In the matter of Kredo Beauty Private Limited

National Company Law Tribunal17 March 2023

CitationIA No. 611/ND/2021 in Company Petition No. (IB)- 1164 (ND)/2019

Ratio decidendi

The rule this decision rests on

A creditor that holds more than 20% of the voting rights in a corporate debtor is not, by that fact alone, a related party under Section 5(24)(j) of the Insolvency and Bankruptcy Code, 2016; the question must still be tested against every other limb of Section 5(24). A member of the Committee of Creditors is a related party under Section 5(24)(l) of the Insolvency and Bankruptcy Code, 2016 if it is capable of controlling the composition of the board of directors of the corporate debtor, which includes the power to appoint or remove directors; that capability is assessed by reference to the shareholder voting mechanisms the Companies Act, 2013 provides for those acts, including voting by show of hands under Section 107 and the requirement of an ordinary resolution under Sections 114 and 169, so that a shareholder who cannot be excluded from the show-of-hands count in a company with few shareholders is capable of controlling board composition. Where the Committee of Creditors comprises related parties of the corporate debtor in the manner described above, the constitution of the Committee is erroneous in law, and a resolution plan approved by such a Committee is void ab initio as contravening Section 21(2) read with Section 30(2)(e) of the Insolvency and Bankruptcy Code, 2016.

Written by Miss Lucy from the judgment below, not taken from a headnote.

Judgment

As delivered

NATIONAL COMPANY LAW TRIBUNALNEW DELHI BENCH (COURT-II)IA. NO. 611/ND/2021INCompany Petition No. (IB)- 1164 (ND)/2019IN THE MATTER OF:M/s. Punjabi Accessoriezz Private LimitedD- 605, Neel Khanth Business ParkNathani Road, Vidya Vihar (West)Mumbai, Maharashtra - 400086 … Applicant/Operational CreditorVERSUSM/s. Kredo Beauty Private Limited … RespondentAND IN THE MATTER OF IA NO. 611/2021:1. M/s. Punjabi Accessoriezz Private LimitedThrough its Resolution ProfessionalD- 605, Neel Khanth Business ParkNathani Road, Vidya Vihar (West)Mumbai, Maharashtra – 400086 … Applicant No. 12. M/s. Crickxon Trade and Export Private LimitedAddress – 1st Floor, Ganga Jamuna Building,28/1, Shakespeare Sarani, Kolkata – 700017 … Applicant No. 23. M/s. Swift Builders LimitedAddress – 1st Floor, Ganga Jamuna Building,28/1, Shakespeare Sarani, Kolkata – 700017 … Applicant No. 34. Ms. Vanshika RahejaAddress - CU-49, PitampuraDelhi – 110034 … Applicant No. 45. Ms. Mridula ManglaAddress – Flat No. 111, Jamna ApartmentSector – 09, Rohini, Delhi – 110085 … Applicant No. 5IA No. 611 of 2021 in (IB)-1164/(ND)/2019Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.Section: 30(6) of the IBC, 2016Order Delivered on: 17.03.2023CORAM:SH. ASHOK KUMAR BHARDWAJ, HON’BLE MEMBER (J)SH. L. N. GUPTA, HON’BLE MEMBER (T)PRESENT:For the RP : Mr. Ravi Bansal RP along with Mr. Vedant Chahal,Adv. and Ms. Veenu Darall, Mr. Ravi PrasarORDERPER SHRI L. N. GUPTA, MEMBER (T)

The present IA No. 611/2021 has been filed by Mr. Ravi Bansal, the Resolution Professional of Kredo Beauty Pvt. Ltd. (hereinafter referred as “Applicant/RP”) for approval of the Resolution plan submitted by Ms. Vanshika Raheja jointly with Ms. Mridula Mangla (hereinafter referred to as ‘Resolution Applicant’) seeking the following main relief:

1) pass an order for approval of Resolution Plan submitted by Resolution Applicant- Ms. Vanshika Raheja jointly with Ms. Mridula Mangla as approved with 100% voting under section 30(4) of Insolvency & Bankruptcy Code. 2016 vide item no.8 of the 13th Meeting of Committee of Creditors of Corporate Debtor held on 12.01.2021.”

