The NCLAT, New Delhi expounded that in absence of any proof and just by relying on letters demanding repayment of loans sent by financial creditors to the Corporate Debtor, the NCLT should not have accepted the Section 7 application of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”). It was also enunciated that once the beginning of CIRP is found to be based on fraud, other issues about the constitution of CoC and decisions, etc. become irrelevant as once the foundation of CIRP crumbles, all the later process would fall as it wouldn’t have any base to stand on. Concerning the allegation of related parties, the Tribunal propounded that the four companies are ‘related parties’ of the Corporate Debtor and therefore, there was a clear contravention of the first proviso of Section 5(24) of the IBC. The CoC became illegal and all the decisions taken thereof too became illegal when the related parties became members of the CoC.
Brief Facts:
An Application under Section 7 of the IBC was preferred by a financial creditor (Nandakini Contractors Pvt. Ltd.) against the Corporate Debtor (Hirakud Industrial Works Limited) for non-payment of the loan. The Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) was initiated based on the admission of debt and without any supporting documents concerning the loan.
As per the Appellant Hindalco Industries Limited (“HIL”), it is the lessee and sole user of the private railway siding owned by the Corporate Debtor. An auction was conducted and the HIL was adjudged as the highest bidder for the land underneath the said railway siding, however, due to CIRP, the auction stopped. It was alleged by the Appellants that the auction was being conducted to discharge the dues of the workmen of the Corporate Debtor.
During the pendency of the said application, two interlocutory applications were filed by the HIL to seek detailed expression of interest as per Regulation 36A(1) of the Insolvency Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) Regulations 2016 (hereinafter referred to as the “2016 Regulations”) and to set aside the resolutions and approvals given in the Committee of Creditors’ (hereinafter referred to as “CoC”) meetings.
It was alleged by the Appellants that the resolution plan was approved while the application of HIL was pending vide which it was contended that CoC was illegally constituted as related parties were included.
The main contention of the Appellants was that the said application was filed with collusion between the financial creditor and Corporate Debtor to defraud workers. It was alleged that the financial creditor and the Corporate Debtor share common directors and have mutual shareholdings. Further, the NCLT sought proof of loan from the financial creditor but no such proof of debt was produced.
It was stated by the Appellants that under the disinvestment of its stake in Corporate Debtor by Infrastructure Development Company Limited (“IDCOL”), 100% shareholding was offered to 3 companies. Thereafter these 3 companies filed a writ petition before the Odisha High Court. The High Court directed that the workers, IDCOL, and the 3 companies should agree to ensure clearance of workmen’s dues and thereafter an agreement was signed.
It was submitted that another writ petition was preferred when the entire shareholding was transferred by the 3 companies to another company and the Odisha High Court again directed to clear the workmen’s dues. But, the dues remained unpaid.
Thereafter, the Odisha Bench directed a public auction of the assets of the Corporate Debtor and that’s when HIL submitted its bid. Re-auction was ordered as the dues were not cleared and during that process, an application under Section 7 was preferred. The NCLT accepted the application and hence a moratorium was imposed. Hence, the present appeals.
Contentions of HIL:
It was alleged that filing an application under Section 7 of IBC and jointly requesting an urgent hearing is evidence of the fact that there was a collision between the financial creditor and the Corporate Debtor. Further, CoC’s constitution is void ab initio as there is no proof of debt regarding the financial creditors. It was alleged that the members of the CoC belong to the same group of companies and examples of the same were given. It was contended that the corporate veil should be lifted to look at the connectedness of the members and to unravel the ulterior motive of the financial creditor and the Corporate Debtor to defraud the creditors, especially workers.
Contentions of the Worker’s Union:
It was argued that the CIRP was only initiated with a fraudulent motive and that the CoC constituted is illegal as its members are related parties. It was contended that when the auction of the assets of the Corporate Debtor became evident, a Section 7 application was filed to block the payment of the dues of the workers. Further, it was alleged that the resolution plan is in contravention of Section 38 of the IBC as it does not spell out the source of funds necessary for the implementation of the plan.
Contentions of the erstwhile Resolution Professional (“RP”):
It was argued that HIL has a vested interest in the assets of the Corporate Debtor and that is no ground to challenge the order passed by NCLT. It was contended that HIL did not deposit the balance amount; hence, the auction sale was never completed. Moreover, the worker’s dues were not submitted during CIRP which is why these claims were not considered in the resolution plan. As regards debt, it was submitted that debt is present in the balance sheet of the Corporate Debtor as an ‘unsecured loan’ in ‘current liabilities’.
