the application filed by the Applicant was dismissed on the ground that he is disqualified to submit a Compromise or arrangement as he is one of the Directors of company of Corporate Debtor and the Applicant, being a related person.
The Appellant is an independent Director of both the Companies i.e., Corporate Debtor and the Compromise or Arrangement Applicant. The Corporate Debtor Company was incorporated on 19.08.1983 and it was classified as Non-Government Company, the process of Corporate Insolvency Resolution was initiated against this Company. Nobody came forward to submit a resolution plan in pursuance of information memorandum calling for Expression of Interest. As there was no approved Resolution Plan, the Company went into liquidation and in the process, the Appellant submitted a Scheme of Compromise and Arrangement. The same was rejected by the Adjudicating Authority on the ground that he is a related person and disqualified to submit such Scheme of Compromise and Arrangement in view of bar as per Regulation 2B of (Liquidation Process) Regulation and under Section 29(j)(ii) IBC.
The finding of the Adjudicating Authority is challenged on the ground that the independent Director is not disqualified either under Section 29A of IBC or in terms of Regulation 2B (Liquidation Process) Regulation, as Corporate Debtor went into liquidation, thereby Judgment in Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. & Anr.1 is not applicable but the Adjudicating Authority erroneously and without considering Section 29-A of IBC and Regulation 2B (Liquidation Process) Regulation (as amended) dismissed the Application and thereby the order is liable to be set aside, requested to allow the Appeal, setting aside the impugned order.
During hearing, learned Counsel for both the Appellant and Respondent would contend that the Adjudicating Authority failed to consider that the independent Non-Government Director, as defined under Section 149(2) of the Companies Act, 2013 is not disqualified and therefore the order is ex-facie erroneous and requested to pass appropriate orders.
Both the Counsel for the Appellant and Respondent filed their respective Written Submissions in detail reiterating the contentions raised in the Appeal. The main contention in Written Submission of both Counsel is that the Adjudicating Authority misinterpreted Section 29(j)(ii) of IBC in conjunction with Independent Director and Promotor as defined in Section 149(6) and Section 2(69) of the Companies Act so also amended Regulation 2B of (Liquidation Process) Regulation, its date of amendment and the judgment of Hon’ble Supreme Court in Arcelor Mittal India Private Limited Vs. Satish Kumar Gupta & Ors.2 which is applicable directly and not the judgment passed in Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. & Anr. referred above.
The Respondent also raised the same contention and relied on the judgment in Arcelor Mittal India Private limited Vs. Satish Kumar Gupta & Ors. and requested to set aside the impugned order dated 14th December, 2021 passed in I.A. No. 4116(ND) of 2021 in CP(IB) No. 2260(ND) of 2019 and direct the Adjudicating Authority to further proceed in accordance with law.
Since both the Counsel submitted that impugned order is contrary to law in their written submissions, this Tribunal shall examine the issue with reference to provisions of IBC and Liquidation Process Regulation.
It is an undisputed fact that the Appellant is an independent Non-Executive Director of both the Corporate Debtor and the Arrangement or Compromise Applicant, but the Adjudicating Authority applied the principle laid down in Arun Kumar Jagatramka referred supra without considering the date of amendment i.e., 06.01.2020 to Regulation 2B of Liquidation Process Regulations, concluded that the disqualification attached to Corporate Resolution Applicant under Section 29A of IBC is applicable to the Application for approval of Scheme of Compromise and Arrangement. But this view is strongly disputed by both the Counsel for Appellant and Respondent on the ground that the Independent Director is not disqualified to apply for Compromise and Arrangement, therefore the principle laid down in Arun Kumar Jagatramka is not applicable.
The disqualification attached to Interim Resolution Professional under Section 29A is as follows:
29A. Person not eligible to be resolution applicant. --A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person--…….
(j)has a connected person not eligible under clauses (a) to (i)
Provided that nothing in clause (iii) of Explanation I shall apply to a resolution applicant where such applicant is a financial entity and is not a related party of the corporate debtor:
Provided further that the expression related party shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares [or completion of such transactions as may be prescribed, prior to the insolvency commencement date;
The word “Independent Director” is defined under Section 149(6) of the Companies Act, 2013 which reads as follows:
…
“(6)An independent director in relation to a company, means a director other than a managing director--or a whole-time director or a nominee director,
(a)who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b)(i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii)who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c)who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed, with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;
[(d) none of whose relatives--
(i)is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year:
(e)who, neither himself nor any of his relatives
i.holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;
ii.is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of-
(A)a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
(B)any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;
(iii)holds together with his relatives two per cent. or more of the total voting power of the company; or
(iv)is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or
(f)who possesses such other qualifications as may be prescribed.”
