Director as “Any Person Aggrieved” under Insolvency and Bankruptcy Code

[Guest post by Vaidehi Shankar, Associate at Mundkur Law Partners, Bangalore. The views and opinions expressed herein are those of the author in her personal capacity and do not, in any way or manner, reflect the position or opinion of Mundkur Law Partners]

On August 31, 2017, the Supreme Court delivered one of the first landmark judgments on the Insolvency and Bankruptcy Code, 2016 (Code) in Innoventive Industries v ICICI Bank (discuss here on this Blog). In this landmark ruling, the Court inter alia held that once an insolvency professional is appointed, the erstwhile directors of the corporate debtor cannot maintain an appeal on behalf of the corporate debtor.

To restate the brief facts and decision of the Supreme Court, Innoventive Industries (Innoventive), the corporate debtor, experienced financial crisis and entered into a master restructuring agreement with its creditors. After some back and forth, ICICI Bank, in its capacity as a financial creditor under the Code, filed for insolvency resolution of Innoventive. The corporate debtor, Innoventive, argued that the insolvency resolution application should not be accepted, as it was subject to a notification under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 (MRA) by which Innoventive was entitled to a moratorium and takeover of management by state government. However, the National Company Law Tribunal (NCLT) admitted the application and declared the moratorium, and an appeal to the National Company Law Appellate Tribunal (NCLT) was met with the same fate. The matter subsequently made its way on appeal to the Supreme Court. Through a comprehensive order, the Court examined the issues regarding the maintainability of the appeal, prevalence of the Code over the MRA provisions and the debt payment obligation of Innoventive Industries under the master restructuring agreement. Ultimately, the Could dismissed Innoventive’s appeal and inter alia held that the provisions of the Code would prevail over the MRA.

However, noteworthy for this post is the position that the Court has taken on the issue of maintainability of the appeal. The directors of the corporate debtor had filed the appeal on behalf of the company. An insolvency professional was already appointed and in charge of the management of affairs of the corporate debtor. Keeping these facts in mind, the Court held:

According to us, once an insolvency professional is appointed to manage the company, the erstwhile directors who are no longer in management obviously cannot maintain an appeal on behalf of the company. In the present case, the company is the sole appellant. This being the case, the present appeal is obviously not maintainable.

The Court further stated that it was not inclined to dismiss the appeal merely on this count, and the order went on to discuss the other issues in detail. The Court thought it necessary to deliver a detailed judgment on this appeal so that all courts and tribunals would take notice of the paradigm shift in law. However, the non-maintainability of the appeal raises a few questions regarding the capacity of an erstwhile director to prefer an appeal under the Code.

The Code specifically provides that from the date of the appointment of the interim insolvency professional, the powers of the board of directors of the corporate debtor stand suspended. The powers of the board as well as the management of the affairs of the corporate debtor shall vest in the interim insolvency professional from thereon (section 17 of the Code). Thereafter, the director’s role is limited to extending cooperation and assistance to the interim resolution professional, as may be required by him in managing the affairs of the corporate debtor (section 19 of the Code).

From a reading of the above provisions, the Court’s reasoning that the erstwhile directors do not represent the corporate debtor anymore is consistent with the provisions of the Code. Having said that, it is pertinent to note that under section 61(1) of the Code, “any person aggrieved” by an order of the NCLT may prefer an appeal to the NCLAT.  Similarly, section 62 of the Code also allows “any person aggrieved” by an order of the NCLAT to appeal to the Supreme Court.

“Any person aggrieved” means a person who is competent to move a tribunal for substantive relief; such person is entitled to file an appeal to the NCLAT or the Supreme Court.[1] The term ‘aggrieved’ has been interpreted by the Delhi High Court in Vinod K. Patel v Industrial Finance Corporation of India Ltd. (2001) (albeit outside the context of insolvency) to refer to a person having a substantial grievance who has been denied some personal or property rights. Going by such a definition, ‘any person aggrieved’ could include an erstwhile director who has been denied his management powers under the Code, or a shareholder who has been denied his voting rights in view of the committee of creditors under the Code.

