Upon commencement of the resolution process under the Insolvency and Bankruptcy Code, 2016 (Code), powers of the Board of Directors of the company stand suspended and are vested in and exercised by the resolution professional. While the directors are entitled to attend the meetings of the committee of creditors (COC) formed for the company, such directors have no voting rights.
A question arose over whether the directors should be given copies of the resolution plans and other confidential documents that the COC considers during the meetings. Sharing of such documents could be seen as in direct conflict with the obligations of the resolution professional to maintain confidentiality under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) and other related regulations. More importantly, it could create positions of conflict between the suspended Board, who often submit resolution plans or are applicants under Section 12A, and the other participants. The Hon'ble Supreme Court in its recent judgment in Vijay Kumar Jain v. Standard Chartered Bank and Others[1 has, with great respect, left some questions unanswered.
Background of the Case
A director of a company in CIRP had moved the Hon'ble NCLT, Mumbai Bench, seeking the right to participate in the meetings of the COC and access all the documents and/or information including the resolutions plans being discussed in the meetings of the COC, for effective participation in the meetings.
The Hon'ble NCLT on August 1, 2018 held that the directors have the right to attend the COC meetings as per Section 24 of the Code. However, the directors could not receive information that is considered confidential by the resolution professional or the COC, including the resolution plans.2 In the first appeal, the decision of the NCLT was upheld by the appellate tribunal on August 9, 2018. 3 The director then moved the Supreme Court, challenging the decision of the appellate tribunal.
The Judgement of the Supreme Court
The Hon'ble Supreme Court held that the scheme of the Code makes it clear that the directors, though not members of the COC, have a right to participate in every meeting of the COC. In addition, for effective participation as vitally interested parties in discussion on resolution plans, they have the right to receive copies of the resolution plans presented to the COC. The Hon'ble Supreme Court also clarified that under Regulation 21(3)(iii) of the CIRP Regulations, the notice of the COC meeting, which is required to be given to the directors as well4, must contain copies of all the documents relevant for matters to be discussed, including the resolution plans.
The Hon'ble Supreme Court considered the directors to be vitally interested on two counts:
- Such directors are often guarantors and bound by the approved plan, which may scale down their own debts.
- The directors, being well versed in the affairs of the company, may be able to assist the COC on determining whether the resolution plan addresses the cause of default by the company (a mandatory requirement for resolution plans).
The Hon'ble Supreme Court also clarified that any concerns over breach of confidentiality may be alleviated by the resolution professional obtaining a confidentiality undertaking from the directors, which may also contain an indemnity to the resolution professional against any breach.
Whilst the conclusion in the judgement is based on a laudable objective, in practice, it may create disparity, on account of following considerations:
- Suspended directors will include the promoter/promoter-nominated directors and the promoter may be a resolution applicant or a Section 12A applicant for the company. In this situation, sharing of plans and consequent disclosure of information may give rise to a conflict of interest.
- Conflict of interest can arise in other forms too. The resolution professional may discuss avoidable transactions with the COC during the meeting where the directors themselves may be involved and therefore it may not be proper for these matters to be discussed before them.
- Suspended directors fall within the definition of "related party" in the Code and related parties are excluded from the COC even if they are creditors of the company (first proviso to Section 21(2) of the Code). A suspended director could not have been put in a better position.
- It is debatable whether the directors who could not save the company from default could possibly contribute to its resolution.
- The Hon'ble Supreme Court has adopted a purist view in allowing the suspended board to participate, unmindful of the fallout on the resolution in view of the aforesaid factors.
Of course, this judgement operates along with the recent judgments of the Hon'ble Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India5 and K. Sashidhar v. Indian Overseas Bank & Ors.[6,that have established the finality and non-justiciability of the decisions of the COC as regards commercial feasibility and viability of a resolution plan. On a positive note, this will enhance transparency and openness in COCs. For now, the suspended directors, though they have no vote, have a seat on the table.
1 Judgement dated January 31, 2019 passed by a bench comprising Hon'ble Justice Rohinton Fali Nariman and Hon'ble Justice Navin Sinha in Civil Appeal No. 8430 of 2018 and Writ Petition (Civil) No. 1266 of 2018, available here.
2 Order dated August 1, 2018 bearing number MA 518/2018 in CP (IB) 1371 and 1372 (MB) 2017, available here.
3 Order dated August 9, 2018 bearing number Company Appeal (AT) (Insolvency) No. 442 of 2018, available here.
4 In terms of Regulation 19(1) of the CIRP Regulations, the resolution professional is required to give notice of every COC meeting to the participants including the members of the suspended board of directors.
5 2019 SCC Online SC 73.
6 Civil Appeal No. 10673 of 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.