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

2. To put the facts succinctly, the Operational Creditor M/s Punjabi Accessoriezz Pvt. Ltd. filed an Application bearing No. IB-1164 (ND)/2019 under Section 9 of the IBC, 2016 for initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, Kredo Beauty Pvt. Ltd. The said Application was admitted by this Tribunal vide Order dated 16.01.2020 and Mr. Ravi Bansal was appointed as the Interim Resolution Professional (IRP), who was further confirmed as the Resolution Professional of the Corporate Debtor.

3. In terms of Regulation 6(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the said Interim Resolution Professional made a public announcement in Form-A on 21.01.2020. The public announcement was also uploaded on the website of the Insolvency and Bankruptcy Board of India (IBBI). The publication was made in the newspapers Financial Express (English edition) and Jansatta (Hindi Edition) on 21.01.2020.

4. The Interim Resolution Professional constituted the Committee of Creditors, which comprised the following financial creditors with a voting share given against each:

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

5. It is submitted by the Applicant/RP that Form ‘G’ was published on 29.10.2020 in the newspapers namely, Financial Express (English edition) and Jansatta (Hindi edition). It is further submitted that in response to the publication, an Earnest Money Deposit (EMD) of Rs 25,000/- was received from one Prospective Resolution Applicant (PRA) Mr. Ashutosh Tiwari. However, the said PRA did not submit the supporting documents, therefore, the RP returned the amount of EMD submitted by Mr. Ashutosh Tiwari.

6. It is stated by the Applicant/RP that it was resolved, with 100% voting share, in the 9th meeting of CoC held on 10.12.2020 for re-issuance of Form G, and pursuant to that the Applicant/RP made an Announcement on 12.12.2020 in the newspapers namely “Financial Express” & “Jansatta” for inviting EOIs. In response, RP received an EOI on 19.12.2020 from Ms. Vanshika Raheja jointly with Ms. Mridula Mangla for submitting the Resolution Plan.

7. It is submitted by the Applicant/RP that in the 13th meeting of the CoC held on 13.01.2021, the following resolutions were put before the CoC for consideration and approval of the Resolution Plan:

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

8. The matter was earlier heard and reserved for orders. However, while going through the case record, it was observed by this Adjudicating Authority that the applicant did not annex the following with the application: a) Formal Memo of Parties. b) Voting sheet or proof of approval of the Resolution Plan by the CoC. c) Affidavit of the Successful Resolution Applicant (SRA) stating that they are not barred under Section 29A of IBC, 2016 for submitting the Resolution Plan. d) A Legible copy of the Performance Guarantee.

9. Accordingly, vide order dated 03.03.2021, the matter was de-reserved and RP was given an opportunity to cure these defects by filing an additional affidavit within 07 days.

10. The RP, in compliance with the aforesaid directions, filed its affidavit dated 10.03.2021. During the hearing on 19.10.2022, it was further observed by this Adjudicating Authority that the Performance Bank Guarantee had expired and as of 19.10.2022, the Resolution Plan was not backed by any financial instrument. Accordingly, RP was directed to file a valid performance guarantee to be submitted by the SRA. It was further observed that the voting sheet filed by the RP was not clear as the signatures of the members of the CoC could not be identified. Accordingly, for the lack of due diligence and repeated lapses, a cost of Rs. 10,000/- was imposed on RP and he was directed to cure the defects

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

within 10 days. The copy of the order dated 19.10.2022 is reproduced below, for immediate reference:

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

11. In compliance, the Applicant/RP filed the additional affidavit dated 11.11.2022, which is reproduced below:

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

12. Accordingly, the matter was finally heard on 22.12.2022 post the clarifications submitted by the RP, and reserved for orders.

13. At this juncture, we refer to the Compliance Certificate in “Form H” submitted by the RP, which is reproduced below for immediate reference:

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

14. We have heard the Ld. Counsel appearing for the Applicant/RP and perused the basic compliances of the Resolution Plan. The basic features of the Resolution Plan can be summarized below:

14.1 The total claims of creditors/stakeholders admitted are to the tune of Rs. 382.98 Lakhs, against which the Successful Resolution Applicant had proposed to pay Rs. 4.07 Lakhs only. The Financial Creditors are getting paid 0.99% only of their claim amounts. In other words, the Resolution Plan involves a haircut of 99% plus for the Financial Creditors.

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

14.2 Further, the SRA has proposed to pay an amount of Rs. 3.61 Lakhs to the Financial Creditors.

14.3 Furthermore, the Corporate Debtor is having Cash and Cash Equivalents of Rs. 6,08,232/- as of 31.03.2019, as evidenced by the following extracts of the Balance Sheet of the Corporate Debtor annexed with the IM and Application for approval of the Plan:

The Successful Resolution Applicant has further proposed, on Page 360 of the application, to pay the bank balance of the Corporate Debtor amongst the Financial Creditors.

