Mr. Babubhai Shrimali & Ors. Vs The Committee of Creditors & Anr.
IA No. 501/AHM/2021 IN CP (IB) 185/AHM/2018
Facts:
1.An insolvency application was filed by financial creditor Indian Overseas Bank under Section 7 of the Code for initiation of Corporate Insolvency Resolution Process (‘CIRP’) against Corporate Debtor which was admitted on 01.09.2020 and Mr. Avil Menezes was appointed as Interim Resolution Professional (IRP).
2.Applicant No. 1 was appointed as Resident Director and Occupier by appointment letter dated 01.09.2020 executed with Corporate Debtor, the Applicant No. 2 & Applicant No. 3 were appointed as Sr. General Manager, Finance and Accounts and Vice- President, Operations respectively by a separate employment contract dated 11.03.2020.
3.Applicant rendered service during the CIRP period but have not received salary/dues for such service.
Issue: Whether applicant being the suspended director are entitled for salary?
Arguments:
For Applicants:
1.Cousenl for applicant submitted that on request of Resolution Professional theApplicant No. 1 has rendered service as Director, Legal and Administrative Head, Applicant No. 2 has rendered service as Director, CFO and Applicant No. 3 has rendered service as Director, Head of Operations and were assured that salaries during the period of CIRP would be paid. The CoC in its 1st meeting held on 01.10.2020 took note of engagement of Applicants by Resolution Professional. The CoC in its 1st and 2nd meeting discussed on the salaries of the Applicant but did not came on any conclusion
2.A letter dated 02.02.2021 was sent to to the Resolution Professional and requested to clear their salaries. Payment to all other employees pending CIRP was made and only the salaries of Applicants were not made because Applicants were holding senior managerial / acting as vice President / director of the Corporate Debtor.
3.Applicants should be treated as CIRP Costs as the Applicants were professionally associated with the Corporate Debtor and are not the promoters or contributors of the Corporate Debtor. The Respondents are not entrusted with the power to consider whether the same should be paid or not. The Applicants further submit that even though the Applicants being the directors of the Corporate Debtor fall within the ambit of related party as defined under Section 5 (24) (a) of the Code, the salary/remuneration which they are entitled to receive does not qualify as related party transaction under the Code.
For Respondents:
1.It was submitted that Applicants being the directors are the related party of the Corporate Debtor and any payment to them would fall under related party transactions as per Section 28(f) of the Code.
2.In various CoC meetings it was deliberated that 50% of the dues should be paid during the CIRP and the balance 50% be paid as part of CIRP Cost under the Resolution Plan but no resolution was passed. In 19th CoC meeting held on 21.09.2021 once again the agendas with respect to salaries of Applicants were placed before CoC, which was deliberated and it was concluded that the Applicants fall within the definition of related party under the provision of the Code and the Corporate Debtor was already undergoing severe financial stress and that the amounts that were\ sought by the Applicants were exorbitant in comparison to the services rendered by them during the CIRP, thus the payments could not be approved.
3.Any payment to the Director or Senior managerial posts who are involved in running business of the Corporate Debtor would qualify as a ‘related party transaction’ under the Code (Section 28(1)(f) read with Section 5(24)(a)), the approval of the CoC is required by way of resolution. However, the CoC, in exercise of its powers, did not approve the transaction.
4.Applicant No. 2 & 3 has admitted in Form DIR- 12 filed by the Corporate Debtor that they are promoters. The CoC has on at least five occasions, after deliberations, rejected the proposal for payment of salaries to the Applicants. Once the CoC has rejected or approved a related party transaction, the same is not justiciable before court of law
Decision: Applicant are not entitled to salary.
Rationale:
1.It noted that Applicants were part of suspended board of directors of the Corporate Debtor on the date of initiation of CIRP of the Corporate Debtor and even after initiation of CIRP as they had resigned from the post of directors on 28.10.2021. Thus, in view of Section 5(24) (a) the Applicants fall under the category of related party
2.The term related party transaction is not defined under the Code, therefore referring to Section 188 of the Companies Act, 2013. On reading of Section 188 of the Companies Act, 2013 it is understood that related party transaction includes any contract or arrangement with a related party with respect to availing of any services. Therefore, availing of services from the Applicants would amount to related party transactions.
3.Resolution Professional in various CoC meetings had placed a resolution for payment of salary to the Applicants but the CoC in its commercial decision has rejected the resolution.
4.If in commercial wisdom the CoC has rejected the resolution for payment of salary to the Applicants, the question of reversing the decision cannot be considered. Moreover, the Applicants being the promoters and persons associated with the management of the Corporate Debtor are statutorily obligated to extend all assistance to the Resolution Professional in managing the corporate debtor.
order copy:
