This post analyzes the judgment of the Supreme Court of India in Vijay Kumar Jain v. Standard Chartered Bank dated 31/01/2019. 

The Petitioners approached SC aggrieved by the appellate tribunal’s judgment rejecting the appellant’s prayer for directions to the resolution professional to provide all relevant documents including the insolvency resolutions plans in question to members of the suspended board of directors (“BOD”) of the corporate debtor in each case so that they may meaningfully participate in meetings held by the committee of creditors (“CoC”). The Court ordered that the appellant will be given copies of all resolution plans submitted to the CoC within a period of two weeks from the date of the judgment. The court also ordered a fresh deliberation of the resolution plan which would include the appellants as participants as per the procedure detailed in the Insolvency and Bankruptcy Code (“IBC”).

Contention on behalf of Appellant

1. Under section 24(3) of the Code, the Resolution Professional has to give notice of each meeting of the committee of creditors to the members of the suspended board of directors. Additionally under Regulation 21, the notice of such meetings shall not only contain an agenda of the meeting but shall also contain copies of all documents relevant to the matters to be discussed and issues to be voted upon at the meeting. This implies that access to the resolution plans and other relevant documents under consideration at these meetings must be supplied together with the notice of the meeting to members of suspended Board of Directors.
2.  Members of the Suspended BOD are “participants” in the meetings of COC, they are persons who in order to participate effectively must be given the necessary documents so that their views can also be considered by the COC.
3. Section 31(1) of the IBC makes it clear that once the resolution plan is passed by the Adjudicating Authority, it shall be binding on the corporate debtor together with guarantor and other stakeholders. It is clear that the erstwhile BOD, which consists of persons who may have given personal guarantees of debt owed by the corporate debtor, will be bound by the resolution plan and therefore have a vital stake in what ultimately gets passed by the COC.
4. Section 60(5) of the IBC, such persons have a right to challenge the terms of a proposed resolution plan before the tribunal and under section 61 may go further against the adjudicating authority’s order to the appellate tribunal.

Contention on behalf of the Respondent

1. As per section 30(3) and Regulation 39(2), resolution plan were only to be given to the committee of creditor for its consideration. The term “committee” and “participant” are differently defined under the Regulation and that the participants are expressly excluded by Regulation 39. Therefore, resolution professional is required to present resolution plan only to the committee of creditors
2. Notes on Clauses to Section 24 of the Code, made it clear that the reason for the participation of the erstwhile BOD in meeting of the committee of creditors is so that they may give information to assess the financial position of the corporate debtor. They are not in a position of other creditors who may go into the merits and demerits of the resolution plan as such resolution plan affect creditors only and not such persons.
3. Regulation 7(2) of IBBI (Insolvency professional) Regulations, 2016 read with the First Schedule thereto, which made it clear that confidential information can only be shared with the consent of the relevant parties. Further, the confidential information contained in proposed resolution plan can only be shared with members of the committee of creditors after receiving an undertaking from them under the Regulations.
4. “Person aggrieved” in section 61 of the IBC would necessarily refer to persons aggrieved for the purpose of Section 60(5) also, and as members of the ex-BOD cannot be said to be person aggrieved, As the persons such as appellant are not persons aggrieved and since no prejudice is caused to them, they do not have a right to file an application under section 60(5) of the Code or appeal to the Appellant tribunal from orders of the AA under Section 61.
5. “Information memorandum” and “resolution plan” are separately defined and a specific procedure has been laid down in the Code and Regulation dealing with them. They cannot therefore be said to be “documents” within the meaning of regulation 21.
6. That the role of suspended BOD is that of information giver and not information seekers.
7. Confidentiality requirement would be breached if a copy of the resolution plan were to be given to the members of the suspended BOD and that it would be in the interest of some members of the suspended board who may attempt to sabotage the corporate insolvency resolution process.

Analysis of the Judgment 

The issue in question is tricky given that questions concerning greater transparency may appear attractive in abstract; however a neat localization of the same within the broader framework and objective of resolution of insolvency and bankruptcy raises considerable contradictions. Additionally, the Respondent also alluded to the potential of misuse of the information and documents by Suspended directors to forestall and hinder successful resolution of insolvency. Therefore, The validity of legal position subordinating transparency in favour of prompt resolution of insolvency has been tested by the Court on the anvil of existing legal stipulations including regulations thereto.

