Mr. Narayanam Nageswara Rao VS K. Sivalingam
IA. Nos. 897 & 898 of 2024 In CP (IB) No. 299/7/HDB/2018
Facts:
1. Vide order dated 24.06.2022 the Corporate Debtor was admitted into Corporate Insolvency Resolution Process herein after referred to as “CIRP”. Subsequently, the Resolution Professional published Form-G on 06.10.2022, inviting bids for the submission of Resolution Plans. The Applicant being a suspended director/promoter, submitted a Resolution Plan in October 2022. However, the Applicant was initially excluded from the provisional list of eligible Resolution Applicants on 30.10.2022, due to missing documents. A revised list on 03.11.2022, included the Applicant, contingent upon providing the required documentation.
2. Respondents disqualified the Applicant from participating in the CIRP in the 18th Committee of Creditors meeting on 07.03.2024, citing Section 29A(b) &(f) of the Code.
3. Application is filed challenging the above decision.
Issue: Whether the Applicant is disqualified to act as Resolution Applicant?
Arguments:
Applicant:
1. Counsel submitted that the allegation regarding the Securities and Exchange Board of India (SEBI) prohibiting the Applicant or its alleged connected party (Corporate Debtor) lacks supporting documentation. The objection was raised based on documents supposedly obtained from the Bombay Stock Exchange (BSE India). The Applicant asserts he has no knowledge of any such order against the Corporate Debtor or himself. Stating the above reliance was placed on Section 11(4)(b) of the SEBI Act, 1992, which mandates that any order restraining individuals from accessing the securities market or prohibiting them from dealing in securities must be accompanied by written reasons.
2. Counsel claimed that the CoC attributed disqualification criteria arbitrarily, exceeding the scope outlined in Section 29A of the Code. Counsel further submitted that Resolution Professional sent an email to the Applicant containing a link to the SEBI debarred list and an attached Excel sheet from BSE India’ s website. The Applicant was surprised by the data in the Excel sheet. It mentioned that the Unique Client Code (UCC) of the Corporate Debtor was disabled but did not affect the Applicant’s trading access. The sheet also showed other entities being restrained from accessing the securities market, but no such order was found against the Applicant. The disablement of UCC only prevents the Corporate Debtor from trading, not the Applicant. This disablement was based on SEBI’s recommendation to stock exchanges, not a direct order against the Applicant
Respondents:
1. Counsel denied all allegations made by the Applicant, stating the same as false and devoid of merit. It is averred that the Applicant, being a promoter and member of the suspended board of the Corporate Debtor, is subject to certain disqualifications under Section 29A of the Insolvency and Bankruptcy Code. Although exemptions exist for MSME Corporate Debtors, they only pertain to certain clauses of Section 29A, not all.
2. Counsel submitted that after reviewing EOIs and conducting due diligence, critical issues regarding the Applicant and connected parties arose: such as firstly, the Applicant and connected parties were categorized as willful defaulters by banks, with outstanding amounts totaling crores of rupees. Secondly, the Corporate Debtor, connected to the Applicant, is barred from accessing the securities market and appears on SEBI’s debarred entities list on various stock exchange websites such as NSE/BSE/MCXSX.
3. Counsel submitted that the absence of a specific order from SEBI restraining the Applicant from accessing the securities market doesn’t negate their disqualification. The Resolution Professional contends that Section 29A(f) indeed requires such a prohibition order from SEBI, as outlined in Section 11(4)(b) of the SEBI Act, 1992.
Decision: NCLT allowed the application.
Rationale:
1. Hon’ble NCLT noted that counsel for the respondents admit that applicant has obtained interim suspension of his categorization as willful defaulter from the High Court of Telangana, however, he further submitted that it is temporary, and the final verdict from the High Court is still pending. Learned counsel further contended that since applicant’s name is not there in the debarred list of SEBI, he may not be covered under Section 29 A(f) but since corporate debtor’s name is there in the debarred list and he being a connected party to the CD, he will be disqualified under Section 29 A(j) being a connected party to the corporate debtor.
2. It held that Resolution applicant herein, being an ex-director of the corporate debtor, we are of the view that contention of the respondent that the applicant is disqualified to submit resolution plan as CD is debarred by SEBI and that the applicant is a connected party to the CD is not maintainable. Further, we should always bear in mind that legislature while passing the Bill, has given some special relaxation under Section 29(A) to MSME promoters so that they are allowed to participate in the resolution process of corporate debtor.
Order:
