The National Company Law Appellate Tribunal (“NCLAT”), in the case of Ashish Gupta v. Delagua Health India Private Limited and Others [Company Appeal (AT) (Ins.) No. 17 of 2022], has held that majority shareholders of a company have the locus to challenge an admission of corporate insolvency resolution process (“CIRP”) against the corporate debtor where the admission took place on account of collusion amongst the creditors of the corporate debtor.

Facts

Ashish Gupta (“Appellant”) was employed with Delagua Health India Private Limited (“Corporate Debtor/ Respondent No. 1”) with effect from February 11, 2014 as director of the Corporate Debtor and tendered his resignation on July 2, 2017 with immediate effect. He had not been paid salary for the period from January, 2016 till June, 2017 and submitted that the said operational debt of the Corporate Debtor fell due on June 30, 2017. Not having received the said payment, a demand notice was sent to the Corporate Debtor on June 15, 2019 (“Demand Notice”). An application under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) was filed after the Appellant did not receive any response from the Corporate Debtor (“Application”).

The National Company Law Tribunal, New Delhi (“Adjudicating Authority”), by the order dated October 11, 2021 (“Impugned Order”), rejected the Application. The present appeal was preferred by the Appellant under Section 61 (Appeals and Appellate Authority) of the IBC against the Impugned Order.

Issues

• Whether the Application filed before the Adjudicating Authority was a collusive petition.
• Whether, in the given facts and circumstances of the present case, Delgua Health Limited (Grand Bahamas) (“Respondent No. 2”) and Delgua Water Testing Limited (“Respondent No. 3”) as shareholders are entitled to defend the interests of Respondent no.1.
• Whether there is any pre-existing dispute surrounding the operational debt.

Arguments

Contentions of the Appellant:

The Appellant contended that the Demand Notice was addressed by the Appellant to the Corporate Debtor at its registered office address, as mentioned in the company master data. Further, proof of service of the Demand Notice was provided.

In response to the contentions of the Respondents that the Appellant was in control of the registered office address and the official e-mail ID of the Corporate Debtor, the Appellant had stated that he had taken efforts to delete his name and e-mail address from the company master data besides taking initiative for a new board of the Corporate Debtor by calling extraordinary meeting of the Corporate Debtor in 2018 but was not allowed to do so by the majority shareholders.

The Appellant contended that the Corporate Debtor did not appear before the Adjudicating Authority. Instead, Respondent No. 2 and Respondent No. 3, together holding 98.98% shareholding of the Corporate Debtor, subsequently filed an intervening application though they did not have any locus in the matter. The Adjudicating Authority on October 11, 2021 wrongly proceeded to dismiss the Application by holding it to be a collusive petition without giving any reasons.

The Appellant contended that since the Demand Notice had been sent at the registered office address of the Corporate Debtor, as mentioned in the company master data, there was no infirmity in the service of the Demand Notice.

It was also the contention of the Appellant that the consultancy agreement dated November 4, 2013 (“Consultancy Agreement”) being referred to by the Respondents was superseded by an employment agreement dated August 1, 2014 (“Employment Agreement”) and since the dues arose from the Employment Agreement, only the Employment Agreement was mentioned in the Application. Thus, there was no attempt on the part of the Appellant to suppress the Consultancy Agreement and that it was the Respondents who were misleading the NCLAT by making a mention of the Consultancy Agreement which has been superseded by the Employment Agreement.

Further, with respect to the contention of the Respondents that the Appellant had violated the clauses of the Consultancy Agreement pertaining to non-compete, the Appellant contended that Caya Constructs (“Caya”) and the Corporate Debtor are in different businesses hence clauses 9.1 and 9.2 of the Consultancy Agreement was not attracted and there was no violation of the Consultancy Agreement.

Contentions of the Respondents:

The Respondent No. 2 and Respondent No. 3 submitted that the Appellant and Respondent No. 2 had signed the Consultancy Agreement on November 4, 2013 by virtue of which the Appellant had agreed to provide certain services to Respondent No. 2 to assist them in setting up an entity in India and for overseeing its operations. However, this fact had not been deliberately disclosed by the Appellant before the Adjudicating Authority. The Corporate Debtor had been subsequently incorporated on February 11, 2014. Post incorporation of the Corporate Debtor, the Appellant along with one Mr. K.K. Vashishtha (“KKV”) were appointed as directors of the Corporate Debtor and thereafter their fees/ remuneration was paid directly by the Corporate Debtor. Both the Appellant and KKV resigned from the directorship of the Corporate Debtor with effect from July 2, 2017 without sending proper intimation to the shareholders of the Corporate Debtor. The abrupt resignation of both directors had caused a void in the board of the Corporate Debtor. Further, because of the said void on the board, the Appellant continued to remain in control of all modes of communications in respect of Corporate Debtor and hence by design ensured that the Demand Notice never actually got served upon the Corporate Debtor. In this way, the Appellant intentionally and deliberately shut the opportunity for the Corporate Debtor to respond to the Demand Notice.

Furthermore, though the Appellant and KKV had submitted their respective resignations on the same day and the Appellant had full knowledge of the resignation of KKV, he acted in collusion with KKV and chose to serve the Demand Notice upon KKV with an ulterior motive. KKV, even though he had already resigned as director of the Corporate Debtor, presented himself before the Adjudicating Authority on behalf of Corporate Debtor and unauthorisedly expressed inability to pay the amount claimed by the Appellant in the Demand Notice during the hearing of the Application. The Adjudicating Authority, having observed this act of connivance between the Appellant and KKV, correctly dismissed the petition as collusive.

