Bank Of India vs Iris Electro Optics Pvt. Ltd. & Ors

(Arising out of Order dated 27th November, 2019 passed by the Adjudicating Authority (National Company Law Tribunal), Hyderabad Bench, Hyderabad in I.A. No. 785 of 2019 in CP No. 181/7/HBD/2019)

IN THE MATTER OF:

Bank of India ....Appellant

Versus

M/s. IRIS Electro Optics Pvt. Ltd. & Ors. .....Respondents

Present:

For Appellant: Mr. Ashish Rana and Mr. Harshit Garg, Advocates.

For Respondents: Mr. Siddharth Jain, Advocate for Respondent Nos. 1 & 2. Mr. T.N. Durga Prasad, Advocate for Respondent No.3

BANSI LAL BHAT, J.

Aggrieved of the order dated 27th November, 2019 passed by the

Adjudicating Authority (National Company Law Tribunal), Hyderabad

Bench, Hyderabad in I.A. No. 785 of 2019 in CP (IB) No.

181/7/HDB/2019 declining to recall the order of admission dated 28th 2

March, 2019 or replacing the 'Resolution Professional' of Respondent-

'M/s. IRIS Electro Optics Private Limited'- ('Corporate Debtor') by

another person, the Appellant- 'Bank of India' has assailed the order

dated 27th November, 2019 passed by the Adjudicating Authority on

several grounds set out in the memo of appeal to which reference will be

made in the following paras.

2. The case set up by the Appellant is that the application under

Section 7 of the Insolvency and Bankruptcy Code, 2016 ("I&B Code" for

short) was filed by 'Laxmi Kantha Rao Thota' (Respondent No.3) against

'M/s. IRIS Electro Optics Private Limited'- ('Corporate Debtor')

fraudulently with a malicious intent and not for resolution of 'Corporate

Debtor', warranting imposition of penalty in terms of Section 65 of the

'I&B Code'. It is the case of the Appellant that the Appellant- 'Bank of

India' is a secured creditor which did not trigger any 'Corporate

Insolvency Resolution Process' against the 'Corporate Debtor' but 'Laxmi

Kantha Rao Thota' (Respondent No.3), who is a 'related party' of the

'Corporate Debtor', filed an application under Section 7 of the 'I&B

Code' in connivance with the 'Corporate Debtor'. According to Appellant,

it was brought to the notice of the Adjudicating Authority that the

'Financial Creditor' has triggered 'Corporate Insolvency Resolution

Process' against the 'Corporate Debtor' in collusion with the 'Corporate

Debtor' being a 'related party' to defeat the legitimate interests with the

Company Appeal (AT) (Insolvency) No. 49 of 2020 3

object of nullifying the action taken by the Appellant under Section 34

of the SARFAESI Act, 2002. However, the Adjudicating Authority

declined to determine the issue raised by the Appellant in terms of the

impugned order which is assailed as being illegal and unsustainable.

3. It is contended on behalf of the Appellant that pursuant to the

order of admission dated 28th March, 2019, the first 'Committee of

Creditors' meeting of the 'Corporate Debtor' was convened on 1st May,

2019 wherein Respondent No.1 was appointed as 'Resolution

Professional' and claim of Respondent No.3 (husband of the suspended

Director of the 'Corporate Debtor') was accepted and he was given voting

rights in 'Committee of Creditors'. The Appellant claims to have pointed

out the irregularity afterwards as first 'Committee of Creditors' meeting

was conducted in its absence. It is submitted that in the second

'Committee of Creditors' meeting convened on 28th May, 2019, Mrs.

Archana Thota (related party) had filed a claim and despite

acknowledging her status as 'related party', she had been assigned a

share of 42.96%.

4. It is further submitted that the Appellant had filed I.A. No. 461 of

2019 under Section 65 of the 'I&B Code' seeking recall of the order of

admission and investigation against Respondent Nos. 1 & 3 for

collusion and to nullify the voting rights of the Respondent No.3.

Company Appeal (AT) (Insolvency) No. 49 of 2020 4

However, the Adjudicating Authority passed order dated 19th August,

2019 deferring the decision on the issue of collusion between

Respondent Nos. 1 & 3 till final disposal of the application. It is

submitted that the Adjudicating Authority directed determination of the

voting share of the 'Financial Creditors' including its status as a 'related

party' afresh and pursuant to such direction Respondent No.1

determined the voting share allotting 63.95% to Appellant- 'Bank of

India' and 36.05% to Respondent No.3, thereby ensuring that the

Appellant would not succeed in replacement of the 'Resolution

Professional'.

5. The Appellant further submitted that it challenged the voting

share by way of I.A. No. 785 of 2019 under Section 65 of the 'I&B Code'

seeking enquiry and recall of order of admission dated 28th March, 2019

which culminated in passing of the impugned order dated 27th

November, 2019 by the Adjudicating Authority.

