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Unrelated parties under no obligation to furnish information under Section 19 of Insolvency Code, NCLT
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Unrelated parties under no obligation to furnish information under Section 19 of Insolvency Code, NCLT

Aditi Singh

The National Company Law Tribunal, Chandigarh Bench has held that Section 19 of the Insolvency and Bankruptcy Code (Insolvency Code) casts an obligation on the ex-personnel of the corporate debtor, its promoter or any other person associated with the ex-management including ex-directors to extend all assistance and cooperation to the Interim Resolution Professional to enable him to manage the affairs of the corporate debtor.

It has, however, clarified that unrelated parties are under no obligation to furnish information under Section 19 of the Insolvency Code.

The judgment was passed by a two-member Bench of Member (Judicial), MK Shrawat and Member (Technical), Pradeep R Sethi in an application moved by the Interim Resolution Professional (IRP) for Educomp Infrastructure & School Management Limited (corporate debtor) under Section 19(2) and 19(3) read with Sections 17, 18 and 25 of the Code.

The IRP argued that for the purpose of successfully carrying out the Insolvency Resolution Process and managing the affairs of the corporate debtor, it is expected that the management of corporate debtor would provide all assistance and co-operation.

However, in the present case, even after repeated requests for details relating to assets of the corporate debtor, the management of the Corporate Debtor had turned a deaf ear.

The IRP specifically sought full access and control rights of the software where the books of accounts of the corporate debtor were recorded, saved and managed. This software, the Tribunal was informed, was being controlled by the parent company of the corporate debtor.

In order to ascertain the proper value of the corporate debtor, the IRP also sought information on the lease deed agreements and license agreements executed between the corporate debtor and several schools/trusts and a copy of the financials of the schools/trusts.

In response, one of the respondents, a suspended director argued that the present application was nothing but an abuse of power.

It was stated that as per the explanation to Section 18 of the Insolvency Code, the ‘assets’ of a corporate debtor did not include assets owned by any third party. Therefore, the information pertaining to the assets of any third party could not in any way be important to the insolvency resolution process.

The Tribunal was further informed that the server of the software holding the books of account of the corporate debtor belonged to the promoter of corporate debtor i.e. Educomp Solutions Limited (ESL) and was thus an asset of ESL and not the corporate debtor. Since ESL was also undergoing CIRP, unhindered access of the data could only be obtained from the Resolution Professional of ESL, it was submitted.

The Resolution Professional of ESL added that the data of ESL & Corporate Debtor were hosted on a server common to both and bifurcation of the two databases with separate security protocols was a complex technical issue requiring technical competence. It was further submitted that the access of the software had already been provided to the Applicant and his team, to the best extent possible.

The other respondents who were associated with the corporate in the capacity of a Director cited suspension and resignation as grounds to evade the obligation under Section 19.

After hearing the parties, the Tribunal stated that Section 19 of the Insolvency Code cast an obligation on the ex-personnel of the corporate debtor, its promoter or any other person associated with the ex-management including ex-directors to extend all assistance and cooperation to the Interim Resolution Professional, as may be required by him in managing the affairs of the Corporate Debtor.

The language of Section 19 suggests that it must issue directions to such defaulting personnel of the ex-management to comply with the directions of the resolution professional and to co-operate with him. The aforesaid provisions are mandatory in character so as to enable the Resolution Professional to complete the CIRP expeditiously and manage the affairs of the Corporate Debtor as a going concern. Therefore, there is no escape for those persons concerned to extend full cooperation to the IRP/RP appointed.”

It, however, added that no such obligation exists on the unrelated parties.

The aforesaid provision ( Section 19) makes it abundantly clear that besides the ex-management, the requirement is that the ex-directors.. (are) collectively or independently, must furnish information and complete assistance to the Resolution Professional as required by him to facilitate in managing the affairs of the Corporate Debtor, however, the unrelated parties are under no obligation to furnish information as far as the scope and ambit of Sec. 19 of The Code is concerned.”

The Tribunal further stated that Section 19 ought to be read along with Section 18 which deals with the duties of Interim Resolution Professional and Section 17 which deals with the management of affairs of the Corporate Debtor by Resolution Professional/Interim Resolution Professional.

From the plain reading of above Sections, it is very much clear that the Insolvency Professional has to perform multiple roles, such as to manage the affairs of the company and simultaneously to prepare Information Memorandum to invite Expression of Interest. To implement the intention of the Code up to this extent, it is obvious that the Suspended Directors and Managerial persons should extend full cooperation. Simultaneously also furnish all information about their accounts and financial facilities availed from various financial creditors..

Analysing the facts of the present case, the Tribunal held that the cooperation extended by the respondent Directors was not full and complete and only part compliances had been made.

The consequence can be that the part compliance may also be treated as non-compliance of the provisions of Section 17 & 18 resulting into the moving of this application under Section 19 by the Resolution Professional. Even part compliance may attract the provisions of Section 70 wherein punishment is prescribed under the Code.”

The Court, however, disagreed with the IRP with respect to its claim over the information on the financials of the schools who were contractual parties.

It observed that the relevant lease agreements had already been provided to the IRP and he could at best, verify their veracity.

The IRP could however not demand the statement of accounts pertaining to all these lessees, it clarified.

If on demand the respondents are willing to submit then such cooperation ought to be appreciated, however, submission of such information cannot be made compulsory under Regulation 36 or Section 19 of the Insolvency Code. There is no judicial authority available to Resolution Professional to seek financial information of a third party. His enquiry should remain limited to the business transaction executed between the Corporate Debtor and the said party.”

Even the information pertaining to the lessee cannot be made part of the Information Memorandum because the business operation of a Resolution Applicant depends upon his commercial wisdom to be exercised in case his Resolution Plan is approved, it said.

The Tribunal thus partly allowed the IRP’s application, holding that the operation of Section 19 of the Insolvency Code shall remain confined to the management of the corporate debtor and not third parties.

The IRP was represented by Senior Advocate Akshay Bhan with Advocate Rohit Khanna, briefed by AZB & Partners Partner Anindita Roy Chowdhary, with Vatsala Rai, Raghav Chadha, and Aman Deep Singh Talwar.

The management of corporate debtor was represented by Senior Advocate Anand Chhibbar with Advocates Surjeet Bhadu and  Gaurav Mankotia.

Schools were represented by Advocate Manish Joshi and Sumesh Dhawan.

[Read Judgement]

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