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Withdrawal Application after Initiation of Corporate Insolvency Proceedings under the IBC

Introduction

In case of any disputes between the parties, there are probabilities that parties might compromise and settle the matter during the pendency of the case before the Court.  In this blog, we analyse the situation where the application has been made before the National Company Law Tribunal (the NCLT) or National Company Law Appellate Tribunal (the NCLAT) under the Insolvency and Bankruptcy Code 2016 (the Code) and in case if such application has been admitted and the Corporate Insolvency Resolution Process (the CIRP) is initiated by the NCLT and the parties with consensus ad idem wish to withdraw the said application.

On July 24, 2017, the Hon’ble Supreme Court in case of Nisus Finance and Investment Managers LLP (“Facility Agent” or “Financial Creditor”) and Lokhandwala Kataria Construction Pvt. Ltd. (“Debtor”) ordered that the application for CIRP could be withdrawn or the subject matter could be settled by the parties even after the CIRP have been initiated.

Facts of the Case:

Nisus Finance and Investment Managers LLP (“Facility Agent” or “Financial Creditor”) filed an application before the National Company Tribunal (“NCLT”), Mumbai against the Lokhandwala Kataria Construction Pvt. Ltd. (“Debtor”) for initiation of insolvency proceedings. The Debtor was acting as a guarantor of Vista Homes Pvt Ltd. (“Principal Debtor”) with respect to amount owed by the Principal Debtor. The Financial Agent, the Debtor and the Principal Debtor are one among the parties to the Debenture Trust Deed executed between the Principal Debtor, Facility Agent and other Debenture holders. The Debtor was acting as a guarantor to redeem the debentures in the event if Principal Debtor, fails to pay to the debenture holders. The Facility Agent had the authority to invoke its rights to ensure that the returns are reached to the debentures holders. The Principal Debtor failed to redeem the debentures which were due for its redemption and the Facility Agent filed application under the Code for CIRP with the NCLT, Mumbai. The NCLT admitted the application of Facility Agent on being satisfied that the Debtor defaulted in redeeming the debentures.

Upon Moratorium being declared by the NCLT, Mumbai, the parties approached the NCLAT with a plea requesting to set aside the order of the NCLT and allow them to withdraw the case as the parties had settled the dispute and the dues are paid by the Debtor.

The NCLAT rejected the plea that the Adjudicating Authority may permit withdrawal of the application on a request made by the applicant before its admission and same cannot be withdrawn once the order for admission is issued and Moratorium is declared. Contesting the order of the NCLAT, the parties appealed the said order with the Hon’ble Supreme Court highlighting that NCLAT could utilize the inherent power recognized by Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 to allow a compromise between the parties after admission of the matter.

Judgement:

The Hon’ble Supreme Court highlighted that the Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 was not notified as on the date of order passed by the NCLAT. However, the Hon’ble Supreme Court utilised its powers under Article 142 of the Constitution of India, which states that Supreme court in the exercise of its jurisdiction may pass such order or decree as is necessary in doing complete justice. The Hon’ble Supreme Court while exercising its powers allowed the parties to withdraw the application. The Hon’ble Supreme Court disposed the appeal after accepting and recording the consent of the parties, where parties undertook to abide by the consent terms and the debtor agreed to pay the sums due. It is important to note that the intention of law is to provide the justice, therefore depending on the facts and circumstances, an application may be withdrawn even after the admission of the application.

Some thought provoking facts from the case:

  1. One of the objections raised by the Debtor before the NCLT, Mumbai was that the Facility Agent has no locus standi to file the case as no liability has been shown as owed and Facility Agent is not an authorised agent and not permitted under the law to file an application, hence application is not maintainable. The NCLT, Mumbai highlighted that since all the parties being privy to the Debenture Trust Deed, the Debtor cannot backout saying that the Facility Agent cannot act as Financial creditor on behalf of or as Debenture holders to initiate the CIRP against the Debtor.

 

  1. The NCLAT dismissed the appeal of the Debtor for withdrawal of application on the ground that before admission of an application under Section 7, it is open to the Financial Creditor to withdraw the application but once it is admitted, it cannot be withdrawn and is required to follow the procedures laid down under Sections 13, 14, 15, 16 and 17 of the Code. Therefore, parties cannot be allowed to withdraw the application once admitted, and matter cannot be closed till claim of all the creditors are satisfied by the corporate debtor. However, as explained in this blog, the Supreme Court may on a case to case basis, allow to withdraw the application which is already admitted by applicable authority.

