Recently, the National Company Law Appellate Tribunal (hereinafter referred to as NCLAT) dismissed the appeal filed by M/s. Clarion Health Foods LLP, the majority shareholder in M/s. Goli Vada Pav Pvt., challenging the initiation of Corporate Insolvency Resolution Process (hereinafter referred to as CIRP). The appellant argued it was not informed of the CIRP and sought to prioritize its own petition under the Companies Act. However, the Tribunal ruled that shareholder disputes fall outside the scope of the Insolvency and Bankruptcy Code (hereinafter referred to as IBC) and that only debtor-creditor disputes are relevant at the CIRP admission stage.
Brief Facts:
The Appellant, M/s. Clarion Health Foods LLP, is the majority shareholder (63.64%) in the Corporate Debtor (hereinafter referred to as CD), M/s. Goli Vada Pav Pvt. Ltd. The Operational Creditor, Vista Processed Foods Pvt. Ltd. (Respondent 2), filed a petition under Section 9 of the IBC for a default of ₹3,56,04,233/-, which was admitted by the Adjudicating Authority on 05.09.2023, initiating the CIRP against the CD.
The Appellant, unaware of the CIRP initiation, was not a party to the case. Prior to this, the Appellant filed a Company Petition (CP-28/2023) under the Companies Act, 2013. Respondent No.1 presented the AA's order, arguing the CIRP rendered the Appellant's petition moot. The Appellant sought to quash the AA's order, claiming they were not given an opportunity to represent in the Operational Creditor's petition. The Appellant argues their petition was filed first, while the CIRP followed.
Contentions of the Applicant:
The Appellant contended that, with a 63.64% stake in the Corporate Debtor (CD), he filed a petition under Sections 241-242 of the Companies Act in January 2023. However, the CD did not inform the Appellant or the NCLT about a Section 9 petition filed by Respondent No. 2, which led to the initiation of the CIRP process without the Appellant's knowledge.
The Appellant argued that had it been informed of the insolvency proceedings; it would have paid the debt to protect its substantial investment. It claims to be an "aggrieved person" under Section 61 of the IBC, thus entitled to appeal. The Appellant further contends that the CD's failure to implement an EOGM decision to appoint its representative as a director prevented its involvement in key decisions.
The Appellant asserted that majority shareholders have the right to appeal insolvency orders, citing precedents where shareholders intervened in CIRP proceedings. The appeal is based on the lack of disclosure and the Appellant’s ongoing petition under Sections 241-242 of the Companies Act.
Contentions of the Respondent:
The Respondent argued that the Appellant’s challenge is based on the interpretation of “dispute” under Section 5(6) of the IBC, which must be between the debtor and the creditor. The Respondent contended that there is no pre-existing dispute in this case.
The Respondent relied on the Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) ruling, which clarified that the debt must be due and payable, and no dispute should exist for the application to be admitted.
The Respondent further cited Chetan Sharma v. Jai Laxmi Solvents (2018) and Axis Bank v. Lotus Three Developments (2018), stating that shareholder disputes are irrelevant under the IBC and only debtor-creditor issues matter at the admission stage.
Additionally, the Respondent asserted that disputes related to shareholder oppression are governed by the Companies Act, not the IBC. Since the Appellant is merely a shareholder, they lack standing to challenge the CIRP, as established in Nirej Vadakkedathu Paul v. Sunstar Hotels (2023).
Respondent No. 2 further argued that the appeal is based on a pre-existing dispute, but this is irrelevant since the operational debt owed to them is undisputed. The Respondent insists the appeal should be dismissed as it lacks merit and does not involve the operational creditor.
Observations of the Tribunal:
The Tribunal clarified that disputes related to shareholder oppression or mismanagement under the Companies Act fall outside the scope of the IBC, which takes precedence under Section 238. The Tribunal emphasized that the Operational Creditor had established the debt and default, and the Adjudicating Authority's order was based on a reasoned hearing. The Tribunal stated, “the contention of appellant regarding resolution of Company Petition under Section 241 & 242 of Companies Act, 2013 before the CIRP petition does not hold water.”
On the claim of a pre-existing dispute, the Tribunal referred to its earlier judgment in Chetan Sharma Vs. Jai Laxmi Solvents (P) Ltd. & Anr. (2017), quoting, “It is a settled law that unilateral transfer of liability does not constitute a 'dispute' within the meaning of Section 5(6) of the I&B Code.” The Tribunal dismissed the appellant's contention, stating that the CIRP was admitted according to IBC provisions.
The Tribunal examined the appellant’s locus standi and explained that only creditors or the corporate debtor could initiate CIRP. It found no merit in the appellant's argument, quoting a previous judgment, “a derivative action by plaintiff, as a majority shareholder, for the benefit of Umang would not be maintainable.”
The Tribunal ruled that shareholders cannot challenge the admission of the CIRP, as it would "render the object of I&B Code, 2016 illusory." It also emphasized, “no specific law allows any shareholder of the ‘Corporate Debtor’ to challenge the admission of CIRP once the debt due and default is established by the ‘Adjudicating Authority’.”
The Tribunal further stated that any appeal challenging the admission of CIRP would be "futile, purposeless and will only cause delay in resolution." It quoted previous judgments, asserting that investors (shareholders) are not "aggrieved persons" under the IBC and that the appellants had no locus standi.
The Tribunal concluded that "equity shareholders are investors in the company and they are owners of the company to the extent of their proportionate shareholding" and have "the last priority in the liquidation state." It also noted that shareholders must accept the loss of capital if the company goes into liquidation and cannot pursue derivative actions in CIRP.
The Decision of the Tribunal:
The Tribunal held that the appellant, being a shareholder of the company, was not the “aggrieved party” as per the provisions of the Code. The appellant had no locus to file the appeal, and the same was deemed not maintainable. Accordingly, the appeal was dismissed.
Case Title: Clarion Health Food LLP v. Goli Vada Pav Pvt. Ltd
Case No: Company Appeal (AT) (Ins.) No. 1522 of 2023
Coram: Justice Rakesh Kumar Jain, Member (Judicial), Mr. Naresh Salecha, Member (Technical) and Mr. Indevar Pandey, Member (Technical)
Advocate for Petitioner: Mr. Rakesh Kumar, Mr. Aditya Shukla, Ms. Preeti Kashyap, Mr. Ankit Sharma, Mr. Varun Pandit, Mr. Yash Tewari, Mr. Yash Dhawan
Advocate for Respondent: Sr. Advocate Mr. Swarupama Chaturvedi, Ms. Saumya Kapoor, Mr. Aayush Shivam & Ms. Kavita Chaturvedi (Advocates for Respondent 1). Mr. Jehan Mehta, Mr. Akshay & Mr. Dyuti Ghai (Advocates for Respondent 2).
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