SC: In CIRP, suspended directors are entitled to a copy of resolution plans

Today, i.e. on 31st January 2019, in the matter of Vijay Kumar Jain v. Standard Chartered Bank & Ors., the Hon’ble Supreme Court pronounced that members of the suspended 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 “resolution plans” as part of “documents” that have to be furnished along with the notice of such meetings.

The Hon’ble Supreme Court observed that:

(Para 8) The statutory scheme of the Insolvency and Bankruptcy Code, 2016, insofar as the former members of the Board of Directors are concerned, is as follows:

  • A committee of creditors is first constituted under Section 21 consisting only of all the financial creditors of the corporate debtor.
  • Under Section 24, all meetings of this committee are to be conducted by the resolution professional who, however, does not happen to be part of this committee.
  • Section 24(3)(b) is important in that, the resolution professional has to give notice of each and every meeting of the committee of creditors, inter alia, to members of the suspended Board of Directors.
  • Like operational creditors who may attend and participate in such meetings, provided the aggregate dues owing to them are not less than ten per cent of the total debt, both such operational creditors and erstwhile members of the Board of Directors have no vote.
  • Section 25(2)(f) and (i) are also important in that, once the resolution professional convenes meetings of the committee of creditors, he is to present all resolution plans at these meetings.
  • Under Section 30, the resolution professional shall examine each resolution plan received by him in which he must confirm, inter alia, that such plan provides for the repayment of the debts of operational creditors which shall not be less than the amount to be paid to them in the event of liquidation of the corporate debtor.
  • This plan is then submitted to the Adjudicating Authority if it is approved by the requisite majority of the committee of creditors. The Adjudicating Authority under Section 31(1), if satisfied that the plan passes muster, shall then, by order, approve such plan, which shall be binding on all stakeholders involved in the resolution plan, including guarantors.

The statutory scheme of the Insolvency and Bankruptcy Code, 2016, makes it clear that though the suspended Board of Directors are not members of the committee of creditors, yet, they have a right to participate in each and every meeting held by the committee of creditors, and also have a right to discuss along with members of the committee of creditors all resolution plans that are presented at such meetings under Section 25(2)(i). It cannot be gainsaid that operational creditors, who may participate in such meetings but have no right to vote, are vitally interested in such resolution plans, and must be furnished copies of such plans beforehand if they are to participate effectively in the meeting of the committee of creditors. This is for the reason that under Section 30(2)(b), repayment of their debts is an important part of the resolution plan qua them on which they must comment. So the first important thing to notice is that even though persons such as operational creditors have no right to vote but are only participants in meetings of the committee of creditors, yet, they would certainly have a right to be given a copy of the resolution plans before such meetings are held so that they may effectively comment on the same to safeguard their interest. (Para 9)

(Para 12) There is no doubt whatsoever that Notes on Clauses are an important aid to the construction of Sections of the Insolvency and Bankruptcy Code as they show what the Drafting Committee had in mind when such provisions were drafted.

Notes on Clause 24: “Clause 24 prescribes the modalities for the meeting of the committee of creditors. The meetings are conducted by the resolution professional and may be attended by the members of the board directors or partners of the corporate debtor. This gives an opportunity for the committee of creditors and the resolution professional to seek information that they may require to assess the financial position of the corporate debtor and prepare a resolution plan.”

However, a closer look at the Notes on Clause 24 makes it clear that the third sentence of the Notes on Clause 24 is itself problematic.

  • First and foremost, it speaks of the resolution professional seeking information. The resolution professional does not seek information at a meeting of the committee of creditors, which is what Section 24 is all about. The resolution professional only seeks information from the erstwhile Board of Directors under Section 29 before preparing an information memorandum, which then includes the financial position of the corporate debtor and information relating to disputes by or against the corporate debtor etc. All this has nothing to do with Section 24 of the Code which deals with meetings of the committee of creditors.
  • Secondly, the resolution professional does not prepare a resolution plan as is mentioned in the Notes on Clause 24; he only prepares an information memorandum which is to be given to the resolution applicants who then submit their resolution plans under Section 30 of the Insolvency and Bankruptcy Code. The committee of creditors, in turn, gets information so that they can assess the financial position of the corporate debtor from various sources before they meet.

