Supreme Court Clarifies Rights of Suspended Directors in Insolvency Proceedings: Vijay Kumar Jain vs. Standard Chartered Bank (2019)

Date of the Judgment: 31 January 2019
Citation: (2019) INSC 78
Judges: R.F. Nariman, J., Navin Sinha, J.
Can former directors of a company undergoing insolvency proceedings access crucial resolution plans? The Supreme Court of India recently addressed this important question in the case of Vijay Kumar Jain vs. Standard Chartered Bank & Ors., clarifying the rights of suspended board members during the corporate insolvency resolution process. The Court held that these directors, though not part of the committee of creditors, are entitled to receive copies of resolution plans to effectively participate in meetings, as they are bound by the resolution plan and have a vital stake in the process. This judgment was delivered by a two-judge bench comprising Justice R.F. Nariman and Justice Navin Sinha, with Justice R.F. Nariman authoring the opinion.

Case Background

Ruchi Soya Industries Ltd., a company engaged in processing oilseeds and refining crude oil, faced insolvency proceedings after company petitions were filed by Standard Chartered Bank Ltd. and DBS Bank Ltd. in September 2017. The National Company Law Tribunal (NCLT) admitted these petitions in December 2017, initiating the corporate insolvency resolution process (CIRP). Mr. Shailendra Ajmera was appointed as the Interim Resolution Professional. The Committee of Creditors (CoC) was formed under Section 21 of the Insolvency and Bankruptcy Code, 2016. Vijay Kumar Jain, a member of the suspended Board of Directors, was initially allowed to attend the first CoC meeting. However, he claimed that he was later denied participation in subsequent meetings. He then filed an application before the NCLT to ensure his effective participation. Although he executed a non-disclosure agreement to maintain confidentiality of the resolution plans, the NCLT dismissed his application, allowing him to attend but not insist on receiving confidential information. The Appellate Tribunal upheld his right to attend CoC meetings but denied access to resolution plans. This led to the appeal before the Supreme Court.

Timeline

Course of Proceedings

The NCLT initially dismissed the appellant’s application, allowing him to attend CoC meetings but not to receive confidential information. The Appellate Tribunal recognized the appellant’s right to attend and participate in CoC meetings but denied access to resolution plans. An application for modification/clarification of the Appellate Tribunal’s order was also dismissed. Aggrieved by the Appellate Tribunal’s order, the appellant filed the present appeal before the Supreme Court. The Supreme Court, while issuing notice, stated that the bids will not be finalized by the Adjudicating Authority without the leave of this Court. Subsequently, the Court clarified that the Adjudicating Authority could continue with the proceedings but no order could be passed until the Supreme Court adjudicated on the appeal.

Legal Framework

The Supreme Court considered the following key provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) and its related regulations:

• Section 21 of the Insolvency and Bankruptcy Code, 2016: This section deals with the constitution of the Committee of Creditors (CoC), comprising all financial creditors of the corporate debtor. It specifies that a related party of the corporate debtor shall not have any right of representation, participation, or voting in a meeting of the CoC.
• Section 24 of the Insolvency and Bankruptcy Code, 2016: This section outlines the procedure for meetings of the CoC. It mandates that the resolution professional must give notice of each meeting to the members of the CoC, members of the suspended Board of Directors, and operational creditors whose dues are not less than 10% of the debt. While the directors and operational creditors can attend, they do not have voting rights.
• Section 25 of the Insolvency and Bankruptcy Code, 2016: This section details the duties of the resolution professional, including convening and attending CoC meetings and presenting all resolution plans at these meetings.
• Section 29 of the Insolvency and Bankruptcy Code, 2016: This section pertains to the preparation of the information memorandum by the resolution professional, which includes the financial position of the corporate debtor and information relating to disputes.
• Section 30 of the Insolvency and Bankruptcy Code, 2016: This section specifies the process for submitting resolution plans, including the requirement that the resolution professional must examine each plan and present those that meet the specified conditions to the CoC for approval.
• Section 31 of the Insolvency and Bankruptcy Code, 2016: This section deals with the approval of resolution plans by the Adjudicating Authority, stating that a plan approved by the CoC and meeting the requirements of Section 30 shall be binding on the corporate debtor, its employees, members, creditors, guarantors, and other stakeholders.
• Section 60(5) of the Insolvency and Bankruptcy Code, 2016: This section grants the National Company Law Tribunal (NCLT) jurisdiction to entertain or dispose of any application or proceeding by or against the corporate debtor, including questions of law or fact related to the insolvency resolution process.
• Section 61 of the Insolvency and Bankruptcy Code, 2016: This section allows any person aggrieved by an order of the Adjudicating Authority to appeal to the National Company Law Appellate Tribunal (NCLAT).
• Regulation 21 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation specifies the contents of the notice for CoC meetings, including a list of matters to be discussed, issues to be voted upon, and copies of all documents relevant to the matters to be discussed and voted upon.
• Regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation deals with the determination of fair value and liquidation value, which are to be provided to every member of the committee after receipt of resolution plans.
• Regulation 36 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation specifies the contents of the information memorandum, including details of guarantees given in relation to the debts of the corporate debtor.
• Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation provides for the measures that a resolution plan may include, such as satisfaction or modification of any security interest, reduction in the amount payable to creditors, and extension of maturity dates.
• Regulation 39 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation deals with the approval of resolution plans and the requirement to send a copy of the order of the Adjudicating Authority approving or rejecting a resolution plan to the participants.
• Regulation 7(2)(h) and Paragraph 21 of the First Schedule of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016: These provisions mandate that insolvency professionals must maintain the confidentiality of information related to the insolvency resolution process, except when disclosure is consented to by the relevant parties or required by law.