Dr A.M Singhvi, counsel for Innoventive, made this very argument before the Supreme Court. He stated that an application to amend the cause title of the case could be made, stating that the erstwhile directors are filing an appeal not as representatives of the corporate debtor, but as persons aggrieved by the NCLAT order. However, the Court rejected this argument stating that the company was the sole appellant and the appeal was obviously not maintainable.

However, it could be further argued that where an erstwhile director cannot appeal in his managerial capacity, such an appeal could be made in his fiduciary capacity. The fiduciary duties of a director are enshrined in section 166 of the Companies Act, 2013. Under that provision, a director is duty-bound to act in good faith in order to promote the objects of the company, in the best interests of the company, its employees and the shareholders. Directors act on behalf of their company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company.[2]

It could be argued that although an erstwhile director no longer has powers of management vested in him, the fiduciary duties of such director to act in the best interest of the company would not end. Section 17 of the Code only provides that the powers of the board of directors “shall stand suspended and be exercised by the interim resolution professional”. It is not as if the directorship itself ceases. The act of a director opposing an application to initiate corporate insolvency resolution filed against his company, and appealing the same to the authorities in good faith should be seen as an exercise of his fiduciary duty to act in the best interest of the company. For instance, if the amount of default in question is a small sum – from a director’s point of view, it may not be in the best interest of the company to undergo a resolution process for the company as a whole at the hands of its creditors, which is merely due to a financial/operational debt that could be resolved in an easier manner.

Further, the provisions of the Code do not provide the corporate debtor an opportunity to be heard prior to the admission of an application for corporate insolvency resolution. The NCLAT had recognised this issue in paragraph 52 of its order in the Innoventive Industries case and held that since the insolvency resolution process under the Code has serious civil consequences on the corporate debtor as well as its directors and shareholders, the NCLT should issue a limited notice to the corporate debtor before admitting an application under the Code. This would provide the corporate debtor an opportunity to present any mitigating factors for the NCLT’s consideration before an application is admitted (see paragraph 51 of the NCLAT’s order). However, such a limited notice would serve no purpose where an interim insolvency resolution professional is already appointed, such as in the present case. The directors of Innoventive were unable to avail the opportunity to present mitigating factors in their favour and oppose the admission of the application. An appeal made by the director in exercise of his powers to oppose a corporate insolvency resolution process in good faith, solely for the benefit of the company and its interests, should be justified in the eyes of law. However, it remains to be seen in the future if such an argument based on a director’s fiduciary duties would hold up before the adjudicatory authorities.

The Supreme Court’s decision in Innoventive Industries is likely to have a considerable impact on the pending appeals before the appellate authorities under the Code. This decision has questionably restricted the interpretation of “any person aggrieved”. Hereafter, it would be necessary to clearly demarcate one’s capacity to file an appeal under the Code, so as to not be trapped within the ambit of non-maintainability under this decision. Further, it would be interesting to see how the restrictive nature of the Code on interpreting the role of directors in a company develops. One can only hope that the fiduciary nature of a director’s role is taken into consideration for purposes of interpreting the Code.

– Vaidehi Shankar

[1] CR Datta on Company Law, Volume 3, 7th Ed, 3.2269.

[2] CR Datta on Company Law, Volume 2, 7th Ed, 2.1562.

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1 comment

  • An excellent analysis on the powers and duties of the Directors. For instance, NCLT passes an order without a proper hearing or breaches the dictates of law, the issue is “who could challenge?” Could it be restricted to the Director in his individual capacity or as one representing the company? The Director is only suspended from performing the activities of the company and not removed. He continues as such after the legal embargo is removed. If he could challenge the Vires of the Statute as Unconstitutional as a Director, could he not assail the order of NCLT. A trustee kept away from position by operation of law or through orders of court,could challenge the very the correctness of the order passed by NCLT or NCLAAT. Order of Nariman J is … requires reconsideration.

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