The National Company Law Appellate Tribunal (“NCLAT”) has recently, in its judgment dated April 20, 2023 in Bhushan Shringapure v. Mr. B.K. Mishra, has held that, Section 24(3) of the Insolvency and Bankruptcy Code, 2016 (“IBC'') is mandatory in nature. The NCLAT held that it is incumbent upon a Resolution Professional (“RP”) to serve notice of each meeting of the Committee of Creditors (“CoC”) to the Operational Creditor(s) (“OC”) if the aggregate dues owed to the OCs is more than 10% of the entire debt of the Corporate Debtor (“CD”).

Brief facts:

Bhushan Shringapure, Shinde Chemicals and Pals Pharma (“Appellants”) filed an appeal challenging the order of the National Company Law Tribunal, Mumbai (“NCLT”) dated September 19, 2022 by which NCLT approved the resolution plan of the CD and refused to consider the plea that there was non-compliance of the Section 24(3)(c) and Section 24, IBC.

Appellants were a part of OCs. It was an admitted fact that the claim of all the OCs cumulatively amounted to Rs. 24.98 crores which is more than 10% of the admitted debt of the CD. Despite having cumulative debt of more than 10% of the entire admitted debt of the CD, the RP did not issue any notice to the OCs inviting them to sit for the CoC meetings of the CD in terms of Section 24(3)(c), IBC.

Issue:

Whether it is mandatory on part of the RP to issue notice to all the OCs in terms of Section 24(3)(c), IBC if it is found that the admitted claim of OCs is more than 10%?

Submissions by the parties:

Appellants made the following submissions:

1. As per Section 18(1)(b),IBC, it is the duty of the RP to receive and collate all the claims submitted by the Creditors to him. RP had collated the claims of the financial creditors, OCs, Statutory Dues, claims filed by workman and other creditor (other than financial and operational). The OCs had submitted a claim of Rs. 34.19 crores out of which the RP admitted Rs. 24.98 crores which was more than 10% of the total admitted claims of the CD.
2. Section 24(3)(c), IBC provides that it is the mandatory duty of the RP to give notice of each meeting of the CoC to the OCs or their representatives if the amount of aggregate due is not less than 10% of the debt.
3. Even though it is provided in Section 24, IBC that the OCs may not have the right to vote in such meetings, they certainly have a right to watch the proceedings and express their views in the CoC meetings. The Appellants relied upon an order of NCLAT in the case of ANG Industries Limited v. Shah Brothers Ispat Private Limited, [2018 SCC Online NCLAT 270].

Respondent No.1/ RP made the following submissions:

1. Appellants had the knowledge of initiation of CIRP and the subsequent meetings of the CoC after filing their claims but they were sleeping over their rights for a long time and the appeal was filed with an ulterior motive to delay the resolution process.
2. Since the OCs or their representatives do not have the right to vote in a CoC meeting in view of Section 24(4), IBC, therefore, the non-representation in the meeting shall not be treated as a ground to set aside the approved resolution plan.
3. The amount owed to the Appellant No. 1 is Rs. 3,87,52,963/-, the Appellant No. 2 is Rs. 1,67,71,359/- and the Appellant No. 3 is Rs. 1,63,43,257/- and none of the individual Appellants are creditors of more than 10% of the total debts and even cumulatively the said amount does not cross the mark of 10% of total debt, therefore, the appeal was totally mis-conceived.
4. The Respondent No.1/ RP relied on the judgment of Rahul Khilnani v. Sh. Atul Kumar Jain, reported in CA (AT) (Ins.) No. 586 of 2021 to contend that Section 24(4), IBC does not make room for the Operational Creditor to vote in the meeting of the CoC, therefore, no prejudice has been caused to them for not-complying with Section 24(3), IBC.

NCLAT’s findings:

1. Section 24(3)(c), IBC is mandatory in nature and it is incumbent upon the RP to serve notice to all the OCs of each meeting of the CoC.
2. In view of Section 24(4), IBC the OC or their representatives shall not have a right to vote in each meeting of the CoC in which they participate and in case they remain absent despite notice then they cannot rake up a dispute for getting the proceeding invalidated on that account.
3. Respondent No. 1/ RP’s argument, that, since the OCs have no right to vote in the meeting of the CoC, therefore, they have not suffered any prejudice, does not apply because in such a situation the provision of notice to the OCs or their representatives in Section 24(3)(c), IBC would be otiose and the said provision itself would become redundant.
4. It is incumbent upon the RP to serve notice of each meeting of the CoC to the OCs or their representatives if the amount of the aggregated due is not less than 10% of the debt.
5. Since, no notice was given by the RP to the OCs, therefore, it was a dereliction of duty on part of the Respondent No.1/ RP and he deserves to be burdened with costs amounting to Rs. 1 lakh which shall be payable by the Respondent No.1/ RP to the Appellants.
6. Based on the Appellants categorical submission, that if they would have attended the CoC meetings, they would have benefited by another 1 or 2% of the amount over and above the amount which has been allocated to them in the resolution plan, the bench held, that it was not a fit case of setting aside the Impugned Order passed by the NCLT, since amounts involved were too meager.

Please find attached a copy of the judgment.

This update has been contributed by Udit Mendiratta (Partner) and Shivkrit Rai (Associate).

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