These provisions, taken together, establish the framework for the corporate insolvency resolution process, emphasizing the roles and rights of various stakeholders, including the suspended Board of Directors.

Arguments

Appellant’s Submissions:

• The appellant argued that under Section 24(3) of the Insolvency and Bankruptcy Code, 2016, the resolution professional must give notice of each CoC meeting to the suspended Board of Directors.
• They contended that Regulation 21 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, mandates that the notice of these meetings must include copies of all relevant documents, including resolution plans.
• According to the appellant, the suspended directors are “participants” in the meetings and need access to resolution plans to participate effectively. They emphasized that Section 31(1) of the Insolvency and Bankruptcy Code, 2016, makes the resolution plan binding on the corporate debtor, guarantors, and stakeholders, thereby giving the directors a vital stake in the process.
• The appellant also argued that under Section 60(5) of the Insolvency and Bankruptcy Code, 2016, they have the right to challenge the resolution plan and further appeal under Section 61. They relied on the Bankruptcy Law Committee Report of 2015 to support their submissions.

Respondent’s Submissions (Resolution Professional):

• The resolution professional argued that Section 30(3) of the Insolvency and Bankruptcy Code, 2016, and Regulation 39(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, clearly state that resolution plans are only for the consideration of the CoC.
• They contended that the terms “committee” and “participant” are defined differently under the regulations, with participants expressly excluded by Regulation 39.
• The respondents argued that if any regulations go beyond the provisions of the Code, they should be struck down as ultra vires. They relied on the Notes on Clauses to Section 24 of the Insolvency and Bankruptcy Code, 2016, stating that the participation of the erstwhile Board of Directors is only to provide information.
• They cited Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353, for the proposition that Notes on Clauses are important parliamentary material.
• The resolution professional also relied on Regulation 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, read with the First Schedule, which states that confidential information can only be shared with the consent of the relevant parties. They argued that the suspended directors are not “persons aggrieved” and thus cannot file applications under Section 60(5) or appeals under Section 61.

Respondent’s Submissions (Committee of Creditors):

• The committee of creditors argued that “information memorandum” and “resolution plan” are separately defined, and a specific procedure has been laid down for them, meaning they are not simply “documents” under Regulation 21.
• They relied on the Notes on Clauses, stating that the role of the suspended Board of Directors is to provide information, not seek it. They also pointed to the proviso to Section 21(2) of the Insolvency and Bankruptcy Code, 2016, which states that a director who is also a financial creditor has no right to participate in CoC meetings.
• They argued that a harmonious construction of the Code would lead to the anomaly that a director simpliciter would have the right to get documents, but a director who is a financial creditor would not. They emphasized the differentiation between “participant” and “committee” and stated that confidentiality would be breached if resolution plans were given to the suspended directors.
• They also argued that the “persons aggrieved” in Section 61 of the Insolvency and Bankruptcy Code, 2016, refer to those aggrieved for the purpose of Section 60(5), and members of the ex-Board of Directors cannot be considered as such.

Submissions Table

Innovativeness of the argument: The appellant’s argument innovatively combines the procedural requirements of notice and document sharing with the substantive rights and liabilities of the suspended directors under the resolution plan. The argument that the term “documents” is wide enough to include resolution plans, and that the directors are vitally interested in the resolution plan as they are bound by it, is a novel approach that the Court accepted.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in a separate section. However, the core issue that the Court addressed was:

1. Whether members of the suspended Board of Directors of a corporate debtor undergoing the corporate insolvency resolution process are entitled to receive copies of the resolution plans submitted to the Committee of Creditors (CoC) so that they may meaningfully participate in meetings held by the CoC.