The Court referred to the Bankruptcy Law Committee Report of November, 2015 which states that the code would enable symmetry of information between creditors and debtors. The law must ensure that information that is essential for the insolvency and bankruptcy resolution process is created and available when it is required. The law must enable access to this information to third parties who can participate in the resolution process, through the regulated professional.

Participants and the Role of power to vote

The respondent submitted that the RP is required to present resolution plan only to the Committee of Creditors (CoC). This was based on the reading of Section 30(3) and Regulation 39(2) of the CIRP regulations holding that the term “committee” and “participants” are defined under different regulations and that the participants are expressly excluded by Regulation 39.

The relevant sections are reproduced for perusal

(3) The resolution professional shall present to the committee of creditors for its approval such resolution plans which confirm the conditions referred to in sub-section

39. Approval of resolution plan.—(1) A prospective resolution applicant in the final list may submit resolution plan or plans in accordance with the Code and these regulations to the resolution professional electronically within the time given in the request for resolution plans under regulation 36B along with:

(a) And affidavit stating that it is eligible under section 29A to submit resolution plans; and

(b). ******

(c) An undertaking by the prospective resolution applicant that every information and records provided in connection with or in the resolution plan is true and correct and discovery of false information and record at any time will render the applicant ineligible to continue in the corporate insolvency resolution process, forfeit any refundable deposit, and attract penal action under the Code.

(1A) A resolution plan which does not comply with the provisions of sub-regulation (1) shall be rejected.

(2) *******

(3) The committee shall evaluate the resolution plans received under sub-regulation (1) strictly as per the evaluation matrix to identify the best resolution plan and may approve it with such modifications as it deems fit:

Provided that the committee shall record the reasons for approving or rejecting a resolution plan.

The committee of creditors, as per section 21, comprises of all the financial creditors of the corporate debtor. The Committee comes into existence after the interim resolution professional collate all the claims received against the corporate debtor and after determining the financial position of the corporate debtor. The procedure of meeting of committee of creditors has been provided by Section 24 of the IBC. The question here is whether members of the suspended board of directors or the partners of the corporate person can be categorized as a ‘participant’ in the meeting of the Committee of Creditors. On a broader note, the issue concerns the need of homogeneity and consequent exclusivity in the functioning and membership of the Committee of Creditors. Therefore, even though members of the Suspended Board of director are given notice of each meeting and may attend the meeting of the committee of creditors, the inability to vote should be held as an argument against their membership of the Committee. Consequently, the resolution plans must be presented only to the ‘core’ of the Committee of the Creditors that does not include members of the suspended Board of Directors.

Though the erstwhile BOD are not members of the committee of creditors, they have a right to participate in each and every meeting held by the committee of creditors, and also have a right to discuss along with members of the committee of creditors all resolutions that are presented at such meeting under section 25(2)(i). The court opined that even in absence of the right to vote, members of the suspended Board of Director are vitally interested in such resolution plans. Such ‘vital interest’ of and by itself provides a right to be furnished copies of resolution beforehand in order to participate effectively in the CoC meeting under Section 25. The court also illustrated the right of the operational creditors who are also not entitled to vote but are considered vitally interested in the resolution plan. The metric behind whether access to resolution plan must be provided is not legal membership or absence thereof rather it concerns the presence of vital interest of the third parties and whether absence of access impedes their ability to represent their interest and participate in the meeting of the committee of creditors. This is certainly a positive move that would result in greater participation and deliberation, quantitatively as well as in quality, in the meetings of CoC.

Furthermore, the court noted that the regulations recognize the vital interest of the member of the suspended Board of Direction in the case of determination of the cause of default. Members of Suspended Board can thereby represent the CoC that the cause of default is not due to and is not attributable to the actions of the erstwhile management. The judgment also cites Regulation 35 and Regulation 38(1)(a) to establish the case for vital interest of the Suspended BOD in access to resolution plans.

