In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Chennai Bench while deciding IA Nos. 1293 and 1295 of 2024 in Company Appeal (AT) (CH) (Ins) No. 129/2024 vide order dated March 7, 2025 held that the shareholders cannot be substituted in place of the suspended director, as their right being the shareholders of the company is restrained by the investment made by them in the Corporate Debtor.
In the instant case, an appeal was filed by the suspended director of the Corporate Debtor challenging the impugned order dated July 20, 2023 passed by the National Company Law Tribunal (Adjudicating Authority), Bangalore Bench, admitting an application under Section 9 of the Code against the Corporate Debtor. NCLAT vide its order dated April 18, 2024 granted interim order on April 18, 2024.
Thereafter, NCLAT vide its order dated October 14, 2024 had vacated an interim order dated April 18, 2024 on the ground that the suspended director resigned from his post August 12, 2024, the appeal could not continue. Aggrieved by the said order, one of the shareholders, M/s. Mantri Developers Private Limited (Applicant), holding 49.99 % shareholding, filed Recall Application before the NCLAT pursuant to order passed by the Hon'ble Supreme Court, which gave liberty to file recall application before the NCLAT.
While dismissing the aforesaid Recall Application on the ground that it lacks power to recall its own orders except in exceptional circumstances, as carved out in the Five Judges Bench judgment, passed in the matter of Union Bank of India v. Mr. Dinkar T. Venkatasubramaniam & Ors.1, NCLAT categorically held that the shareholders cannot be substituted in place of the suspended director, as they happen to be the shareholders limited to their rights restrained by investment in the Corporate Debtor. Further, since the suspended director admittedly resigned as a director of the Corporate Debtor, he could not have been permitted to be continue the appeal and furthermore, the recall which has been preferred by the shareholder, cannot be permitted to be substituted in place of the suspended director of the Corporate Debtor as its status is statutorily distinct, to the director.
Therefore, vide the above ruling upholds the distinction between rights of the shareholders and directors in CIRP and NCLAT reiterates that the shareholders cannot step into the role of a director simply by virtue of their shareholding.
Footnote
1 CA (AT) (Ins) No.729/2020
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