Suspended Director’s Right To Submit Resolution Plan

15th November, 2022 - 6:22 am Categories: Legal Issues 0 Comments

INTRODUCTION

All resolution plan (RP) paperwork must be sent to a company’s suspended board of directors, as well as its operating creditors, in order for them to participate in debt recovery and safeguard their interests. Creditors have had little authority in the face of failure, and promoters retain management of the firm even after default, according to the Bankruptcy Law Committee, but when a default happens, power is intended to move to creditors, and owners of equity have no influence in the company. In light of the foregoing, the Code established a change from debtor who is in possession to creditor who has control, as well as a transfer of power from the defaulting debtor’s governance to its creditors.

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Once a Petition in the instance of a Corporate Debtor is recognized, the resolution expert is needed to gather claims and constitute a Committee of Creditors, according to the Code. The aforementioned Committee of Creditors examines the Corporate Debtor’s viability and, if necessary, proposes a resolution in its commercial wisdom, failing which the Corporate Debtor is cleared. During the insolvency resolution process, however, the Resolution Professional is obligated to give notice of each meeting to representatives of the suspended board of directors of the Corporate Debtors, who are not permitted to vote at such meetings under Section 24(3)[1] of the Code.

The information memorandum and resolution plan(s) are two of the most important and critical documents in the Corporate Debtor’s resolution process, and they are only given to the representatives of the Committee of Creditors and Resolution Applicants who have signed a confidentiality agreement.

In Vijay Kumar Jain v. Standard Chartered Bank and others[2], the Apex Court considered whether the resolution professional should provide all material to the suspended board of directors of the corporate debtor, including the insolvency resolution plans The Appellant petitioned the Adjudicating Authority (“NCLT”) for authorization to participate effectively in Committee of Creditors (CoC) meetings. The NCLT rejected the request, allowing the Appellant to attend CoC sessions but without requiring the resolution professional or the CoC to provide personal information. The National Civil Liberties Appellate Tribunal (“NCLAT”) heard an appeal from a prior decision that upheld the appellant’s ability to attend and participate in the CoC meeting but refused his request for access to important documents, including the settlement plan.

Those who were harmed by the aforementioned order appealed to the Supreme Court of India.

The Appellant argued that under Section 24(3) of the Insolvency and Bankruptcy Code. Each meeting of the CoC must be notified to the members of the suspended Board of Directors, and the notice must contain reprint of any papers pertinent to the subjects to be addressed and issues to be voted on at the meeting, including the resolution plans, as required by Regulation 21. The Appellant further stated that the former Board of Directors, which may have provided personal guarantees for the corporate debtor’s liabilities, will be bound by the resolution plan and hence have a significant interest in what the CoC permits. It was further argued that such individuals have the right to oppose the substance of a presented resolution plan before the NCLT under Section 60(5)[3] of the Code, as well as the right to appeal the NCLT’s decision to the NCLAT under Section 61[4]. Furthermore, it was contended that such persons have the right to challenge the contents of a proposed resolution plan before the NCLT under Section 60(5) of the Code, and that they have the right to appeal the NCLT’s decision to the NCLAT under Section 61.

The Respondents contended that resolution plans were merely to be brought to the CoC for consideration, citing Section 30(3)[5] of the Code and Regulation 39(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. They further claimed that the Regulations have differing interpretations of the phrases “committee” and “participant,” and that Regulation 39 plainly excludes participants. They also cited the Code’s Notes on Clauses, which said that the former Board of Directors’ involvement at CoC meetings is to provide information for examining the corporate debtor’s financial position. They are not in the same position as other creditors, who must balance the benefits and drawbacks of resolution plans, because resolution plans only affect creditors, not individuals.

The Apex Court emphasized the Code’s legislative framework, noting, for example, that while the former Board of Directors are not CoC members, they have the right to join and evaluate any resolution proposals presented at such meetings with CoC members under Section 25(2)(i)[6].

The Court went on to examine the annotations on Clause 24, noting that it specifies a resolution professional seeking information. During a CoC meeting, the resolution professional does not seek particulars, which is the goal of Section 24[7].  Before creating an information memorandum that includes the corporate debtor’s financial status and information relevant to claims by or against the corporate debtor, the resolution expert simply collects information from the former Board of Directors under Section 29[8]. Section 24 of the Code, which governs CoC meetings, has no bearing on any of this. Second, as noted in the Notes on Clause 24, the resolution professional does not generate a resolution plan; instead, he creates detailed memorandum that is delivered to the resolution applicants, who subsequently present their resolution plans to the Code under Section 30. According to Section 31(1)[9] of the Code, members of the previous Board of Directors, who are often guarantors, have a vested interest in a resolution plan, and the resolution plan binds them.

The Court went on to say that a resolution plan that has been authorized or rejected by an Adjudicating Authority decision must be made available to “participants,” including former Board of Directors members. Participants are entitled to a copy since they have a stake in the resolution plan’s result and can appeal to the Appellate Tribunal if they are dissatisfied under Section 61 of the Code.

Based on a together reading of the Insolvency Code and the Regulations, the Supreme Court held that the representatives of the former Board of Directors who are critically focused in resolution plans that may be considered at CoC meetings must be included as part of the “materials” that must be provided with the notice of such meetings.

The Apex Court stated that the resolution professional can get a confidentiality agreement from representatives of the former Board of Directors when it comes to sensitive material. This might take the form of a non-disclosure agreement, which safeguards the resolution professional in the event that details aren’t kept totally secret.

Author: Ishan Anand, IV Year, B.A.LL.B. (Hons.), a Student of SVKM’S NMIMS School of Law, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] Insolvency and Bankruptcy Code, § 24(3), 2016

[2] 2019 SCC OnLine SC 103

[3] Insolvency and Bankruptcy Code, § 60(5), 2016

[4] Insolvency and Bankruptcy Code, § 61, 2016

[5] Insolvency and Bankruptcy Code, § 30 (3), 2016

[6] Insolvency and Bankruptcy Code, § 25 (2)(i), 2016

[7] Insolvency and Bankruptcy Code, § 24, 2016

[8] Insolvency and Bankruptcy Code, § 29, 2016

[9] Insolvency and Bankruptcy Code, § 31 (1), 2016