IBC UPDATE | SUPREME COURT ALLOWS SETTLEMENT POST INITIATING RESOLUTION PROCESS

Supreme Court of India while exercising its extra ordinary power under Article 142 of Constitution of India in Lokhandwala Kataria Construction Private Limited V/s Nisus Finance & Investment Manager LLP) (Lokhandwala Case) approved the recording of Consent Terms post the admission of application for initiation of corporate insolvency resolution process (Application) under the Insolvency and Bankruptcy Code, 2016 (IBC).

In June 2017, the National Company Law Tribunal, Mumbai (NCLT) admitted the Application against financial debtor, Lokhandwala Kataria Construction Private Limited. Post the admission of the Application, the disputes between the parties came to be settled.

The parties to the Application approached the National Company Law Appellate Tribunal, (NCLAT) for withdrawing the Application and recording the Consent Terms between the parties. However NCLAT dismissed the Appeal while mainly emphasising Rule 8 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (Rules) which allows withdrawal of application only before its admission.

Aggrieved by the order passed by NCLAT, the parties approached the Apex Court, which partly upheld the order passed by the NCLAT inasmuch as lack of inherent power on part of NCLAT to allow recording of Consent Terms was concerned. However, by exercising its power under Article 142 of Constitution (which deals with Enforcement of decrees and orders of Supreme Court and orders as to discovery, etc), the Supreme Court recorded the Consent Terms between the parties as opposed to the Rule 8 of IBC Rules which restricts withdrawal of Application post its admission.

The nexus behind such restriction is that on admission of Application, other creditors get a right to participate in the resolution process of Financial Debtor and the resolution process attains the nature of a collective action by various financial creditors.

MHCO COMMENT

Lokhandwala Case as decided by the Apex Court will set a new precedent for all the financial debtors who wish to settle disputes post admission of Application. However, it may be noted that the NCLT or the NCLAT is not endowed with inherent powers under IBC. In light of the above facts and circumstances, the government may also consider amending the provisions of IBC concerning withdrawal of Application post its admission. Until then, the Parties shall have to approach Apex Court for settlement post admission of Application.

This article was released on 29 July 2017. 

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

SEBI DECISION ON LIABILITY OF INDEPENDENT DIRECTORS

The Securities and Exchange Board of India ("SEBI") recently passed an order, in the matter of Zylog Systems Limited ("Company"), crystallizing the liability of independent directors of a company.

Facts:

1. The Company had declared a dividend, that was approved at its Annual General Meeting held on 25 August, 2012. However, the Company failed to disburse the dividend, within a period of 30 days, as mandated by Section 207 of the Companies Act, 1956 which resulted in several shareholders filing complaints with SEBI.
2. SEBI therefore issued a show cause notice, to all individuals who were directors at the time the dividend was declared . Two of the aforesaid individuals, Mr S Rajgopal and Mr V Ramani were independent directors of the Company at the time of declaration of dividend and submitted that they were not involved with the day-to-day administration of the Company.
3. One of the independent directors Mr S Rajgopal, stated that he came to know of the default in November 2012 and in support of his contention, furnished minutes of the meeting of the Audit Committee, of which he was the chairperson, where the Committee had chastised the Company for its failure to pay dividend distribution tax.
4. Mr VK Ramani stated that he came to know of the default at the board meeting held on 14 November, 2012. Both individuals relied on their remarks made in the aforesaid board meeting regarding the statutory lapses of the Company, which inter alia included comments on the unpaid dividend. Both individuals had also resigned as directors of the company, soon after the board meeting on 14 November 2012. Mr S Rajgopal on 20 November, 2012 and Mr V Ramani on 2 January, 2013.

Order:

In view of the aforesaid facts and circumstances, SEBI held that since the two independent directors had tried to convince the Company at its board meeting on 14 November 2012 to pay the dividend due, and resigned on account of its non-compliance to do so and owing to the fact that they were not involved in the day-to-day affairs of the Company, both individuals had discharged their duties as independent directors of the Company and no action would be taken against them.

 MHCO COMMENT

In order to absolve themselves of liability, independent directors of companies must ensure that they record their objections to the wrongful conduct of the company, in the minutes of Board meetings and take appropriate steps to ensure that the non-compliance is communicated to the management of the Company.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.