Contentions of the Successful Resolution Applicant (“SRA”)
It was submitted that the workers were not interested in claiming the dues; therefore, after approval of the resolution plan, they cannot claim their dues. Further, as per the parameters set in Sections 5(24) and 29A of the IBC, the related parties’ threshold was not met in the present case. It was alleged that even if the worker’s union was to be included, there would be no material change as the claims of all the members of the CoC exceed the claims of the workers.
Observations of the Tribunal:
The Tribunal observed that payment of workmen’s dues was a condition precedent in the share purchase agreement executed after the tripartite agreement. While the payment was due, the Corporate Debtor closed down the business. Thereafter, the entire shareholding was also transferred to Indo Wagon due to which Adishwar Nivesh was controlling the Corporate Debtor.
Further, it was noted that the Section 7 Application was filed based on an alleged loan agreement and in this regard, there was no proof or documentary evidence submitted. It was remarked that the Section 7 Application has to be filed in a particular format (Form-1) and as per this format, no such evidence was submitted on record. It was also noted that the financial creditor did not bring the loan agreement on record.
It was expounded that in absence of any proof and just by relying on letters demanding repayment of loans sent by financial creditors to the Corporate Debtor, the NCLT should not have accepted the application. Moreover, it was a blunder on part of the RP to not place proof of debts before the NCLT despite the order being passed by NCLT to submit the evidence.
Considering that the financial creditor and Corporate Debtor belonged to the same group of companies and that an urgent hearing was requested jointly for the Section 7 Application, it was opined by the Appellate Authority that the financial creditor and Corporate Debtor did collide to file the Application.
Concerning the piercing of the corporate veil, it was noted that it was important to pierce the veil to examine the conduct of the companies involved in the fraudulent initiation of CIRP and to analyze the interconnectedness of the various parties. It was held that the companies were being guided by a ‘controlling mind’ to frustrate the object and purpose of IBC.
The Bench further remarked that IBC ensures the balancing of acts of all the stakeholders in the insolvency resolution of the corporate persons. Any such action that is in contravention of the spirit of the IBC should be looked at deeply to ascertain the element of fraud.
Concerning the allegation of related parties, the Tribunal noted that the four companies are ‘related parties’ of the Corporate Debtor and therefore, there was a clear contravention of the first proviso of Section 5(24) of the IBC. The CoC became illegal and all the decisions taken thereof too became illegal when the related parties became members of the CoC.
Moreover, in the present case, the connection between the Corporate Debtor, financial creditor, members of the CoC, and the holding companies of the SRA through common directors prove that there was a collision of the parties to initiate CIRP.
The Bench was of the view that the present case was a fit example where Section 65 of the IBC would get attracted. It was also enunciated that once the beginning of CIRP is found to be based on fraud, other issues about the constitution of CoC and decisions, etc. become irrelevant as once the foundation of CIRP crumbles, all the later process would fall as it wouldn’t have any base to stand on.
The Appellate Authority noted that the RP must verify the claims and their authenticity as per Regulation 13 of the 2016 Regulations. But in the present case, the claims were not even verified. Such an act of omission cannot be overlooked. Further, regarding workers submitting their claims, it was observed that RP being a non-partisan functionary could have advised the workers to submit their claims, especially when he was aware that the workers had been making efforts to pay their long-standing dues.
It was held that considering the elements of fraud and malice involved in the present case, the resolution plan cannot be sustained in law. Further, when the constitution of the CoC itself is tainted, the decision taken by the Committee cannot be made valid on the pretext of commercial wisdom.
The decision of the Tribunal:
Based on the above-mentioned reasons, the order of the NCLT and the resolution plan were quashed and set aside. The Corporate Debtor was freed from the rigours of CIRP including the moratorium. Regarding possible collusion between the parties, IBBI was directed to conduct an investigation. Accordingly, all 4 appeals were disposed of.
Case Title: Hindalco Industries Ltd. V. Hirakud Industrial Works Ltd. & Ors. with other connected matters
Coram: Justice Ashok Bhushan, Dr. Alok Srivastava (Technical Member)
Case No: Company Appeal (AT)(Insolvency) No. 42 of 2022 with other connected matters
Advocates for Appellant: Advs. Mr. Krishnan Venugopal, Mr. Ashish Prasad, Mr. Kaustubh Mishra, Mr. J. Rajesh, Mr. Arijit Prasad, Mr. Debashish Mohapatra
Advocates for Respondents: Advs. Mr. Siddhartha Sharma, Mr. Arjun Asthana, Mr. Krishnraj Raj Thakkar, Mr. Ashok Kumar Jain
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