Rights of Suspended Directors to Appeal under IBC

By Harshvi Chaumal

In Innoventive Industries v ICICI Bank [2017] ibclaw.in 02 SC, the Supreme Court handed down one of the very first significant rulings under the Insolvency and Bankruptcy Code, 2016 (Code) on August 31, 2017. The Court determined, among many other things, that when an insolvency practitioner is chosen, the former directors of the corporate debtor cannot pursue an appeal application on the borrower’s account.

To recapitulate the circumstances and the Supreme Court’s ruling, the corporate debtor, Innoventive Industries (Innoventive), had budgetary difficulties and had gotten into a comprehensive reorganization arrangement with its lenders. After a little while, ICICI Bank moved for Innoventive’s insolvency proceedings as a credit institution there under Code. With regard to corporate debtor Innoventive, it was contended that its Resolution Plan should not be allowed since the company was entitled to an intimation under The Maharashtra Relief Undertakings (Special Provisions) Act, 1958 [“Relief Act”], which gave Innoventive the right to a moratorium and the state administration’s seizure of management. The National Company Law Tribunal (NCLT) granted the motion and imposed the moratorium, and a challenge to the appellate tribunal of the National Company Law (NCLT) was also denied. After that, it went all the way to the Apex Court on appeal. The Court considered the concerns surrounding the maintainability of the appeal, the predominance of the Code over that of the provisions of Relief Act, and Innoventive Industries’ responsibility to make debt payments under the major restructuring accord through a detailed ruling. Innoventive’s appeal was eventually dismissed by the Court, which stated, among other things, that perhaps the Code’s regulations would have precedence over the Relief Act.

In this case, the Court’s stance on the subject of the appeal’s maintainability is notable. The appeal was filed on behalf of the corporation by the corporate debtor’s directors. It had already been decided to recruit an insolvency specialist to oversee the company’s activities. In light of all of the above, the Court decided as follows:

The Court also said that it was never inclined to quash the appeal only on this ground, and the decision proceeded on to consider the other concerns in depth in the future. Such that all judges and judicial bodies would be aware of the fundamental changes in law, the Court felt it important to provide a thorough judgement on this appeal. Although the appeal could not be maintained, it raises some concerns about an ex-power director’s to pursue an appeal under the Insolvency and Bankruptcy Code, 2016 [“Code or IBC”].[1]

The Code stipulates that now the functions of the corporate debtor’s management board are suspended as of the date of the employment of the interim insolvency resolution professional. From then on, the board of directors’ authorities, as well as the administration of the corporate debtor’s activities, will be vested in the interim insolvency resolution professional (section 17 of the Code). Following then, the director’s responsibility is constrained to assisting and cooperating with the interim insolvency resolution professional as needed in handling the corporate borrower’s affairs (section 19 of the Code).

Based on an interpretation of the aforesaid clauses, the Court’s conclusion that the former directors no longer constitute or represent the company debtor is compatible with the Code’s requirements. As a result of this, “any individual dissatisfied” by an NCLT decision may seek an application to the NCLAT under section 61(1) of the Code. In the same way, section 62 of the Code empowers “any individual dismayed” by an NCLAT decision to move to the Apex Court.

An individual who is qualified and competent to seek a court for substantial relief has the right of appealing to the NCLAT or the Apex Court.  The High Court of Delhi, in Vinod K. Patel v Industrial Finance Corporation of India Ltd.[2] (2001), construed the term ‘aggrieved’ to mean an individual who has been deprived either personal or economic privileges and has a genuine dissatisfaction. According to this description, “any individual wronged” might include a former director who was stripped of his administrative authority by the Code, or a shareholder who was stripped of his right to vote due to the Code’s council of creditors.[3]

Innoventive’s lawyer, Dr. A.M Singhvi, made a similar case in front of the Apex Court. He indicated that a petition to change the cause title of the matter could be filed, noting that the former directors are bringing an appeals as individuals dissatisfied by the NCLAT ruling, rather than as representatives of the corporate debtor. The Judge, nevertheless, dismissed this argument, finding that the firm was the single appellant and that the appeal was clearly unsustainable.

