Dheeraj Wadhawan vs The Administrator, Dewan Housing Finance Corporation Limited

Per: Rajasekhar VK, Member (Judicial) and Ravikumar Duraisamy, Member (Technical)

This is an Interlocutory Application (IA) filed by Mr. Dheeraj Wadhawan, one of the superseded Directors of Dewan Housing Finance Corporation Limited (DHFL), a Financial Service Provider, under section 60(5) of the Insolvency & Bankruptcy Code (IBC), inter alia seeking a declaration that the Applicant is entitled to attend each and every meeting of the Committee of Creditors (CoC) as a member of the erstwhile Board of Directors under the provisions of the IBC read with the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 and the financial service provider rules, including through his representatives and through video conferencing.

Before addressing the contentions raised in the application it is necessary to give a brief background of the circumstances in which the present application has been preferred.

On 20.11.2019, the Reserve Bank of India (RBI), in exercise of the powers vested in it in terms of section 45-IE of the Reserve Bank of India Act, 1934, superseded the Board of Directors of DHFL and appointed Mr. R Subramaniakumar as the Administrator. Further, in exercise of the powers conferred on it under section 45-IE(5)(a) of the RBI Act, RBI also constituted a three-member Advisory Committee to assist the Administrator in the discharge of his functions vide its order dated 22.11.2019.

On 29.11.2019, the RBI filed a petition under section 227 read with section 239(2)(zk) of the IBC and rules 5 & 6 of the Insolvency & Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, for initiating Corporate Insolvency Resolution Process (CIRP) against the Respondent/ Financial Service Provider. The petition was admitted vide order dated 03.12.2019, and the Respondent was appointed as the Administrator in accordance with the Rules ibid.

On 10.01.2020, 12.01.2020, 14.01.2020 and 15.01.2020, the Applicant addressed emails to the Respondent/Administrator requesting him to send notice of every meeting of the CoC along with the agenda of such meetings. The Respondent/ Administrator, vide email dated 12.01.2020, replied that members of the erstwhile Board of Directors of the Financial Service Provider were not legally entitled to attend CoC meetings, since, as on the insolvency commencement date, the superseded Board of Directors were no longer directors of the Financial Service Provider. Hence, the ‘superseded Board of Directors’ could not be treated as ‘suspended Board of Directors’ within the meaning of section 24 of the IBC.¹ This decision was

24: Meeting of committee of creditors. —

The members of the committee of creditors may meet in person or by such electronic means as

may be specified.

All meetings of the committee of creditors shall be conducted by the resolution professional.

The resolution professional shall give notice of each meeting of the committee of creditors to –

sub-sections (6) and (6A) of section 21 and sub-section (5);

the case may be;

less than ten per cent. of the debt.

The directors, partners and one representative of operational creditors, as referred to in sub-

section (3), may attend the meetings of committee of creditors, but shall not have any right to

vote in such meetings:

Provided that the absence of any such director or partner or representative of operational

creditors, as the case may be, shall not invalidate proceedings of such meeting.

Subject to sub-sections (6), (6A) and (6B) of section 21, any creditor who is a member of the

committee of creditors may appoint an insolvency professional other than the resolution

professional to represent such creditor in a meeting of the committee of creditors:

Provided that the fees payable to such insolvency professional representing any individual

creditor will be borne by such creditor. again reiterated vide email dated 15.01.2020 addressed to the Applicant.

The Applicant, therefore, claims that the conduct of the Respondent/ Administrator in refusing to give notice of hearings of the meetings of the CoC to the Applicant constitutes a breach of the provisions of the IBC. He, therefore, has inter alia sought the following prayers: ^—

Notice of the present IA was given to the Respondent/ Administrator, who has filed a reply thereto on 17.02.2020.

In the reply, the Respondent/Administrator has broadly submitted the following points: -

For the above reasons, the Respondent/ Administrator has prayed that the present IA be dismissed with costs.

We have perused the Application and the Reply, and the materials placed on record. We have also heard Mr JJ Bhatt, learned Senior Counsel for the Applicant and Mr Ravi Kadam, learned Senior Counsel for the Respondent/ Administrator, who made persuasive arguments at length on 19.02.2020, with the able assistance of their respective Counsel on record.

Mr JJ Bhatt, learned Senior Counsel for the Applicant, opening the arguments on behalf of the Applicant, led us through the provisions of section 45-IE^{22.45-IE. Supersession of Board of directors of non-banking financial company (other than Government Company).} of the RBI Act. He submitted that

Mr JJ Bhatt further submitted that under the IBC, the Board of Directors of the Corporate Debtor is suspended and the Interim Resolution Professional (IRP) takes over. Under the RBI Act, the word used is “supersession” and the Board is reconstituted at the end of the Administrator’s term. There is no bar per se that the erstwhile board cannot be re-inducted. Further, during the CIRP, while the Board is suspended, some directors may complete their term. Once the eclipse envisaged by the CIRP has come to an end, the same members may take over.

