Shareholders’ plea against McDowell Holdings’ insolvency proceedings rejected by NCLAT
They had challenged the order of the National Company Law Tribunal
Shareholders’ plea against McDowell Holdings’ insolvency proceedings rejected by NCLAT
They had challenged the order of the National Company Law Tribunal
The National Company Law Appellate Tribunal (NCLAT) has rejected a plea by the shareholders of McDowell Holdings Ltd (MHL), challenging the initiation of the Corporate Insolvency Resolution Process (CIRP) against the firm.
A two-member bench of the appellate tribunal upheld the April 2022 order of the Bengaluru bench of the National Company Law Tribunal (NCLT), which directed to initiate CIRP over the plea filed by its financial creditor Sunstar Hotels and Estates.
Nine shareholders, who together hold more than 15 percent of the stake in McDowell, had moved the NCLAT against the order.
While rejecting the plea, NCLAT observed that the shareholders, “Do not have any locus. Therefore, the appeals are not maintainable.” It further stated that the earlier rulings, the NCLAT, “held that an investor in a corporate debtor cannot claim to be an ‘aggrieved person’ for preferring an appeal against an order against the insolvency petition.”
The shareholders who filed an intervention application before NCLT alleged before NCLAT that Sunstar in ‘connivance with the 2nd respondent (MHL)’ initiated ‘illegal and fraudulent’ CIRP with mala-fide and ulterior motives to defraud various stakeholders including the appellants.
They further stated that MHL was a non-banking financial company (NBFC) having assets of over Rs.500 crore. Thus, it was not within the jurisdiction of the NCLT, as the proceedings could have been filed only after the approval of the Reserve Bank of India (RBI) as required under the Insolvency and Bankruptcy Rules, 2019.
The shareholders also offered to pay the entire outstanding debt of over Rs.1000 crore, including interest to protect the financial interest of MHL, having assets in the form of shares in other companies.
The NCLAT, however, rejected it stating, “Prima-facie there is no specific law which allows any shareholder of the corporate debtor to challenge the admission of CIRP once the debt due and the default is established by the adjudicating authority, in an application made by the financial creditor filed under IBC.”
The appellate tribunal ruled no law allowed a third party to settle the claims of the financial creditor on behalf of the corporate debtor, more so, without any consent of the corporate debtor.
Meanwhile, the appellants’ and the respondents alleged that they became shareholder/financial creditors, respectively, for a few crores and tried grabbing MHL whose investment in form of shares in other companies was valued at more than Rs.1000 crores.
The NCLAT order noted, “Both the appellants’ and the respondents have alleged that they are acting on behalf of the ex-promoter Vijay Mallya group of companies and trying to take over the company at the behest of the ex-promoter.”
NCLT had directed to initiate CIRP against MHL over the plea filed by Sunstar under IBC for the default amount of Rs.16.80 crores.
McDowell availed Inter Corporate Deposit (ICD) from Zuari Fertilisers and Chemicals Ltd (ZFCL) which was later merged with Zurai Agro Chemical Limited (ZACL).
In June 2019, the erstwhile Vijay Mallya-promoted company entered into a settlement agreement with ZACL and Mangalore Chemicals and Fertilizers Ltd (MCFL). Accordingly, a sum of Rs.10.60 crore along with interest, was outstanding ICD was to be repaid in two tranches.
It was to sell and transfer to ZACL, 11.8 lakh shares of MHL in MCFL and release shares of United Breweries Limited and amounts realized from the sale of those shares.
As per the agreement, Rs.8.36 crore was the outstanding interest on the date of the settlement agreement. The repayment of borrowing was to be completed within 18 months. This was extended twice and the payment was to be made by September 2021.
Still, MHL was unable to meet repayment obligations towards ZACL, which, in November 2021, entered into a formal agreement with Sunstar.
It agreed to discharge the entire liability of the MHL, which entitled Sunstar to enter into the shoes of ZACL by way of the right of subrogation for the ‘recovery of dues’ from the holding company.