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

14.4 The payment to all the stakeholders of the Corporate Debtor is proposed to be made as per the following schedule:

14.5 As per “Form H”, the Fair Market Value of the Corporate Debtor is Rs.1,37,84,843/- and Liquidation Value is Rs. 98,21,582/-, whereas the creditors are getting Rs. 4.07 lakhs only in the Resolution Plan.

14.6 SRA has proposed the following Shareholding pattern of the Corporate Debtor, after the approval of the Resolution plan:

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

15. The existing Shareholding Pattern of the Corporate Debtor as annexed at internal Page 3 of the Resolution Plan is reproduced below:

When we compare the existing “Shareholding Pattern” of the Corporate Debtor with the “Composition of CoC” as given in Paragraph 4 of this order, we find that both the CoC members namely, “Crickxon Trade & Export Private Limited” and “Swift Builders Limited are the Shareholders of the Corporate Debtor. In other words, the entire Committee of Creditors (CoC) of the Corporate Debtor consists of its Shareholders only.

16. At this stage, when we again peruse the compliances in “Form- H”, it is observed that none of the two Financial Creditors’ (or the members of the CoC) names are reflected under the category of “Unsecured Creditors in Column 2(a)”, which means they are not considered as “related party” and therefore, they have not been debarred

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

from the voting rights under Section 21(2) of the IBC, 2016. The relevant extract of the “Form-H” is reproduced below:

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

17. Hence, in the given backdrop, we would like to examine, if the CoC members, namely, M/s Crickxon Trade and Exports Private Limited and Swift Builders Limited, are “unrelated parties” of the Corporate Debtor.

18. To examine this issue, we refer to the definition of “Related Party” as provided under Section 5(24) of IBC, 2016, which reads thus:

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

19. On perusal of Section 5(24)(j), it is observed that any person who controls more than 20% of voting rights in the CD, comes under the purview of a related party. It is a matter of fact that in the present case, the two CoC members hold a 19% voting share each. Therefore, individually they are not Related Parties to the Corporate Debtor in terms of Section 5(24)(j). However, in order to pass the test of being unrelated parties, the members of the CoC have to still sail through all the criteria stipulated under Section 5(24) of IBC, 2016. Therefore, we would like to examine if they are a related party under any of the other criteria stipulated under Section 5(24) of IBC, 2016.

20. The other criteria, for declaring a person as a related party to the Corporate Debtor, is stipulated under Section 5(24)(l) of IBC, 2016, which is reproduced below: “(l) any person who can control the composition of the board of directors or corresponding governing body of the corporate debtor;” (Emphasis Supplied)

The aforesaid criterion implies that any person, who is capable of controlling the composition of the board of Directors of the Corporate Debtor is a related party to the Corporate Debtor. When we say controlling the composition, it obviously includes the appointment and removal of Directors. In view of the above, we would like to examine at this stage, whether the two Shareholders/CoC members were in a position or legally capable to appoint or remove a Director in the Corporate Debtor Company i.e., Kredo Beauty Pvt. Ltd.

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

21. In order to adjudicate this issue, we would like to examine the provisions regarding the removal and appointment of a Director. First, we refer to the provision relating to the removal of the Director stipulated under Section 169(1) of the Companies Act 2013, which is reproduced below:

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

On perusal of the above, it can be inferred that an Ordinary Resolution is required to be passed by the Members/Shareholders of the Company for the removal of a Director.

22. Similarly, the provisions for Appointing Directors are given under Section 152(2) read with 102 of the Companies Act, 2013, which reads thus:

Xxxx xxxx xxxx

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

On perusal of the abovesaid provisions, it is observed that the appointment of Directors in place of those who are retiring is not considered a Special business at the Annual General Meeting of the Company. In other words, the appointment of Directors in place of those retiring is considered “an ordinary business”, and an ordinary resolution is required to be passed for its approval.