 

  1. It is pertinent to note that the Supreme Court while passing order highlighted and agreed to the view of the NCLAT on Rule 11 has not been adopted at that point of time and in the absence of no inherent power, the question of exercising inherent power does not arise. Therefore, the Supreme Court took the cognizance of Article 142 of the Constitution of India where the Apex Court has authority to pass such order or decree as is necessary in doing complete justice.

Authors: Ms Shivani Handa and Mr Ashwin Bhat.

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Regulatory update: SEBI – Compensation to Retail Individual Investors (RIIs) in an IPO.

SEBI vide its circular dated 15 February 2018 has directed that RIIs applying for shares in IPO should be compensated if Self Certified Syndicate Banks (SCSB) fail to make the allotment despite of RIIs eligibility.

In order to bring uniformity in the calculation of compensation available to the RIIs, SEBI has stated that the compensation shall be calculated as below:

(Listing price– issue price) *multiplied by* (no. of shares that would have been allotted if a bid was successful) *multiplied by* (probability of allotment of shares determined on the basis of allotment).

Source:

https://www.sebi.gov.in/legal/circulars/feb-2018/compensation-to-retail-individual-investors-riis-in-an-ipo_37864.html

Regulatory Updates: Ministry of Corporate Affair – the “Companies (Registered Valuer’s and Valuation) Amendment Rules, 2018.

MCA vide its notification dated 9 February 2018 has notified the “Companies (Registered Valuer’s and Valuation) Amendment Rules, 2018“, to amend Rule 11 on “Transitional Arrangement”, i.e. persons rendering valuation services.

According to the provisions of these rules, any person rendering valuation services under the said act on the date of the commencement of the particular rules can continue to until 31 March 2018 without a certificate, however, with the new amendment the time has been extended till 30 September 2018.

Source:

http://www.mca.gov.in/Ministry/pdf/CompaniesRules2018_12022018.pdf

Regulatory Update: Ministry of Corporate Affairs – Companies (Authorized to Register) Amendment Rules, 2018.

The MCA vide its notification dated 16 February 2018 has amended the Companies (Authorised to Register) Rules, 2014 and notified the Companies (Authorised to Register) Amendment Rules, 2018, substituting form no. URC-1 (Application by a Company for registration under Section 366 i.e, Conversion from firm into Company and LLP into Company)

Source:

http://www.mca.gov.in/Ministry/pdf/CompaniesAuthorisedRegisterAdmendmentRules2018_19022018.pdf

Regulatory Update: MCA – Companies (Management And Administration) Amendment Rules, 2018

The MCA vide its notification dated 16 February 2018 has amended the Companies (Management and Administration) Rules, 2014 and notified the Companies (Management and Administration) Amendment Rules, 2018, to substitute/ amend the prescribed forms MGT-6 (Return to the Registrar in respect of declaration under section 89 received by the Company) and MGT-15 (Form for filing report on Annual General Meeting).

Source:

http://www.mca.gov.in/Ministry/pdf/CompaniesManagementAdministrationAdmendmentRules2018_19022018.pdf

Regulatory Updates: MCA – Companies (Audit and Auditors) Amendment Rules, 2018

The MCA vide its notification dated 16 February 2018 has notified the Companies (Audit and Auditors) Amendment Rules, 2018, to substitute/ amend the prescribed Forms ADT-1 (Notice to the Registrar by Company for appointment of Auditor) and ADT-2 (Application for removal of auditor(s) from his/ their office before expiry of term) in Annexure to the Companies (Audit and Auditors) Rules, 2014.

Source:

http://www.mca.gov.in/Ministry/pdf/CompaniesAuditAuditorsAdmendmentRules2018_19022018.pdf

Independent Directors- Are they Independent in their Judgements?

Independent Directors (ID) bring objectivity and an independent opinion to the decisions made by the directors of the company. IDs play a supervisory role and take into account the interests of shareholders, creditors, employees and other stakeholders in general. While IDs generally do not take part in the day-to-day functioning, their acumen should be such that they ask the right set of questions to ensure that the decisions made by the directors are in the best interest of the company, so that concentration of power or special influence can be adequately balanced and in the best interest of the company. IDs will have to take an active interest in the decision-making process not only in the meeting of the Board but also generally take steps to ensure that the interests of all stakeholders are protected.