Sub-issue: The Court also dealt with the sub-issue of whether the Notes on Clauses to Section 24 of the Insolvency and Bankruptcy Code, 2016, restrict the role of suspended directors to merely providing information, and whether the regulations go beyond the Code in requiring the sharing of resolution plans.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353 – The Supreme Court of India relied on this case for the proposition that Notes on Clauses are important parliamentary material that may be relied upon to understand the object of the Section in question.
• Arcelormittal India Private Limited v. Satish Kumar Gupta & Ors., Civil Appeal Nos. 9402-9405/2018 – The Supreme Court of India relied on this case to state that the time that has been utilized in these proceedings must be excluded from the period of the resolution process of the corporate debtor.

Legal Provisions:

• Section 3(31) of the Insolvency and Bankruptcy Code, 2016: This section defines “security interest” as a right, title, or interest or a claim to property securing payment or performance of an obligation, including mortgages, charges, and other agreements. The Court used this definition to highlight how guarantors, who may be members of the erstwhile Board of Directors, are impacted by resolution plans.
• Section 21 of the Insolvency and Bankruptcy Code, 2016: This section deals with the constitution of the Committee of Creditors (CoC), comprising all financial creditors of the corporate debtor. The Court considered the proviso of this section to determine who constitutes a member of the committee of creditors.
• Section 24 of the Insolvency and Bankruptcy Code, 2016: This section outlines the procedure for meetings of the CoC. The Court considered the provision of notice to suspended directors and operational creditors.
• Section 25 of the Insolvency and Bankruptcy Code, 2016: This section details the duties of the resolution professional, including convening and attending CoC meetings and presenting all resolution plans at these meetings.
• Section 29 of the Insolvency and Bankruptcy Code, 2016: This section pertains to the preparation of the information memorandum by the resolution professional, which includes the financial position of the corporate debtor and information relating to disputes.
• Section 30 of the Insolvency and Bankruptcy Code, 2016: This section specifies the process for submitting resolution plans, including the requirement that the resolution professional must examine each plan and present those that meet the specified conditions to the CoC for approval.
• Section 31 of the Insolvency and Bankruptcy Code, 2016: This section deals with the approval of resolution plans by the Adjudicating Authority, stating that a plan approved by the CoC and meeting the requirements of Section 30 shall be binding on the corporate debtor, its employees, members, creditors, guarantors, and other stakeholders.
• Section 60(5) of the Insolvency and Bankruptcy Code, 2016: This section grants the National Company Law Tribunal (NCLT) jurisdiction to entertain or dispose of any application or proceeding by or against the corporate debtor, including questions of law or fact related to the insolvency resolution process.
• Section 61 of the Insolvency and Bankruptcy Code, 2016: This section allows any person aggrieved by an order of the Adjudicating Authority to appeal to the National Company Law Appellate Tribunal (NCLAT).
• Regulation 21 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation specifies the contents of the notice for CoC meetings, including a list of matters to be discussed, issues to be voted upon, and copies of all documents relevant to the matters to be discussed and voted upon.
• Regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation deals with the determination of fair value and liquidation value, which are to be provided to every member of the committee after receipt of resolution plans.
• Regulation 36 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation specifies the contents of the information memorandum, including details of guarantees given in relation to the debts of the corporate debtor.
• Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation provides for the measures that a resolution plan may include, such as satisfaction or modification of any security interest, reduction in the amount payable to creditors, and extension of maturity dates.
• Regulation 39 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation deals with the approval of resolution plans and the requirement to send a copy of the order of the Adjudicating Authority approving or rejecting a resolution plan to the participants.
• Regulation 7(2)(h) and Paragraph 21 of the First Schedule of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016: These provisions mandate that insolvency professionals must maintain the confidentiality of information related to the insolvency resolution process, except when disclosure is consented to by the relevant parties or required by law.

Authorities Table

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353*: The Court acknowledged the importance of Notes on Clauses as parliamentary material but found the Notes on Clause 24 to be problematic in the present context.
• Arcelormittal India Private Limited v. Satish Kumar Gupta & Ors., Civil Appeal Nos. 9402-9405/2018*: The Court relied on this case tostate that the time utilized in these proceedings must be excluded from the resolution process period.
• Section 3(31) of the Insolvency and Bankruptcy Code, 2016: The Court used this definition to highlight how guarantors, who may be members of the erstwhile Board of Directors, are impacted by resolution plans.
• Section 21 of the Insolvency and Bankruptcy Code, 2016: The Court considered the proviso of this section to determine who constitutes a member of the committee of creditors and held that it does not apply to directors who are not related parties.
• Section 24 of the Insolvency and Bankruptcy Code, 2016: The Court considered the provision of notice to suspended directors and operational creditors and held that this provision must be read with Regulation 21.
• Section 25 of the Insolvency and Bankruptcy Code, 2016: The Court considered the duties of the resolution professional.
• Section 29 of the Insolvency and Bankruptcy Code, 2016: The Court considered the preparation of the information memorandum.
• Section 30 of the Insolvency and Bankruptcy Code, 2016: The Court considered the process of submitting resolution plans.
• Section 31 of the Insolvency and Bankruptcy Code, 2016: The Court considered the binding nature of the resolution plan and held that directors are bound by it.
• Section 60(5) of the Insolvency and Bankruptcy Code, 2016: The Court considered the jurisdiction of the NCLT.
• Section 61 of the Insolvency and Bankruptcy Code, 2016: The Court considered the right to appeal to the NCLAT.
• Regulation 21 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: The Court held that this regulation mandates that the notice of CoC meetings must include copies of all relevant documents, including resolution plans.
• Regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: The Court considered the provision of fair value and liquidation value to the members of the committee.
• Regulation 36 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: The Court considered the contents of the information memorandum.
• Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: The Court considered the measures that a resolution plan may include.
• Regulation 39 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: The Court considered the process of approval of resolution plans.
• Regulation 7(2)(h) and Paragraph 21 of the First Schedule of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016: The Court considered the confidentiality requirements of insolvency professionals but held that they must be balanced against the right of the suspended directors to access the resolution plans.