It is, therefore, difficult to understand the Notes on Clause 24. Even assuming that the Notes on Clause 24 may be read as being a one-way street by which erstwhile members of the Board of Directors are only to provide information, we find that Section 31(1) of the Code would make it clear that such members of the erstwhile Board of Directors, who are often guarantors, are vitally interested in a resolution plan as such resolution plan then binds them. Such plan may scale down the debt of the principal debtor, resulting in scaling down the debt of the guarantor as well, or it may not. The resolution plan may also scale down certain debts and not others, leaving guarantors of the latter kind of debts exposed for the entire amount of the debt.

(Para 12) The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 also make it clear that these persons are vitally interested in resolution plans as they affect them.

  • Thus, under Regulation 36, the information memorandum that is given to each member of the Committee of Creditors (CoC) and to any potential resolution applicant, will contain details of guarantees that have been given in relation to the debts of the corporate debtor (Regulation 36(2)(f)).
  • Also, under Regulation 37(d), a resolution plan may provide for satisfaction or modification of any security interest. This would certainly include a guarantor who may be a member of the erstwhile Board of Directors.
  • Further, under Regulation 37(1)(f), a resolution plan may provide for reduction in the amount payable to the creditors, which again vitally impacts the rights of a guarantor.
  • Last but not least, a resolution plan which has been approved or rejected by an order of the Adjudicating Authority, has to be sent to “participants” which would include members of the erstwhile Board of Directors – vide Regulation 39(5). Obviously, such copy can only be sent to participants because they are vitally interested in the outcome of such resolution plan, and may, as persons aggrieved, file an appeal from the Adjudicating Authority’s order to the Appellate Tribunal under Section 61 of the Code.

Quite apart from this, Section 60(5)(c) is also very wide, and a member of the erstwhile Board of Directors also has an independent right to approach the Adjudicating Authority, which must then hear such person before it is satisfied that such resolution plan can pass muster under Section 31 of the Code. (Para 12)

It is also important to note that every participant is entitled to a notice of every meeting of the committee of creditors. Such notice of meeting must contain an agenda of the meeting, together with the copies of all documents relevant for matters to be discussed and the issues to be voted upon at the meeting vide Regulation 21(3)(iii) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Obviously, resolution plans are “matters to be discussed” at such meetings, and the erstwhile Board of Directors are “participants” who will discuss these issues. The expression “documents” is a wide expression which would certainly include resolution plans. (Para 13)

Under Regulation 24(2)(e) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the resolution professional has to take a roll call of every participant attending through video conferencing or other audio and visual means, and must state for the record that such person has received the agenda and all relevant material for the meeting which would include the resolution plan to be discussed at such meeting. (Para 14)

(Para 14) Regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 makes it clear that the resolution professional shall provide fair value and liquidation value to every member of the committee only after receipt of resolution plans in accordance with the Code [Regulation 35(2)].

Also, under Regulation 38(1)(a) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, a resolution plan shall include a statement as to how it has dealt with the interest of all stakeholders, and under sub-clause 3(a), a resolution plan shall demonstrate that it addresses the cause of default. This Regulation also, therefore, recognizes the vital interest of the erstwhile Board of Directors in a resolution plan together with the cause of default. It is here that the erstwhile directors can represent to the committee of creditors that the cause of default is not due to the erstwhile management, but due to other factors which may be beyond their control, which have led to non-payment of the debt. (Para 14)

Therefore, a combined reading of the Insolvency and Bankruptcy Code, 2016 as well as the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 leads to the conclusion that members of the suspended 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. (Para 14)

The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, far from going beyond the Code, flesh out the true intention of the Code that is achieved by reading the plain language of the Sections that have already been adverted to. So far as confidential information is concerned, it is clear that the resolution professional can take an undertaking from members of the erstwhile Board of Directors, to maintain confidentiality. The source of this power is Regulation 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, read with paragraph 21 of the First Schedule thereto. This can be in the form of a non-disclosure agreement in which the resolution professional can be indemnified in case information is not kept strictly confidential. (Para 15)

Directors, simplicitor, are not the subject matter of the proviso to Section 21(2), but only directors who are related parties of the corporate debtor. It is only such persons who do not have any right of representation, participation, or voting in a meeting of the committee of creditors. Therefore, the contention that a director simplicitor would have the right to get documents as against a director who is a financial creditor is not an argument that is based on the proviso to Section 21(2), correctly read, as it refers only to a financial creditor who is a related party of the corporate debtor. (Para 16)

Copy of judgment: Judgement_31-Jan-2019

-Tushar Kaushik

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