Mr JJ Bhatt also placed extensive reliance on the judgment of the Hon’ble Supreme Court in ArcelorMittal India Private Limited v Satish Kumar Gupta & others,^{33.(2019) 2 SCC 1 dated 04.10.2018} wherein both words, “superseded” and “suspended” have been used. The relevant paras are extracted below: -

Mr JJ Bhatt, learned Senior Counsel, also referred to the judgment of the Hon’ble Supreme Court in Vijay Kumar Jain v Standard Chartered Bank & others.^{44.Civil Appeal No.8430/2018 along with Writ Petition (Civil) No.1266/2018, decided on} He quoted the following sentences from this judgment: -

31.01.2019

Lastly, Mr JJ Bhatt, learned Senior Counsel, referred to para 7.1 of the order dated 03.12.2019 of this Adjudicating Authority under the heading, “7. Findings.” He submitted that this Authority had noted that the Board of Directors of DHFL was “suspended” by RBI.

In these circumstances, Mr JJ Bhatt, learned Senior Counsel, submitted that the Application be allowed as prayed for.

Per contra, Mr Ravi Kadam, learned Senior Counsel appearing for the Respondent/ Administrator, submitted that the RBI’s order dated 20.11.2019 superseding the Board of DHFL has not been challenged by the Applicant or the other directors of DHFL. Therefore, the order dated 20.11.2019 has attained finality.

Mr Ravi Kadam, learned Senior Counsel, drew our attention to para 2 of the said order dated 20.11.2019, in which it has been noted that statutory inspection of DHFL revealed serious deterioration in its financial position. Para 3 of the order also notes that there were serious concerns about the conduct of affairs of the company. The major supervisory concerns were noted in the Annexure to the said order. He drew attention particularly to Para ‘C’ thereof, which reads as follows in the context of the financial position of DHFL as at 31.03.2018:

Mr Ravi Kadam, learned Senior Counsel, submitted that terms like “supersede,” “terminated,” “vacated” and “reconstituted” used in section 45-IE of the RBI Act indicated that there is a finality to the supersession of the Board of Directors of such companies. In effect, the Board members vacate their offices. Therefore, he submitted, the question is whether a person who has been removed as director as on date of the filing of the petition be held to be eligible to be included within the meaning of the term, “erstwhile directors.”

Mr Ravi Kadam further submitted that when the Board is reconstituted, there will be a fresh appointment and not a continuation of the earlier appointment. There is no way for the earlier directors to come back to hold their offices, unless the RBI’s order is challenged in proper proceedings and is set aside by a court. In any case, he submitted, the very fact that clause (a) of sub-section (4) of section 45-IE clearly lays down that upon an order of supersession, the chairman, managing director and other directors shall from the date of supersession of the Board of Directors vacate their offices, and sub-section (8) thereof further stipulates that “no person shall be entitled to claim any compensation for the loss or termination of his office” clearly establishes that there is cessation of office and that the Board of Directors is not “suspended.” The RBI had determined that members of the Board of Directors were not “fit and proper” persons and hence the Board was superseded. Even in the case of “reconstitution” of the Board, the appointments are fresh appointments and not a continuation of the earlier appointment.

Continuing with his arguments, Mr Ravi Kadam submitted that section 17 of the IBC only envisages that the IRP shall exercise the powers of a “suspended” board. In the present case, on the date of commencement of the CIRP, there was in fact no “board” at all. He submitted that section 17(1)(b)^{55.17. Management of affairs of corporate debtor by interim resolution professional.— (1) From the date of appointment of the interim resolution professional, -(a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional; (b) the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional; (c) the officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional; (d) the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the interim resolution professional in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional.} of the IBC postulates that there should be a Board existing at the time of commencement of the CIRP. Therefore, the notice that the Resolution Professional was required to give regarding meetings of the CoC was only to be given to the “suspended” Board of Directors and not a “superseded” one.

Mr Ravi Kadam concluded his arguments by submitting that the present application deserves to be dismissed since it was misconceived, and further the Applicant has not challenged the supersession in any court till date, and the RBI’s order dated 20.11.2019 has attained finality.

In so far as the two judgments quoted by Mr JJ Bhatt, learned Senior Counsel for the Applicant are concerned, Mr Ravi Kadam, learned Senior Counsel for the Respondent/ Administrator submitted that the sentence, “… and the Board of Directors of the corporate debtor shall stand superseded” appearing in para 76.2 of ArcelorMittal should really be taken to read as ‘suspension’ only. It should not be taken out of the context in which the judgment came to be delivered. In support of this contention, he relied on the judgment of the Hon’ble Supreme Court in Roger Shashoua & others v Mukesh Sharma & others,^{66.(2017) 14 SCC 722, decided on 04.07.2017} wherein the Supreme Court had expounded as follows: -

In so far as the judgment in Vijay Kumar Jain was concerned, Mr Ravi Kadam, learned Senior Counsel, submitted that the issue in question in that case was the right to participate, and not the right to receive notice. He relied on para 14 at page 37 of the judgment, which lays down that, – “… 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.” Mr Ravi Kadam emphasised that the real issue in that judgment was that the right to attend must be a meaningful right, and denial of documents amounts to denial of the right conferred by law upon the participant.