Final Decision: The Supreme Court allowed the appeal, setting aside the orders of the NCLT and the Appellate Tribunal. The Court held that the suspended directors are entitled to receive copies of resolution plans to effectively participate in meetings of the Committee of Creditors.

Ratio Decidendi

The ratio decidendi of the judgment can be summarized as follows:

1. Suspended Directors’ Right to Information: Members of the suspended Board of Directors of a corporate debtor undergoing the corporate insolvency resolution process are entitled to receive copies of the resolution plans submitted to the Committee of Creditors (CoC). This right is essential for them to meaningfully participate in CoC meetings, as they are bound by the resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016.
2. Interpretation of “Documents” in Regulation 21: The term “documents” in Regulation 21 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, is to be interpreted broadly to include resolution plans. This is because the regulation mandates that all relevant documents pertaining to matters to be discussed in the CoC meetings must be provided to all participants, including suspended directors.
3. Harmonious Construction of the Code and Regulations: The provisions of the Insolvency and Bankruptcy Code, 2016, and its related regulations must be interpreted harmoniously to ensure that all stakeholders, including suspended directors, are able to protect their interests. The regulations cannot be interpreted in a manner that goes against the intent of the Code, which is to ensure a fair and transparent resolution process.
4. Role of Suspended Directors: The role of suspended directors is not merely to provide information but also to participate meaningfully in the process, and their participation cannot be effective without access to the resolution plans.

Obiter Dicta

While the judgment primarily focused on the main issue, some obiter dicta can be identified:

• Notes on Clauses: The Court expressed reservations about relying too heavily on the Notes on Clauses to Section 24 of the Insolvency and Bankruptcy Code, 2016, as they may not always accurately reflect the legislative intent. The Court found that the Notes on Clauses in this case were problematic and did not align with the overall scheme of the Code, which seeks to ensure that all stakeholders have a meaningful say in the process.
• Balancing Confidentiality and Participation: The Court acknowledged the need to maintain confidentiality in the insolvency resolution process but emphasized that this need must be balanced against the right of suspended directors to effectively participate in the process. The Court suggested that a non-disclosure agreement, such as the one executed by the appellant, is sufficient to address confidentiality concerns.
• Importance of Stakeholder Participation: The Court stressed the importance of ensuring that all stakeholders, including suspended directors, are given an opportunity to participate in the insolvency resolution process. The Court emphasized that the process must be fair and transparent and that all parties who are bound by the resolution plan must have access to the relevant information.

Dissenting Opinion

There was no dissenting opinion in this case. The judgment was delivered by a two-judge bench, and both judges concurred with the final decision.

Conclusion

The Supreme Court’s judgment in Vijay Kumar Jain vs. Standard Chartered Bank is a landmark decision that clarifies the rights of suspended directors in corporate insolvency resolution proceedings. The key takeaways from this judgment are:

• Right to Access Resolution Plans: Suspended directors are entitled to receive copies of resolution plans to effectively participate in Committee of Creditors meetings. This right is crucial as they are bound by the resolution plan and have a vested interest in the outcome.
• Broad Interpretation of “Documents”: The term “documents” in Regulation 21 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, includes resolution plans.
• Meaningful Participation: The judgment emphasizes the need for meaningful participation of all stakeholders in the insolvency process, ensuring fairness and transparency.
• Limitations on Notes on Clauses: The Court cautioned against relying too heavily on the Notes on Clauses to Section 24 of the Insolvency and Bankruptcy Code, 2016.

This judgment ensures that the corporate insolvency resolution process is not only efficient but also fair, by allowing suspended directors to have a say in the process, thus protecting their interests and upholding the principles of natural justice.

Flowchart of the Case