The National Company Law Appellate Tribunal, in the case of Mr. Mukund Choudhary Vs. Mr. Subhash Kumar Kundra [Company Appeal (AT) (Insolvency) No. 452 of 2021] held that it is the duty of the Suspended Directors of the Corporate Debtor to sign the financial statements of the Corporate Debtor during the on-going Corporate Insolvency Resolution Process.
FACTS
The Appellants are the Suspended Directors of the Corporate Debtor whereas the Respondent is the Resolution Professional of the Corporate Debtor.
The National Company Law Tribunal, New Delhi, Principal Bench (Adjudicating Authority) had disposed an Interlocutory Application filed by the Respondent seeking direction to the Appellants to cooperate with the Respondent and provide the signed copies of financial statements to the Respondent.
The Appellants being aggrieved by the Order of the Adjudicating Authority have filed the present appeal before National Company Law Appellate Tribunal (the Tribunal) under Section 61 of Insolvency & Bankruptcy Code, 2016 (the I&B Code).
ISSUE BEFORE THE TRIBUNAL
Whether the Appellants being the Suspended Directors of the Corporate Debtor are bound by the law to sign the financial statements of the Corporate Debtor during the process of CIRP?
CONTENTIONS OF THE APPELLANTS
The Appellants contended that the Respondent has been in control of the Management of the Corporate Debtor since the initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor wherein the Appellant has raised objections in the balance sheet dated 31.03.2021 prepared by the Respondent and sought clarification for the same.
The Appellants pleaded that they are not inclined to sign the financial statements prepared by the Respondent because of objections to various entries in the balance sheet till the Respondent provides justification and clarity regarding the said entries.
The Appellants submitted that the Adjudicating Authority disposed of the Application filed by the Respondent without giving opportunity of filing replying to the Appellants.
The Appellants further argued that since the Respondent has the entire control and management of the Corporate Debtor, it is the Respondent who has to act and execute all the deeds on behalf of the Corporate Debtor. Since the Respondent is the competent person to sign the financial statements of the Corporate Debtor, the Appellants being Suspended Directors of the Corporate Debtor shall not be coerced to sign the financial statements of the Corporate Debtor.
In addition to above, the Appellants also challenged the correctness of the balance sheet prepared by Respondent and stated that the balance sheet prepared by the Respondent has discrepancies and the Appellants seek clarification for the same.
The Appellants further relied upon the General Circular No. 08/2020 dated 06.03.2020 (the Circular) according to which the Resolution Professional of the Corporate Debtor is responsible for the signing of the documents of the Corporate Debtor in the capacity of CEO in order to meet the protocol of the Ministry of Corporate Affairs.
The Appellants pleaded that Appellants being suspended directors of the Corporate Debtor are not responsible for signing of financial statements of the Corporate Debtor.
The Respondent contended that, Appellants despite of several requires, reminders and communication, failed to provide the signed financial statements wherein the Respondent had filed the Application before the Adjudicating Authority.
The Respondent submitted that the books of accounts were prepared by the Statutory Auditor (Auditor) that was appointed by the Corporate Debtor back in 2017. The draft financial statement and the draft audit report were sent to the Appellants for their review and perusal. The documents were to be signed by the Appellants who failed to do the same.
The Respondent argued that the signed documents were required for the purpose of enabling the Respondent to file the financial statement before the Registrar of Companies in accordance with the applicable provisions of the Companies Act, 2013.
The Respondent pleaded that the Respondent had provided all the requisite documents to the Appellants but the Appellants did not cooperate regarding the same and there was no response.
DECISION AND FINDINGS
In light of the submissions of the Appellants and Respondent, the Tribunal observed that the Court does not release the directors from their duties being the director towards the company but merely suspends their powers as the directors and appoints the Resolution Professional for the management of Company in view of CIRP procedure.
The Tribunal while addressing the contentions of Appellants noted that it is an undisputed fact the Appellants had signed the financial statements of the Corporate Debtor for first three quarters of the Financial Year 2019-20.
The Tribunal further noted that the Appellants were objecting to sign the financial statements of the last quarter merely on the grounds of objectionable entries and requirement of certain clarification even when the financial statements were prepared by the same Auditor who was appointed in 2017.
The Tribunal referred sub-section of 2 of Section 19 of the I&B Code and held that;
“Section 19(2) of the Code clearly specified that the personnel of the Corporate Debtor, as promoters or any other persons are required to assist the RP failing which an Application can be filed before the Adjudicating Authority seeking direction for co-operation”
The Tribunal further held that the Circular relied by the Appellants is merely a procedure for the filing of forms. The Circular does not restrict the Suspended Directors of the Corporate Debtor from signing the financial statements of the Corporate Debtor.
The Tribunal observed that the order passed by the Adjudicating Authority is well reasoned and there is no need to set aside the Impugned Order.
The Tribunal held that even though the Appellants are the Suspended Directors, it is the duty of the Appellants to cooperate with the Respondent and sign the financial statement of the Corporate Debtor in accordance with the provisions of the I&B Code and the Companies Act, 2013.
AMLEGALS REMARKS
Through this decision, the Tribunal has interpreted the provisions and the Circular under the I&B Code that lack the specific words providing for the duty of Suspended Directors to sign the financial statements of the Corporate Debtor.
Such lack of specific provisions acted as a hurdle in the smooth functioning of the CIRP of the Corporate Debtor.
The Tribunal has rightly held that in order to maintain the smooth functioning of the CIRP and to protect the objective of the I&B Code, every person associated to the Corporate Debtor shall cooperate in every manner with the Resolution Professional during the CIRP.
The Tribunal in fact also clarified that being Suspended Director of the Corporate Debtor does not release such directors from adhering to the duties of the Corporate Debtor and suspension of such directors is merely the suspension of their powers.
For any queries or feedback, please feel free to get in touch with aditi.tiwari@amlegals.com or siddharth.kakka@amlegals.com
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