In Vijay Kumar Jain v. Standard Chartered Bank (decided on 31 January 2019), the Supreme Court was concerned with the question whether under the Insolvency and Bankruptcy Code, 2016 the resolution professional is obligated to provide to members of the suspended board of directors all relevant documents pertaining to the corporate insolvency resolution process, including the resolution plan. The Court answered in the affirmative.
The Supreme Court was considering a series of cases where the insolvency resolution professional denied information to members of the suspended board of directors. In one such case involving Ruchi Soya Industries Limited, the National Company Law Tribunal dismissed an application by a suspended director of the company to obtain access to information and participate in meetings of the committee of creditors (CoC) even though he had executed a non-disclosure agreement to keep the information confidential. The director was unsuccessful in his appeal before the National Company Law Appellate Tribunal and hence he knocked on the doors of the Supreme Court.
In answering the question posed, the Supreme Court first set out the relevant provisions of the Code as well as applicable Regulations. Primarily, section 24(3)(b) of the Code is categorical in that it requires the resolution professional to provide notice of every meeting of the CoC to members of the suspended board of directors. This is similar to the position relating to substantial operational creditors, i.e., those who hold at least 10 percent of the total debt. Moreover, while convening CoC meetings, the resolution professional is also required to present all resolution plans at such meetings. After considering the statutory scheme, the Court noted that although the members of the suspended board are not members of the CoC, they nevertheless enjoyed the right to participate in the CoC meetings and in the discussions therein.
In this case, the corporate debtor relied extensively on the notes on clauses to section 24 of the Code, which provided that the participation of the board members in CoC meetings would enable the resolution professional “to seek information that they may require to assess the financial position of the corporate debtor and prepare a resolution plan”. This argument was supported by the importance the Court ascribed to notes on clauses in the Code in its earlier decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited (21 September 2017). However, in this case, despite the importance of notes on clauses as an aid to construction of the statute, the Supreme Court found considerable difficulties in the manner in which the note to section 24 of the Code was drafted, and refused to accept that the information flow is only a one-way street, i.e., from the directors to the resolution professional and not the other way around.
In rejecting the reliance on the notes on clauses, the Supreme Court placed emphasis on the fact that directors who are guarantors are necessarily interested in the insolvency resolution process and thus need to be provided access to relevant information. It noted:
“… we find that Section 31(1) of the Code would make it clear that such members of the erstwhile Board of Directors, who are often guarantors, are vitally interested in a resolution plan as such resolution plan binds them. Such plan may scale down the debt of the principal debtor, resulting in scaling down the debt or the guarantor as well, or it may not. The resolution plan may also scale down certain debts and not others, leaving guarantors of the latter kind of debts exposed for the entire amount of the debt. The Regulations also make it clear that these person are vitally interested in resolution plans as they affect them.”
Moreover, such interested persons have a right of appeal before higher fora, which can be meaningfully exercised only when they are in possession of relevant information relating to the corporate insolvency resolution process. The Supreme Court was also categorical in stating that every participant in a CoC meeting (including a director) is entitled to notice of the meeting containing an agenda along with copies all documents to be discussed, including resolution plans.
While this approach towards greater transparency and governance in the insolvency resolution process is understandable, there is a risk in embedding the rationale for transparency on the ground that directors of the suspended board may also be guarantors. This is a factual question and may not be entirely true in all cases. It remains to be seen whether a director who is not a guarantor can rely on the Supreme Court’s reasoning with equal vigour.
The Court also recognised that the erstwhile directors must be provided with all information, as they can make representations to the CoC. This would especially be true in cases where the insolvency may have arisen on account of factors that were beyond the control of the board of directors of the corporate debtor. It goes without saying that fears of wider dissemination of confidential and sensitive information can be allayed by requiring the recipients to enter into appropriate non-disclosure arrangements.
Given this background and the reasons enumerated, the Supreme Court ordered the resolution professional to provide copies of the resolution plans to the appellant directors. Therefore, the resolution professional is to convene a CoC meeting at which the directors can participate before a decision is taken on the fate of the resolution plans and that of the corporate debtor itself.
This decision has the effect of introducing more sunshine into the corporate insolvency resolution process. The Court has clarified the information sharing obligations of the resolution professional and granted information rights to participants such as directors and operational creditors. By doing so, it has fortified a two-way information flow: from the directors to the resolution professional and CoC members that will enable them to prepare the information memorandum, and a converse flow from the resolution professional to the directors so that they can take adequate steps to not only make their position known to the CoC members but also to protect their own interests.
Given the sometimes difficult dynamics involved in the resolution process, the decision-makers such as the CoC members (being financial creditors) and the resolution professional may be keen to keep the erstwhile management out of the picture, but the Supreme Court has effectively stepped in to rectify such a situation. The decision mandates greater transparency, enhanced governance in the insolvency process and a wider and meaningful participation by all interested parties.
This single decision will have the impact of putting back all the 12 decisions, at least those which are not signed and sealed off like Essar Steel. The rich man Mittal will eventually emerge as the Poor guy!!