CRIP : A shareholder or preference shareholder without contractual debt is not a "person aggrieved"

NCLAT Dismisses Shareholder Appeal, Upholds CIRP Admission for Hem Infrastructure. Tribunal Affirms Shareholders Lack Locus Standi to Challenge Insolvency Proceedings

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has dismissed the appeal filed by Peninsula Holdings and Investments Pvt. Ltd., a shareholder in Hem Infrastructure and Property Developers Pvt. Ltd. The appeal challenged the National Company Law Tribunal (NCLT) Mumbai's order initiating the Corporate Insolvency Resolution Process (CIRP) against Hem Infrastructure. The NCLAT decision, delivered by Justice Ashok Bhushan and Mr. Indevar Pandey, aligns with previous judgments establishing that shareholders, without specific contractual debt rights, cannot be considered "persons aggrieved" under Section 61 of the Insolvency and Bankruptcy Code, 2016.

The appeal arose from a petition filed by JM Financial Credit Solutions Limited, the financial creditor, under Section 7 of the IBC, which was admitted by the NCLT, leading to the initiation of CIRP. Peninsula Holdings, holding a 51% equity in the corporate debtor, contended that as a controlling shareholder with preference shares, it should be considered an aggrieved person. The appellant argued the CIRP was initiated erroneously as Hem Infrastructure was a passive entity without direct financial operations.

In its detailed judgment, the NCLAT concluded that Peninsula Holdings, despite its majority shareholding, did not have the locus standi to challenge the insolvency proceedings. The tribunal emphasized that shareholder interests are adequately represented through the appointed Insolvency Resolution Professional (IRP), and allowing shareholder appeals would counteract the IBC's objective of efficient resolution and finality. 

The tribunal reaffirmed that the liability of a corporate guarantor is coextensive with that of the principal borrower, as stipulated under Section 128 of the Indian Contract Act, 1872, thus justifying the CIRP against Hem Infrastructure. The NCLAT found no procedural or legal infirmity in the NCLT's order, dismissing claims of procedural errors and emphasizing that the creditor's decision to initiate proceedings against the guarantor was within their rights.

This judgment further solidifies the legal precedent that shareholders, without explicit debt-related rights, cannot intervene in CIRP admissions, underscoring the IBC's emphasis on protecting creditor rights and ensuring swift insolvency resolutions.

Bottom Line:

A shareholder or preference shareholder without contractual debt rights does not qualify as a "person aggrieved" under Section 61 of the Insolvency and Bankruptcy Code, 2016, and thus lacks the locus standi to challenge admission of Corporate Insolvency Resolution Process (CIRP).

Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Sections 61, 7; Indian Contract Act, 1872 Section 128

Peninsula Holdings and Investments Pvt. Ltd. v. JM Financial Credit Solutions Limited, (NCLAT)(Principal Bench, New Delhi) : Law Finder Doc Id # 2801346