6. Per contra, it is submitted on behalf of Respondent Nos. 1 and 2

that Mrs. Archana Thota had submitted resignation letter dated 30th

November, 2018 as a Director and the acceptance letter dated 1st

December, 2018 was issued by the Managing Director of the 'Corporate

Debtor', thereby resulting in cessation of the status of Mrs. Archana

Thota as one of the Directors of the 'Corporate Debtor'. It is not in

Company Appeal (AT) (Insolvency) No. 49 of 2020 5

dispute that 'Laxmi Kantha Rao Thota' (Respondent No.3- 'Financial

Creditor') is a 'related party' being husband of Mrs. Archana Thota. It is

submitted that the document evidencing resignation of Mrs. Archana

Thota was not filed before the Registrar of Companies but the same

should not be viewed with suspicion as no document has been filed by

the 'Corporate Debtor' with the Registrar of Companies right from its

inception as is clearly revealed by the Master Data.

7. It is further submitted that despite public announcement by the

'Interim Resolution Professional', the Appellant did not file its claim and

a belated claim was submitted after 28 days by which time 'Committee

of Creditors' had been constituted. Still the 'Interim Resolution

Professional' admitted the claim of the Appellant having regard to its

status as a Nationalized Bank. The Respondent No.1 informed the

Appellant about voting right of members of the 'Committee of Creditors'

by providing an intimation on 8th May, 2019.

8. It is further submitted that the Appellant did not approve the

resolution for giving extension for receiving Expression of Interest as

also for extension of the 'Corporate Insolvency Resolution Process' by

another 90 days and since the 'Corporate Insolvency Resolution

Process' period of 180 days expired and no 'Resolution Plan' was

received, the 'Resolution Professional was left with no option but to

Company Appeal (AT) (Insolvency) No. 49 of 2020 6

recommend liquidation of the 'Corporate Debtor' which is now pending

before the Adjudicating Authority.

9. It is contended on behalf of the Respondent No.3 that Mrs.

Archana Thota- wife of the Respondent No.3 was Ex-Director of the

'Corporate Debtor' and it is only because of this position that

Respondent No.3 advanced loan to the 'Corporate Debtor'. However,

Mrs. Archana Thota resigned in November, 2018 which was accepted by

the Managing Director on 1st December, 2018. Thus, Mrs. Archana

Thota was not a Director of the 'Corporate Debtor' on the date of filing of

the application or on the date of admission of the application under

Section 7 of the 'I&B Code'.

10. It is further submitted that the 'Corporate Debtor' had borrowed

an amount of Rs. 62,97,825/- from Respondent No.3 with an interest at

the rate of 24% per annum based on the Loan Agreement and in the

event of default in repaying the debt, Respondent No.3 filed application

under Section 7 of the 'I&B Code' before the Adjudicating Authority. It is

further submitted that the Adjudicating Authority has no power to

review/ recall its own order. The 'Interim Resolution Professional' has

decreased the voting share of Respondent No.3 and also drastically

decreased the claim amount without legal justification.

Company Appeal (AT) (Insolvency) No. 49 of 2020 7

11. We have gone through the records and considered the issue

raised in this appeal in the light of oral and written submissions made

by the parties.

12. It is not in controversy that Mrs. Archana Thota served as a

Director on the Board of Directors of the 'Corporate Debtor' and the

'Financial Creditor'- 'Laxmi Kantha Rao Thota' (Respondent No.3) is her

Husband. The record bears testimony to the fact that Mrs. Archana

Thota submitted her resignation from the Board of Directors of the

'Corporate Debtor' on 30th November, 2018 which came to be accepted

by the Managing Director on 1st December, 2018. Admittedly, the

Respondent No.3 filed an application under Section 7 of the 'I&B Code'

seeking initiation of the 'Corporate Insolvency Resolution Process'

against the 'Corporate Debtor' alleging default in repayment of debt.

This happened on 20th March, 2019 and on the same day the 'Corporate

Debtor' filed its reply admitting its liability on its own account, in

pursuance whereof the order of admission dated 28th March, 2019 came

to be passed at the hands of the Adjudicating Authority.

13. The allegations of collusion inter se Respondent Nos. 2 and 3 i.e.,

the 'Corporate Debtor' and the 'Financial Creditor' have to be viewed in

this sequence of events. It is significant to note that the Adjudicating

Authority, vide order dated 19th August, 2019, while disposing of IA No.

Company Appeal (AT) (Insolvency) No. 49 of 2020 8

461 of 2019 filed by the Appellant seeking recall of admission order

deferred consideration of the issue raised until final disposal of the

petition after observing that Respondent No.3 was the Husband of

Director Mrs. Archana Thota and that the Appellant being the 'Secured

Financial Creditor' was left out when the 'Interim Resolution

Professional constituted 'Committee of Creditors' (page 131 of the paper

book), thereby resulting in infraction of the provisions of the 'I&B Code'

since Respondent No.3 could not be made a member of the 'Committee

of Creditors' as Mrs. Archana Thota was a Director of the 'Corporate

Debtor' on the date of admission of application. While deferring the

decision to final hearing with regard to the issue of collusion between

the 'Corporate Debtor' and 'related party', the Adjudicating Authority

disposed of application with direction to determine the voting share of

'Financial Creditors' including 'related party'/ 'Financial Creditor' afresh

which was subsequently done. However, the Appellant secured 63.95%

voting shares which could not empower it to seek replacement of the

'Resolution Professional'. The voting share was challenged by the

Appellant by seeking recall of the order of admission and enquiry which

was declined in terms of the impugned order.