Kumar Mangalam Birla committee report opines that “Independent Directors are directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transaction with the company, its promoters, its management, or its subsidiary, which in the judgment of the Board may affect their independence of judgment”.

Appointment of IDs is mandatory to all public listed companies and unlisted public companies who have (i) share capital more than Rs. 10 crores (ii) turnover of more than Rs.100 crores (iii) total outstanding loans, debentures, deposits is more than Rs 50 crores. In case of private limited companies, where institutional investors or venture capital investors have investments, they usually opt for an independent director to be on the Board.

The Companies Act, 2013 entrusted the governance to the Board of Directors and the Audit Committee for detection and prevention of fraud. The directorship is a fiduciary position and each person on the Board are exposed to many liabilities, not only under Companies Act but under various other legislation. Considering the fact that the IDs being nonexecutives on Board, they themselves cannot play an effective role even though they have a full commitment to ethical practices. Therefore, the executive directors shall have to be proactive and transparent in decision making and it is expected that IDs are informed about all facts, activities, and ongoings, beyond a structured/mandatory sharing of financials and mandatory board meeting agenda items.

IDs once appointed shall be equally responsible for wrongdoings in the Company. Therefore, before taking any directorship, the IDs may pose certain questions to the Company as provided herein below:

(i) Check on conflict of interest, whether such IDs has any pecuniary relationship with the Company directly or indirectly; (ii) The expectations of the Board from ID; (iii) Board Process on decision making, flow of information to its directors etc; (iv) Compliance status under various statutes as may be applicable to the company; (v) Risk and controls in relation to business and measures taken to mitigate such risks; (vi) Adaptability of the promoters towards suggestions of the Board. The expectation is that the executives shall run the show and non-executive board shall act as advisors; (vii) Check on whether the directors have the Directors and Officers Liability insurance policy.

A prima facie question that usually arises prior to taking an ID position is the liabilities. You can access our handbook on Directors here: https://drive.google.com/file//0BytybNhvfzRcb0JfRUFGQVpmaDQ/view?usp=sharing Eligibility Criteria to be an Independent Director

Independent Director shall be a person:`

  • who is not an executive director or nominee director;
  • who shall possess appropriate skills, experience, and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.
  • who is or was not a promoter of the Company or its holding, subsidiary company or associate company and shall not be related to any of these persons;
  • who including his relatives has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, in last two preceding financial years or during the current financial year;
  • who holds together with his relatives two percent. or more of the total voting power of the company;
  • who, neither himself nor any of his relatives—
    • holds or has held the position of a key managerial personnel or is or has been an employee of the company or its holding, subsidiary or associate company in any of the three financial years preceding the financial year;
    • is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, to:
      • a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
      • any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten percent. or more of the gross turnover of such firm;
  • holds together with his relatives two per cent. or more of the total voting power of the company; or
  • is a Chief Executive or director, by whatever name called, of any non-profit organization that receives twenty-five percent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two percent. or more of the total voting power of the company; or

Are they really Independent in their Judgements?

Most of the Companies in India are family run business, where a majority of the decisions are taken by the promoters (without consulting any other non-executive directors). Further, these promoters hold a majority of the shares in the company, thereby the interest of these promoters are influenced in every such decision. Though, under law the shareholders appoint the independent director, but the process of selection of the independent director, is the existing directors who nominate the independent candidates for the post of the independent non-executive director, that too in consultation with the promoters and the shareholders accepts the nomination on the basis of the recommendation of the Board.

So, the very appointment is dependent on the recommendation being provided by the promoters, it would be hard to explain that the IDs do in fact exercise complete independence.

Despite many fallouts in the real world on the transparency of board’s decisions in their presence, IDs are the only hope to uplift the discipline/ transparency, provided their independence is not being compromised and decisions are taken professionally. If they are no more independent then their appointment in a company will have limited benefit as IDs. (of course, their business acumen and domain expertise is always of value).

Even if one or two of them are independent of their judgment and takes a fair and prudent view, they may be compromised by the decision of the majority. So, in some sense, are the independent directors actually dependents? This is a very strong question and we believe that the way the legislation is proposing for appointment and remuneration of the independent directors, should be re-evaluated.

Author: Ashwin Bhat, is a Junior Partner at NovoJuris Legal