Effect of admission of Insolvency application on pending shareholders disputes - An analysis
Updated: May 23, 2022
[Arjun Makuny is an associate at Tatva Legal and Madhuharanjni is a 4th-year student at Sastra Law School]
Section 241 and 242 of the Companies Act, 2013 provides relief for cases against Oppression. Any member of a company can file a petition under the section if the affairs of the company have been or are being conducted in a manner prejudicial to the public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company. In a recent case, the National Company Law Tribunal (NCLT), Ahmedabad in Pradyumankumar Dwarkadas Patel v. Bhupendrabhai Dwarkadas Patel and Ors  has stated that petition under Sec 241-242 will not be maintainable and becomes infructuous when the application for CIRP under section 7 of the IBC 2016 is admitted.
The proceeding in question was the petition filed by the petitioner, a shareholder, under Section 241-242 for Oppression and Mismanagement on 04.05.2018. During the pendency of the petition, an application under section 7 of the IB code was filed numbered as C.P. (I.B) NO. 161/2019, which was admitted on 16.03.2020. Thereafter, the matter was listed on 10.07.2020 for determining if the instant petition filed under section 241-242 is maintainable upon the admission of the application for CIRP under section 7 of the IBC 2016. The moratorium was imposed and the Resolution Professional (RP) had taken up the management of the company.
The court framed the question it sought to answer in the following terms:
“Whether upon the admission of the insolvency proceeding against the company, the pending application under section 241-242 read with section 62, 75, 447, 448 and 449 of the companies act would be rendered infructuous or would be kept in abeyance till the conclusion of the CIRP.”
In the light of the question raised by the court, the petitioner contended that the petition against oppression was not only against the company but also other individuals i.e; company secretary chartered accountant and the registrar of companies which survive independent of the insolvency proceeding and that it would be purposive and efficacious only when decided on merit as the petition is for determination of the correct shareholding of the petitioner.
As regards the petition under 241 and 242, the respondent contended that it is not maintainable once the petition under section 7 of the IB code is admitted. According to the law, an Interim Resolution Professional/Resolution Professional will be vested with all the powers of the company once the CIRP commences. The management of the company will move to the IRP/RP from the erstwhile directors as section 17 is suspended.
The respondent placed reliance on the case Innoventive Industries Ltd (Corporate debtor) v ICIC bank and Anr, wherein it was held that “the scheme of the IB code is to make an attempt, by divesting the erstwhile management of its powers and vesting it in a professional agency, to continue the business of a corporate body as a going concern until a resolution plan is drawn up, in which even the management is handed over under the plan so that the corporate body is able to pay back its debts and get back on its feet.”Furthermore, it was contended that the petition under section 241-242 was liable to be dismissed in view of the settlement executed and implemented by the parties to withdraw the petition.
JUDGEMENT AND ANALYSIS
The tribunal commenced its analysis on the footing that the management of the company is suspended and vested with the IRP/RP with all intent, consequent to the admission of the CIRP. Thus when the corporate debtor is under CIRP, the petition under section 241 and 242 cannot be dealt with as the management itself has been suspended and the company is under the control of the IRP/RP. It was pointed out that once a CIRP is admitted, which may end, either in the approval of the Resolution plan or order for liquidation of the corporate debtor. Under both situations, the management will never move into the hands of the suspended management.
The Hon’ble NCLT also held that the decision to either approve a resolution plan or send the company into liquidation rests with Committee of Creditors (COC). The tribunal simply stated that the commercial decision of the company lies with the COC and are not open to analysis, evaluation or judicial review by the adjudicating authority. The tribunal concluded that under such circumstances, it would not be prudent to keep the petition under section 241 and 242 in abeyance as it would not fulfil the object of the petition and therefore, the petition under section 241-242 becomes infructuous.
The observations of the tribunal can be summed up as,
Management of the company entirely vests with the RP and the powers of the erstwhile directors are suspended once the CIRP commences. The petition against oppression and mismanagement when the corporate debtor is under CIRP.
The petition under section 241-242 if kept in abeyance would not fulfil the object of the said provision and therefore is not maintainable upon the admission of the application of the insolvency proceeding.