NOTE 24: ONLY INFORMATION GIVER AND NOT SEEKER

The Respondents relied upon Note 24 for the submission that members of suspended Board of Directors are participants in the meeting of the CoC only so that the Committee and the resolution professional may seek information from them. This line of argument seeks to restrict the role and position of the Suspended BOD as akin to witness. Thereby, this argument denies the deliberative character of the role played by the members of the Suspended board of directors.

“Clause 24 prescribes the modalities for the meeting of the committee of creditors. The meetings are conducted by the resolution professional and may be attended by the members of the board directors or partners of the corporate debtor. This gives an opportunity for the committee of creditors and the resolution professional to seek information that they may require to assess the financial position of the corporate debtor and prepare a resolution plan.”

This submission was rejected by the Court by pointing out three specific infirmities that inhibits any scope of reliance on Note 24 by the Court for interpretation of the role played by members of Suspended Board of Directors.

1. Firstly, it speaks of the resolution professional seeking information. The resolution professional does not seek information at a meeting of the committee of creditors, which is what section 24 is all about. The resolution professional only seeks information from the erstwhile BOD under Section 29 before preparing an information memorandum.
2. Secondly, the resolution professional does not prepare a resolution plan as is mentioned in the Notes on Clause 24; he only prepares an information memorandum which is to be given to the resolution applicants who then submits their resolution plan under section 30 of the code. The COC gets info so that they can assess the financial position of the corporate debtor from various sources before they meet.
3. Section 31(1) of the code would make it clear that such member of the erstwhile BOD who are often guarantors are vitally interested in a resolution plan as such resolution plan then binds them.

The restrictive interpretation of the role was also rejected on the ground that the Directors may be vitally involved with the meeting of CoC in some other manner.  As Regulation 36 of the CIRP regulation, the info memorandum that is given to each member of the COC and to any potential resolution applicant will contain details of guarantees that have been given in relation to the debts of the corporate debtor. Given that in many cases directors are themselves guarantors, they are vitally interested in a resolution plan which may or may not result in the scaling down of the debt of guarantor. Such vital interest, in the opinion of the Court, does not augur well with the one-way street of only providing information by the member of suspended Board of Director.  Additionally, the resolution plan which has been approved or rejected by an order of the AA has to be sent to “participants” which would include members of the erstwhile BOD via Reg 39(5) of the CIRP Regulation. In case of dissatisfaction, Section 60(5)(c) of the Code provides an independent right to members of suspended Board of directors to approach the AA, which must then hear such person before it is satisfied that such resolution plan can pass muster under section 31 of the Code.

“Documents” And the Resolution Plans:

It was argued by the Respondent that “information memorandum” and “resolution plan” being separately defined, they cannot be said to be “documents” within the meaning of Regulation 21 of the CIRP regulations. The relevant provision has been reproduced below:

(3) The notice of the meeting shall contain the following —

(i)************

1. ii) *********

(iii) Copies of all documents relevant to the matters to be discussed and the issues to be voted upon at the meeting.

The interpretation of “documents” and whether particular information may be characterized as document under Regulation 29 must be comprehended in reference to the usage of phrase “all” and “relevant to the matters to be discussed” and the “issues to be voted upon at the meeting”. Herein, the regulation itself provides a proxy for the aforementioned determination holding that all such documents which are relevant to the matters to be discussed or the issues to be voted upon must be supplied along with the notice to the meeting in pursuance of the code. The Court ruled that the expression “documents” is a wide expression which would certainly include resolution plans. The Court also ruled that resolution plan can be considered as “matters to be discussed” at the meetings of CoC and that the  members of the suspended Board of Directors being ‘participants’ who will discuss these issues are entitled to such resolution plans along with the notice of the meeting of the CoC.

CONCLUSION

The present judgment, admirably, presents the pro-transparency orientation of the Courts towards resolution of Insolvency and Bankruptcy under IBC. In my opinion, the issues and controversy concerning access to resolution plans and other documents qua third parties is far from over. Given that the present case dealt with rights of access for the suspended BOD members who are participants of the CoC, the calculus of transparency and confidentiality may still need further refinement in the context of other relevant third parties.