23. In order to perform various functions in a Company including appointment and removal of directors, the approval of Shareholders is required in the form of an Ordinary Resolution or Special Resolution, as the case may be. The Criteria for passing ordinary and special resolutions are stipulated under Section 114 of the Companies Act, 2013, which reads thus:

24. The aforesaid provision implies that in order to pass an ordinary resolution, the assent of more than 50%, of members/shareholders of a company is required and for passing a Special Resolution, the assent of IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

at least 75% of members/shareholders is needed. Section 114 of the Companies Act, 2013 further recognizes the terms “show of hands” and ‘poll’ as the voting criteria. We would like to examine the difference between the two and in this context, refer to Section 107 of the Companies Act, 2013, which reads thus:

On perusal of the above, it is observed that in the normal course, the voting has to be done through the show of hands only, unless a Poll is demanded under Section 109 of the Companies Act, 2013, or the voting is carried out electronically.

25. Now, we also refer to the provisions under Section 47 of the Companies Act, 2013, which lays down the criteria for “voting by poll”. The contents of the same are reproduced below:

26. Now, if we compare the aforesaid provisions relating to “voting by poll” with “the voting by show of hands”, it can be inferred that a “voting by poll” has to be specifically demanded under Section 109, and if voting

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

through a “poll” is conducted, then in that situation, the votes of a member shall be in proportion to the paid-up capital held by him. In other words, the higher the paid-up capital held by a member/shareholder in comparison to other members, the higher would be his voting share. In contrast, “voting by show of hands” works on the principle of “one member - one vote”, irrespective of the percentage of paid-up capital held by him in the Company.

27. When we again visit Section 114 of the Companies Act, 2013, we find that both “voting by show of hands” and “voting by poll” are recognized for passing of Ordinary and Special Resolutions. It goes without saying that the criteria of “voting by show of hands” is not excluded for the purpose of passing the resolutions.

28. Now, we sum up the facts of the present case and our findings, as follows:

a) There are only 04 shareholders in the present Corporate Debtor, and both the Members of the CoC are from amongst them.

b) To appoint or remove a Director, an Ordinary Resolution is required to be passed.

c) Voting by Show of Hands, is not excluded as a mode of voting for an Ordinary Resolution for either appointing or removing a Director of the Board.

d) To pass an Ordinary Resolution by a show of hands, approval of more than 50% of the “shareholders in number” is required, which in the present case comes to 3.

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

29. In view of the above, if voting by show of hands would have taken place for passing an Ordinary Resolution for the appointment or removal of a Director in the Corporate Debtor i.e., Kredo Beauty Pvt. Ltd., then the same could not have been possible without the participation of any of the CoC members.

30. Therefore, we are of the firm view that the said two shareholders, who are also the members of the CoC of the Corporate Debtor, were capable of controlling the composition of the Board of Directors of the said Corporate Debtor. Hence, by virtue of their capability of controlling the composition of the Board of Directors of the Corporate Debtor, we conclude that both the CoC members/CoC as a whole comprised of “related parties” to the Corporate Debtor in terms of Section 2(l) of IBC, 2016 and therefore, the entire constitution of CoC is erroneous in the eyes of law.

31. We are of the further view that a Resolution Plan passed by a CoC, which is comprised of related parties of the Corporate Debtor, is void ab initio as it violates Section 21(2) read with Section 30(2)(e) of IBC, 2016.

32. In view of the above, we have no other option but to dismiss the present Application i.e., IA No. 611 of 2021.

33. Since the maximum permissible period of the CIRP period has already elapsed, we have no other option but to order the Liquidation of the Corporate Debtor. Ordered accordingly. Further, in terms of the IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

provisions of Section 34(4)(a) of IBC, 2016, the current Resolution Professional, Mr. Ravi Bansal IP, is replaced by Mr. Mukesh Kumar Grover having registration no. IBBI/IPA-001/IP-P00383/2017-2018/ 10640 (email id: mukesh@mjra.co.in) Mobile No. 9810331606 as the Liquidator of the Corporate Debtor, who shall take steps for Liquidation of the Corporate Debtor in accordance with the law.

34. The Applicant/RP is directed to hand over all the records/ assets/information relating to the Corporate Debtor to Mr. Mukesh Kumar Grover, Liquidator within 3 days from the date of this order.

35. Let a copy of this order be sent by the Registry/Court Officer to IBBI for their records.

Sd/- Sd/- (L. N. GUPTA) (ASHOK KUMAR BHARDWAJ) MEMBER (T) MEMBER (J)

IA No. 611 of 2021 in (IB)-1164/(ND)/2019 Punjabi Accessoriezz Pvt. Ltd. Vs. Kredo Beauty Pvt. Ltd.

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