Meaning of the word “control” is defined under the Companies Act and it shall include the right to appoint majority of the Directors or to control the management or policy decision exercisable by a person or person acting individually or in concert directly or indirectly including by virtue of their shareholding or management rights or shareholder’s arrangements of voting agreement or any other mean.
The Apex Court considering the purport of Section 149(6) and meaning of the word Director in the judgment Arcelor Mittal India Private Limited and in para 45 & 47 of the Judgment, Court held as follows:
“The expression ‘management” would refer to the de jure management of a corporate debtor. The de jure management of a corporate debtor would ordinarily vest in a Board of Directors, and would include, in accord with the definitions of “manager”, “managing director” and “Officer” in Sections 2(53). 2(54) and 2(59) respectively of the Companies Act, 2013, the persons mentioned therein.
“The expression “control’ is therefore defined in two parts. The first part refers to de jure control, which includes the right to appoint a majority of the directors of a company. The second part refers to de facto control. So long as a person or persons acting in concert, directly or indirectly, can positively influence, in any manner, management or policy decisions, they could be said to be “in control”. A management decision is a decision to be taken as to how the corporate body is to be run in its day-to-day affairs. A policy decision would be a decision that would be beyond running day to day affairs, i.e., long term decisions. So long as management or policy decisions can be, or are in fact, taken by virtue of shareholding, management rights, shareholders agreements, voting agreements or otherwise, control can be said to exist.”
In view of the definition referred above, Independent Director does not have control over the Officers of the Company or the management of the Company.
Here in this case, the Appellant being an independent Non-Executive Director is neither having control as defined under the Companies Act, 2013 nor in the management of the company affairs. No disqualification can be attached to him as per Regulation 2B of Liquidation Process Regulations as amended, to submit Scheme of Compromise and Arrangement.
In the judgment of Arun Kumar Jagatramka, Arcelor Mittal India Private Limited referred supra was considered only to the extent of intendment of IBC and not for any other principle however concluded that some scheme mentioned in Section 29A of IBC is applicable to Section 35(1)(f) of IBC. The Apex Court went on to consider the disqualification clause under Section 230(1) of the Companies Act, 2013 amended provisions i.e., proviso to the Regulation 2-B- Liquidation Regulation Act. The Apex Court undertook clarificatory exercise and concluded in the judgment that rationale which permeates the resolution process under Chapter-2 (by virtue of Section 29A of IBC) permeates the liquidation process under Chapter-3 of Section 35(i)(f).
That being the position, there can be no doubt that the proviso to Regulation 2B of Liquidation Process Regulation, a person who is ineligible under Section 29A of IBC would not be permitted to propose a Compromise or Arrangement under Section 230 of the Companies Act, 2013. At the end of the judgment, the Hon’ble Supreme Court concluded that the disqualification placed by the Parliament in Section 29A and 35(i)(f) of IBC must also attach itself to Scheme of Compromise and Arrangement under Section 230 of the Companies Act, and when the Company is undergoing liquidation under the auspicious of IBC. As such, Regulation 2B of Liquidation Process Regulation, especially, proviso to 2B is also constitutionally valid.
Viewed from any angle, principle laid down in Arcelor Mittal India Private Limited Vs. Satish Kumar Gupta & Ors. is applicable to the present case, since, the dispute relates to pre-amendment to Regulation 2B of Liquidation Process Regulation and that no disqualification be attached to independent non-executive Director as per Regulation 2-B of Liquidation Process Regulation r/w Section 29-A and 35(1)(f) of IBC to submit Scheme of Compromise and Arrangement. The Appellant being independent non-executive is not disqualified to propose Compromise and Arrangement in the pendency proceedings relating to liquidation prior to commencement of amended proviso to Regulation 2-B of Liquidation Regulation. Both the Counsel fairly requested to set aside the order as the impugned order is illegal and contrary to law. In view of submissions of both Counsel the order is liable to be set aside. Hence we find that the Adjudicating Authority committed grave error in dismissing the Application based on principle laid down in Arun Kumar Jagatramka without appreciating the facts there-in, date of amendment of Regulation 2B of Liquidation Process and facts of the present case. As such, the order is liable to be set aside.
In view of the foregoing discussion, we find that the Adjudicating Authority erroneously dismissed the IA No. 4116/(ND)/2021 in CP(IB) No. 2260(ND/2019 by an order dated 14th December, 2021 and the same is hereby set aside holding that the Appellant being independent non-executive Director to submit Scheme of Compromise and Arrangement during liquidation process.
In the result, the Appeal is allowed setting aside the order dated 14th December, 2021 passed by Adjudicating Authority in IA No. 4116/(ND)/2021 in CP(IB) No. 2260(ND/2019.