National Company Law Appellate Tribunal

National Company Law Appellate Tribunal, Chennai: While upholding the order of the Adjudicating Authority rejecting the right of a shareholder to seek intervention in a S. 7 application filed by a financial creditor, M. Venugopal, J. and Naresh Salecha* (Technical Member), held that third-party or shareholders does not have any locus to challenge initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor.

Factual Matrix

In the present matter, the respondent no. 2/Corporate Debtor (McDowell Holdings Ltd.) availed an Inter Corporate Deposit (ICD) from Zuari Fertilisers and Chemicals Ltd. (ZFCL) which later merged with Zurai Agro Chemical Limited (ZACL). On 17-06-2019, the Corporate Debtor entered into a settlement agreement with ZACL and Mangalore Chemicals and Fertilizers Ltd (MCFL) to repay a sum of Rs 10,60,56,810/- crore along with interest being outstanding ICD. As per the agreement the repayment of borrowing with interest was to be completed within 18 months and the timeline for repayment was further extended twice but then also the Corporate Debtor was to meet repayment obligations towards ZACL. The ZACL later entered into a formal agreement with the respondent no. 1/Financial Creditor (Sunstar Hotels and Estates (P) Ltd.) to discharge the entire liability of the Corporate Debtor which entitled the respondent no. 1 to enter into shoes of ZACL by way of the right of subrogation for Recovery of Dues from the Corporate Debtor.

The Financial Creditor (Respondent 1) filed an S. 7 application before the Adjudicating Authority seeking initiation of CIRP against the Corporate Debtor. The appellants, i.e., the shareholders, who together hold more than 15 per cent of the stake in the Corporate Debtor filed an application seeking intervention in S. 7 application filed by the financial creditor.

The Adjudicating Authority vide order dated 08-04-2022 rejected the right of a shareholder to seek intervention in a S. 7 application filed by the financial creditor and admitted S. 7 application. Aggrieved by the impugned order passed by the Adjudicating Authority, the appellants preferred an appeal before the NCLAT challenging the same.

Moot Points

I. (a) Whether the Adjudicating Authority committed an error in admitting the CIRP of the Corporate Debtor?

(b) Whether the shareholder of the Corporate Debtor has any locus in S. 7 application filed by the Financial Creditor?

II. Can the shareholders make payment to satisfy the financial debt of financial creditor to take away the Corporate Debtor from the clutches of the CIRP?

Observation and Decision

The NCLAT observed that as per S. 5(7) IBC, a Financial Creditor means any person to whom the financial debt is owed including a person to whom such a debt is legally assigned or transferred and as per S. 7 IBC in case any defaulted has occurred, the Financial Creditor either by itself or jointly with other Financial Creditors can file an application for initiating CIRP against the Corporate Debtor before the Adjudicating Authority. The NCLAT opined that in the present matter, respondent no. 1 stepped into the shoes of Financial Creditor since the conclusion of assignment agreement and is entitled to the reliefs as available in the IBC. Therefore, the Adjudicating Authority’ is supposed to admit S. 7 application.

The NCLAT observed that “…prima-facie there is no specific law which allows any shareholder of the ‘Corporate Debtor’ to challenge the admission of ‘Corporate Insolvency Resolution Process’ of the ‘Corporate Debtor’, once the debt due and default is established by the ‘Adjudicating Authority’, in an application made by the ‘Financial Creditor’ filed under Section 7 of the I & B Code, 2016 before the ‘Adjudicating Authority’.”

The NCLAT observed that there is no law which allows a third party to settle the claims of the financial creditor on behalf of the Corporate Debtor, moreover, law is also silent about the same without any consent of the Corporate Debtor.

The NCLAT held that that the shareholders do not have any Locus, therefore the present appeals are not maintainable. The NCLAT dismissed the present appeals and upheld the initiation of CIRP against the Corporate Debtor.

[Nirej Vadakkedathu Paul v. Sunstar Hotels and Estates (P) Ltd., 2023 SCC OnLine NCLAT 102, decided on 27-02-2023]

*Judgment by Naresh Salecha.

Advocates who appeared in this case :

Mr. P.H. Arvindh Pandian, Senior Advocate for Mr. Athiban Vijay, Counsel for the Appellants;

Mr. P.S. Raman, Senior Advocate for Mr. Parthasarathy and Mr. Rahul Balaji, Counsel for the Respondent No. 1;

Mr. Rishi Srinivas, Counsel for the Respondent No. 2.

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