14. While it is true that the findings recorded by the Adjudicating

Authority did demonstrate the status of Respondent No.3 as a 'related

party'- 'Financial Creditor' (Respondent No.3) being Mrs. Archana

Company Appeal (AT) (Insolvency) No. 49 of 2020 9

Thota's Husband while she was a Director on the Board of Directors of

the 'Corporate Debtor', and that the 'Interim Resolution Professional'

had acted in violation of statutory provisions by excluding the Appellant

as the only 'Secured Financial Creditor' from the 'Committee of

Creditors', determination of the issue in regard to status of 'Laxmi

Kantha Rao Thota' being a 'related party' was very vital as in absence of

'Sole Financial creditor', Responded No.3 became a member of the

'Committee of Creditors', while his status was being assailed as a

'related party'. Deferment of vital issue of 'related party' virtually

resulted in assignment of voting share to it, thereby adversely impacting

the voting share of the Appellant. It was not prudent on the part of the

Adjudicating Authority to defer consideration of the pivotal issue having

significant impact on the 'Corporate Insolvency Resolution Process'

initiated at the instance of an alleged 'related party', jeopardising the

legal interests of the Appellant, who happened to be the 'Sole Secured

Financial Creditor'. The exclusion of Appellant from 'Committee of

Creditors' should have raised eyebrows about the role of 'Interim

Resolution Professional', even though the Adjudicating Authority

appears to have passed direction for fresh determination of voting share

of 'Financial Creditors'. However, such determination was to the

detriment of the Appellant in as much as voting share was directed to

be assigned to the alleged 'related party'- 'Financial Creditor'. Such

Company Appeal (AT) (Insolvency) No. 49 of 2020 10

direction did manifest in fresh determination with Appellant being

allotted 63.95% and the 'related party' with 36.05%. Thus, the voting

share allotted to the Appellant was woefully inadequate leaving it short

of the requisite percentage to seek replacement of the 'Resolution

Professional' who was ex facie guilty of violating provisions of the 'I&B

Code' by convening 'Committee of Creditors' but excluding the 'Sole

Financial Creditor' i.e., the Appellant from being a part of it.

15. Having regard to the proposition of facts, findings and

observations made by the Adjudicating Authority and provisions of

Section 65 of the 'I&B Code' in the context of application under Section

7 having been admitted at the instance of the alleged 'related party', we

are of the considered opinion that the Adjudicating Authority has failed

to exercise jurisdiction vested in it. The material irregularity brought to

our notice in the resolution proceeding goes to the root of the matter

and the impugned order cannot be sustained. This is notwithstanding

the fact that the order of admission of application under Section 7 has

not been assailed in appeal. Once it was brought to the notice of the

Adjudicating Authority that the initiation of the 'Corporate Insolvency

Resolution Process' was at the instance of Respondent No.3, who was

allegedly a 'related party' on the date of filing of application as also on

the date of admission of such application, fraudulently i.e. with intent

to defraud the Appellant being the 'Sole Secured Financial Creditor' of

Company Appeal (AT) (Insolvency) No. 49 of 2020 11

the 'Corporate Debtor', the Adjudicating Authority should not have

abdicated its duty by deferring the decision on application under

Section 65 of the 'I&B Code' preferred by the Appellant until final

hearing despite recording findings and making observations that the

provisions of the 'I&B Code' had been blatantly infracted by the 'Interim

Resolution Professional' by excluding Appellant from the purview of the

'Committee of Creditors'. Admittedly, the Resolution Process has failed

to fructify and the Adjudicating Authority is considering the

recommendation for liquidation of the 'Corporate Debtor'. It is queer

that the pivotal issue remains to be determined while the 'Corporate

Debtor' may go into liquidation leaving the Appellant remediless, which

would result in great miscarriage of justice. It is for this Appellate

Tribunal to step in and ensure that such miscarriage of justice is

prevented.

16. Having regard to all relevant aspects of the matter, we find that

the impugned order cannot be sustained. While allowing this appeal

and setting aside the impugned order dated 27th November, 2019, we

direct the Adjudicating Authority to accord fresh consideration to I.A.

No. 785 of 2019 and record finding about the status of Respondent No.3

as a 'related party' and also a finding on the issue whether Respondent

No.3 has fraudulently initiated 'Corporate Insolvency Resolution

Company Appeal (AT) (Insolvency) No. 49 of 2020 12

Process' by filing application under Section 7 of the 'I&B Code' against

the 'Corporate Debtor'.

17. Parties are directed to appear before the Adjudicating Authority.

The period of judicial intervention and lockdown shall be excluded from

the period of 'Resolution Process'.

[Justice Bansi Lal Bhat] Member (Judicial)

[V.P. Singh] Member (Technical)

[Alok Srivastava] Member (Technical)

NEW DELHI 22nd May, 2020

AR

Company Appeal (AT) (Insolvency) No. 49 of 2020