Nevertheless, it may be claimed that in the event that an ex-director is unable to appeal in his management position, he can do so in his fiduciary position. Section 166 of the Companies Act, 2013 establishes a director’s fiduciary obligations. A director is required to operate in good confidence and sincerity in effort to advance the organisational objectives in the greatest interest of the organisation, its workforce, and its investors under that provision. Directors serve in a fiduciary position on account of their organization, and their activities and deeds must be for the welfare of the corporation.

The fiduciary responsibility of a former director to act in the company’s greatest interest would continue even if he no longer has managerial responsibilities conferred in him. According to Section 17 of the Code, only “the interim resolution professional” has the authority to perform the board of directors’ functions. It’s not like the directorship ends. As a conduct of fiduciary responsibility, the director’s decision to oppose a motion to commence corporate Insolvency resolution submitted against his firm and in good conscience to the officials should be considered. It may not serve the company’s interests to go through a resolution procedure with its creditors, even if the default is only a tiny financial obligation that can be settled more easily from a director’s viewpoint. [4]

As a result, before a petition for corporate insolvency resolution is admitted, the corporate debtor does not have the privilege to be addressed under the Code’s provisions because of the severe civil repercussions the Code-based insolvency resolution procedure has on corporate debtors as well as their board of directors and stockholders, the NCLT should provide a restricted notification to corporate debtors before accepting a proposal under the Code. The NCLT did so in Paragraph 52 of its order in the Innoventive Industries case. Prior to a request being admitted, the corporate debtor would have the chance to offer any mitigating reasons to the NCLT for consideration. The warning would be pointless if an interim insolvency settlement specialist had already been engaged, as was the situation here. Consequently, the executives of Innoventive were unable to submit mitigating considerations in their defense or to resist the application’s acceptance[5]. A director’s appeals in good conscience, purely for the betterment of the business and its objectives, to resist a corporate insolvency settlement procedure should be acceptable in the eyes of the court. Nevertheless, in the long term, it will be interesting to see if an assertion predicated on a director’s fiduciary responsibility holds up in court.

The Supreme Court’s ruling in Innoventive Industries will very certainly have a significant impact on the appeals currently pending before the appellate institutions under the Code. Due to this ruling, the meaning of “any person aggrieved” has been severely limited.[6] The capability to file an appeal under the Code must be clearly defined in the future so that no one gets caught in the domain of non-maintainability as a result of this decision. [7]Furthermore, it will be fascinating to examine how the Code’s restrictions on the interpretation of directors’ responsibilities evolve.[8] One could only expect that when evaluating the Code,[9] the fiduciary aspect of a director’s job would be taken into account.[10]

Reference:

[1] Director as “Any Person Aggrieved” under Insolvency and Bankruptcy Code – IndiaCorpLaw

[2] Rights of Suspended Board of Directors – Vijay Kumar Jain v. Standard Chartered Bank Case – Insolvency and Bankruptcy (cyrilamarchandblogs.com) and https://www.scconline.com/blog/post/2018/08/20/appeal-filed-under-ib-code-by-suspended-board-of-directors-held-not-maintainable-nclat/

[3] 2 Years of Innoventive Industries v ICICI Bank | Law column

[4] Innoventive Industries Limited v. ICICI Bank Limited: Paradigm Shift in Insolvency Law in India – India Corporate Law (cyrilamarchandblogs.com)

[5] Rights of Suspended Board of Directors – Vijay Kumar Jain v. Standard Chartered Bank Case – Insolvency and Bankruptcy (cyrilamarchandblogs.com)

[6] CR Datta on Company Law, Volume 3, 7^th Ed, 3.2269.

[7] Director as “Any Person Aggrieved” under Insolvency and Bankruptcy Code – IndiaCorpLaw

[8] Supreme Court Chooses To Interpret The Insolvency Code For The First Time – Insolvency/Bankruptcy/Re-structuring – India (mondaq.com)

[9] CR Datta on Company Law, Volume 2, 7^th Ed, 2.1562.

[10] Bar and Bench | Indian Legal News | Supreme Court Judgment, High Court Updates, Indian Law Firm News, Law School News, Legal News in India