It was further argued by the Respondents that the Corporate Debtor having been denied opportunity to respond to the collusive Demand Notice or to defend their interests before the Adjudicating Authority in the context of the Application, Respondent No. 2 and Respondent No. 3 had filed an intervention application before the Adjudicating Authority. It was strenuously contended that as the Corporate Debtor being a subsidiary of Respondent No. 2, they were fully entitled to file the intervention application to protect the interest of the shareholders of the Corporate Debtor.

It was submitted by Respondent No. 2 and Respondent No. 3 that the Appellant had deliberately withheld information from the Adjudicating Authority about the Consultancy Agreement which had been signed between the Appellant and Respondent No. 2 on November 4, 2013. The Respondents further submitted that this Consultancy Agreement was placed on record much later by the Appellant and that too only after directions were issued on September 6, 2019 by the Adjudicating Authority to produce the original documents. It was also contended that the Consultancy Agreement constituted the basis of relationship between the Appellant and the Corporate Debtor and that it continued to subsist.

The Respondents submitted that clause 9.1 of the Consultancy Agreement stipulated that without the prior written consent of the Corporate Debtor, the consultant could not accept any engagement or employment or have any concern in any business which is similar to or in any way competitive with any of the businesses of the company or any group company. The Appellant while still serving as consultant with Corporate Debtor started engaging himself in the activities of a competing entity, Caya, thus, breaching the terms of the Consultancy Agreement and causing loss to the business of the Corporate Debtor. Furthermore, the Appellant had made excess withdrawals from the accounts of the Corporate Debtor. Pointing out at these pre-existing disputes, it was submitted that the Application is not maintainable.

Observations of the NCLAT

With respect to issue nos. 1 and 2, the NCLAT observed that on the date of issue of the Demand Notice, the Appellant having admitted that both KKV and he had already tendered their respective resignations from the position of director of the Corporate Debtor with effect from July 2, 2017, it defied logic as to why the Appellant sent the Demand Notice at the given address at a time when the board of Corporate Debtor had ceased to exist. Further, the other copy of the Demand Notice has admittedly been addressed to KKV who at that point of time had also resigned from the position of director of the Corporate Debtor. The Appellant in spite of having full knowledge of the fact that KKV had already resigned, yet, addressed the Demand Notice to him which puts question marks on the intention of the Appellant.

Furthermore, the NCLAT observed that when the Application was filed before the Adjudicating Authority, at which time KKV had already resigned as a director, he still appeared before the Adjudicating Authority, not only recording his presence but also making a statement expressing inability on the part of the Corporate Debtor to pay the amount claimed by the Appellant. In view of the above, the NCLAT stated that the Appellant had connived with KKV to manipulate the Section 9 proceedings in his favour by making KKV unauthorisedly represent on behalf of the Corporate Debtor.

With respect to the contention of the Appellant that intervention on part of shareholders is not permissible, the NCLAT stated that, in view of the peculiar circumstances of the case where the Demand Notice could not be responded to by the Corporate Debtor for reasons beyond their control and a collusive petition having been filed, Respondent No. 2 and Respondent No. 3, being majority shareholders of the Corporate Debtor deserved to be heard in the interest of justice. Hence, the NCLAT held that present appeal deserved to be considered on merit.

With respect to issue no. 3, the NCLAT observed that it was an admitted fact by both parties that the Consultancy Agreement is dated November 4, 2013 while the Employment Agreement is dated August 1, 2014. The Appellant was appointed as director in the Corporate Debtor on February 11, 2014 which was before the Employment Agreement was signed. Based on the chronological sequencing of the two agreements, it was the contention of the Appellant that the Employment Agreement supersedes the terms and conditions of the Consultancy Agreement. However, the Respondents had questioned the validity of the Employment Agreement since it was a document signed only between the Appellant and KKV. The Corporate Debtor or the shareholders or their authorised representatives do not figure anywhere in the document as signatories and therefore was not binding on them. It had also been submitted that the Employment Agreement was not a registered document and hence legally untenable. On the other hand, the Consultancy Agreement was signed between the Appellant and Respondent No. 2.

The NCLAT was of the considered view that given the framework of Section 9 of IBC, the remit of the tribunal is summary in nature and it therefore does not behove the tribunal to undertake either the comparative examination of the areas of specialisation of Caya and the Corporate Debtor. All that the NCLAT observed at this stage is that a dispute centring on breach of fiduciary duty by the Appellant in the context of Consultancy Agreement has been raised by the Respondents as their defence against the claim of the Appellant which is evidenced from the material placed on record.

Hence, in the light of the submissions and pleadings made by Respondent No. 2 and Respondent No. 3 and after seeing the material on record, NCLAT was satisfied that dispute raised on behalf of the Corporate Debtor is not a moonshine dispute or a bluster. In respect of issue no. 3, the NCLAT answered in the affirmative.

Decision of the NCLAT

The NCLAT held that the Adjudicating Authority had not committed any mistake in observing that the Application was collusive and dismissed it on the same grounds.

VA View:

The NCLAT has upheld the spirit of the IBC and protected the interests of stakeholders involved by preventing an unjust admission of a company into CIRP. In cases of collusion such as the above, it is important to look at the circumstances surrounding the facts in order to unveil the true picture which is falsely portrayed by the creditors.

It is a well settled canon of natural justice that anything which eludes or frustrates the recipient of justice should be avoided and reasonable opportunity of hearing be allowed to advance the cause of justice. By taking cognizance of the apparent dispute in existence, the NCLAT has also protected the interests of the shareholders of the Corporate Debtor, namely Respondent No. 2 and Respondent No. 3 and adhered to this well settled position of law and equity.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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