In his rejoinder arguments, Mr JJ Bhatt, learned Senior Counsel submitted that in so far as Vijay Kumar Jain is concerned, the entire judgment proceeds on two fronts – both of participation and of meaningful participation. This judgment discusses the rationale of an erstwhile director to participate.

On Mr Ravi Kadam’s submission regarding supersession of the Board of Directors, Mr JJ Bhatt, learned Senior Counsel submitted the rationale is that the Board immediately preceding the initiation of CIRP should be given the right to participate in the meetings of the CoC. Mr JJ Bhatt further submitted that if, on the date of filing of the petition, the Board of the Financial Service Provider exists, then the rights envisaged under section 24 of the IBC cannot be defeated. Hence, the word “supersession” cannot be read differently in the case, with different fact situations evoking different responses on the right conferred on the erstwhile directors.

Mr JJ Bhatt further submitted it is the purpose of the Code to see that the Board immediately preceding the initiation of the CIRP should be given a right to participate in the meetings of the CoC. The rationale for such entitlement on the right of directors to participate is to see if such director could be of some assistance in the CIRP. Even if there is dismissal of the director concerned, such director should be given an opportunity to participate to see if he could be of some assistance. Dismissal, suspension or termination cannot make a difference, Mr Bhatt submitted. There is no proposition to be found that such directors should not be given a right to participate.

The short question before us is whether the expression ‘supersession’ of the Board of Directors of a non-banking financial company occurring in section 45-IE of the RBI Act, 1934, would have the same effect of a ‘suspension’ of the Board of Directors under the IBC. In other words, whether the ‘superseded’ Board of a Financial Service Provider should be placed on the same pedestal as a ‘suspended’ Board of a Corporate Debtor under the IBC.

Webster’s Third New International Dictionary defines the word “supersession” to mean ‘the state of being superseded,’ ‘removal’ and ‘replacement.’ P. Ramanathan Aiyar's Advanced Law Lexicon defines ‘superseded’ as ‘set aside’ and ‘replaced by’.

In circumstances largely similar involving the supersession of the Committee of Management by the Registrar of Cooperative Societies under section 32 of the Kerala Cooperative Societies Act, 1969, the Supreme Court held in Joint Registrar of Cooperative Societies, Kerala v TA Kuttappan & others,^{77.(2000) 6 SCC 127 decided by the Hon’ble Supreme Court on 09.05.2000} the Hon’ble Supreme Court held that –

In Union of India v Glaxo India Limited & another,^{88.(2011) 6 SCC 668) decided by the Hon’ble Supreme Court on 30.03.2011} the Supreme Court held as follows: -

In both these cases, the primary question was one of notice to the holders of the respective offices which were to be superseded. However, some conclusions can be drawn from the observations of the Hon’ble Supreme Court in the matter which would aid the resolution of the issue at hand in the present case.

The Finance (No.2) Act, 2019 (23 of 2019) amended the National Housing Bank Act, 1987, conferring certain powers for regulation of Housing Finance Companies (HFCs) with RBI. HFCs will henceforth be treated as one of the categories of Non-Banking Financial Companies (NBFCs) for regulatory purposes. RBI was entrusted to carry out a review of the extant regulatory framework applicable to the HFCs and come out with revised regulations in due course.

The Finance (No.2) Act, 2019 (23 of 2019) inserted two new sections into the RBI Act, 1934 – (i) section 45-ID⁹ empowering the RBI to remove directors from office, and (ii) section 45-IE providing for supersession of Board of Directors of NBFCs (other

Rule 4 of the Insolvency & Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, clarifies that for the purposes of those rules, -

Reading the statutory provisions together, it is clear that the intent of the legislature in making provisions for removal of directors from office in terms of section 45-ID and for supersession of the board of directors of a non-banking financial company (Financial Service Provider) in terms of section 45-IE was to move quickly to replace the Board of Directors when there is some default or negligence in the performance of its duties which may become prejudicial to the interest of the society. In such a milieu, the RBI could supersede the Board of Directors and appoint an Administrator in its place who shall have all the powers, functions and duties which may be exercised or discharged by or on behalf of the Board of Directors of such non-banking financial company, until such time the Board of Directors of such company is reconstituted.

