NCLAT rules that superseded members have no right of participation in CoC meetings

The National Company Law Appellate Tribunal, New Delhi Bench (NCLAT) in Dheeraj Wadhawan v The Administrator, Dewan Housing Finance Corporation Ltd. held that ‘supersession of directors’ under the Reserve Bank of India Act, 1934 (RBI Act) is different from 'suspension of directors’ under the Insolvency and Bankruptcy Code, 2016 (Code), and that a 'superseded director' on the vacation of office pursuant to supersession is neither entitled to the notice of the meeting of the committee of creditors (CoC) nor has a right to participate in such meeting.

Background

In November 2019, the Reserve Bank of India (RBI) exercised its powers under Section 45-IE of the RBI Act and superseded the Board of Directors (Board) (appellants Dheeraj Wadhwan and Kapil Wadhwan (Appellants) were the directors of Dewan Housing Finance Limited (DHFL)) on the grounds that the manner in which the business of DHFL was being carried out was detrimental to the interest of its creditors and depositors. Subsequently, the powers of the Board stood transferred to the administrator, who then initiated corporate insolvency resolution process (CIRP).

Post initiation of CIRP, the administrator proceeded with the CoC meetings without furnishing due notice of the CoC meetings along with documents and agenda to the Appellants. Aggrieved by the same, the Appellants approached the National Company Law Tribunal, Mumbai (NCLT). However, the NCLT, by passing relevant orders refused the request of the Appellants (i) to be allowed to attend meetings of the CoC as a member of the erstwhile Board; and (ii) to be furnished with a copy of the resolution plan.

Aggrieved, the present appeals, Company Appeal (AT) (Insolvency) No. 785 of 2020 (Dheeraj Wadhawan v The Administrator, Dewan Housing Finance Corporation Ltd.) and Company Appeal (AT) (Insolvency) No. 647 of 2021 (Kapil Wadhawan v The Administrator, Dewan Housing Finance Corporation Ltd. & Anr.) were respectively filed.

Submissions before NCLAT

Submissions of Appellants: The Appellants contended the following:

Submissions of Respondent: The Respondent contended the following:

Findings and Observations (Judgment)

‘Supersession of directors’ under the RBI Act v. ‘Suspension of directors’ under the Code

The NCLAT observed that upon exercise of the powers under Section 45-IE of the RBI Act by the RBI, the Board vacates their office, and such vacation has finality attached to it. Further, if at a subsequent stage, such persons of the Board are appointed, then it shall be treated as a fresh/new appointment and not a continuation of the original offices as directors of the company. In such a scenario, the Appellants’ contention that suspension of powers of the Board under Section 17(1)(b) of the Code may also have the 'legal effect' of the said directors vacating office is irrelevant and a mere red herring since 'suspension' and 'supersession' are distinct concepts in law.

It was further noted by the NCLAT that the Hon’ble Supreme Court in Vijay Kumar Jain v Standard Chartered Bank (2019 SCC Online SC 13) (Vijay Kumar) has clearly laid down that a director simpliciter can participate in the CoC of the corporate debtor. However, as the ‘superseded’ directors are those directors who have been removed or deemed to have demitted office and who are not holding the position of director on the CIRP commencement date, they cannot be considered a director simpliciter to benefit from participating in the meeting of CoC. Therefore, the ‘superseded’ Board cannot claim parity with the ‘suspended’ Board as the former has vacated the office, while the latter always remains on the Board to assist in the CIRP as per the requirements of the Code.

Further, the NCLAT held that in Vijay Kumar no view was expressed on whether persons who have already vacated their offices as directors before the appointment of the interim resolution professional are entitled to notice and participation in CoC meetings.

Additionally, given the above reasoning, the ‘superseded’ Board is not entitled to a copy of a resolution plan. However, the NCLAT also noted that the copy of the resolution plan after approval from the adjudicating authority cannot be treated as a confidential document. Therefore, after final approval of the resolution plan, its certified copy can be issued in accordance with the relevant rules.

-     Rahul Chakraborti (Partner), Prashamsha Tulachan (Associate) & Saumya Agarwal (Associate)

For any queries please contact: editors@khaitanco.com ​​​​​​​