If this is indeed the raison d'être for the change brought about in the legislation with effect from 09.08.2019 in terms of the Finance (No.2) Act, 2019, then it is clear therefrom that once the Board of Directors of the company is superseded, it indicates a severance with the existing leadership of the company. The language of sub-section (4) of section 45-IE of the RBI Act, 1934, also makes it clear that upon making an order of supersession of the Board of Directors, the chairman, managing director and other directors shall from the date of such supersession, vacate their office, and they shall also not be entitled to claim any compensation for the loss of termination of their office.

A suspension is an eclipse, so to speak, of the Board. The Board continues to exist, albeit under suspended animation. Once the eclipse of suspension is over, the Board regains its full vigour. Supersession, on the other hand, constitutes an extinguishment of all rights and duties as on that date. In that sense, it signals the death of the Board as it existed. Upon expiry of the period of supersession, the original Board is not automatically restored, but is required to be reconstituted in terms of section 45-IE(7) of the RBI Act.

Taking a cue from the judgments of the Hon’ble Supreme Court in Phillips India Limited (supra) and Glaxo India Limited (supra), and reading the statute as a whole, it is clear to us that the intention of the legislature is that the existing directors of the Board of Directors of a company which has been superseded, lose their offices. Upon expiry of the period of supersession, the Board of Directors of such companies shall be reconstituted. The ‘superseded’ Board of Directors cannot, therefore, be equated with a ‘suspended’ Board of Directors within the meaning of section 24 of the IBC.

In the past the Securities Market Regulator namely Securities and Exchange Board of India (SEBI) had superseded Boards of many Stock Exchanges, viz., Ahmedabad Stock Exchange, Bhubaneswar Stock Exchange, Calcutta Stock Exchange Association Ltd, Uttar Pradesh Stock Exchange Association Limited, Pune Stock Exchange Limited, Coimbatore Stock Exchange Limited etc. Even in those cases when the Board of Directors or Committee of Directors were superseded the entire Administration was vested only with the Administrator appointed by the regulator SEBI to exercise and perform all the powers and duties of the Board and committee was formed to assist him wherever felt necessary. Further the administrator can take assistance from any official. Applying the same logic even in the instant case, Supersession means vacating the office of Director and does not mean suspension of the office of Director. It may also be added that a Superseded Board of Directors is not automatically be reinstated after the period of supersession. Further, any person appointed as Director should meet the criteria of “Fit and Proper Person”.

As submitted by the Learned Senior Counsel for the applicant even in this case if the Administrator really wants any information or clarification from the superseded Director, he is at liberty to call for the same from any of the superseded Directors.

Notably, section 45 ID of the RBI Act uses the language such as:

The issue can be simply distinguished between a suspended employee and an employee who is terminated or dismissed from service. As generally known a suspended employee is entitled for certain privileges such as salary, certain communication from the company etc, whereas the terminated or dismissed employee is not entitled for any privileges since his connection with the company is severed. Suspended employee will be reinstated after completion of the period of suspension. Likewise, in this case Suspended Board of Directors is equal to suspended employee and Superseded Board of Directors is equal to Terminated or Dismissed employee.

Further in the factual situation, the Directors of the company are facing probes by various Investigating Agencies and were also behind the bars for some time. That being the case, the prayers in the IA, including that a direction to the Respondent/ Administrator not to implement any decision taken at the meetings of the CoC held without the presence of the Applicant, is totally unacceptable considering the public interest at large.

We fully agree with the submissions of the Learned Senior Counsel for the Respondent Mr. Ravi Kadam, in applying the judgment of the Hon’ble Supreme Court in the matter of Roger Shashoua & others v Mukesh Sharma & others, referred in Para 22 above, in so far as the case at hand is concerned.

In this view of the matter, it is clear that we cannot read “supersession” as “suspension” as the learned Senior Counsel for the Applicant calls upon us to do as that would amount to doing violence to the language of the statute.

Lastly, in so far as this Adjudicating Authority’s order dated 03.12.2019 is concerned, in para 7.1, the term ‘suspended’ appears to be a mere clerical error, inasmuch as the Order dated 20.11.2019 issued by RBI clearly reveals in the title, -“Supersession of the Board of Directors of Dewan Housing Finance Corporation Limited, Mumbai, Maharashtra, under section 45-IE of the Reserve Bank of India Act, 1934.” In para 4 of the same Order, the RBI has stated that in exercise of the powers conferred by section 45-IE of the RBI Act, 1934, the RBI ‘supersedes’ the Board of Directors of DHFL. There is, therefore, no scope to read ‘supersession’ as ‘suspension’ whichever way one looks at it.

For the above reasons, we hold that the Applicant is not entitled to attend the meetings of the CoC as a member of the erstwhile Board of Directors.

The present IA No.518/2010 in CP (IB) No.4258/2019, therefore, fails and is accordingly dismissed. No order as to costs.