NCLAT rejects shareholders' plea against McDowell Holdings' insolvency proceedings

The National Company Law Appellate Tribunal (NCLAT) has rejected a plea by the shareholders of McDowell Holdings Ltd, challenging the initiation of the corporate insolvency resolution process (CIRP) against the firm.

A two-member bench of the appellate tribunal upheld the order of the Bengaluru bench of the National Company Law Tribunal (NCLT), which on April 8, 2022, directed to initiate CIRP over the plea filed by its financial creditor Sunstar Hotels and Estates.

Nine shareholders, who together hold more than 15%of the stake in McDowell Holdings Ltd (MHL), had moved the NCLAT against the order.

While rejecting the plea, the NCLAT observed that the shareholders "do not have any `Locus', and therefore the present appeals are not maintainable."

The appellate tribunal stated that in its earlier rulings, the NCLAT had "held that an investor in a Corporate Debtor cannot claim to be an 'aggrieved person' for preferring an appeal against an order against insolvency petition."

The shareholders, which had filed an intervention application before NCLT also, alleged before NCLAT that Sunstar Hotels and Estates 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 herein.

Shareholders stated that MHL was a non-banking financial company (NBFC) having assets size of more than Rs 500 crore and therefore 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' as required under Rule 5 of the Insolvency and Bankruptcy Rules, 2019.

Moreover, shareholders in their submission also offered to pay the entire outstanding debt including interest to protect the financial interest of MHL, having assets in form of shares in the other companies of more than Rs 1,000 crore.

However, rejecting it NCLAT said, "prima-facie there is no specific law which allows any shareholder of the 'Corporate Debtor' to challenge the admission of CIRP of the 'Corporate Debtor', once the debt due and the default is established by the 'Adjudicating Authority', in an application made by the 'Financial Creditor' filed under Section 7 of the I & B Code, 2016 before the 'Adjudicating Authority'."

The NCLAT further said there is no law that allows 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'.

Both appellants' and the respondents alleged that they have become Shareholder/Financial Creditors respectively for a paltry sum of a few crores and trying to grab the MHL whose investment in form of shares in other companies has been valued more than Rs 1000 crores.

"In addition, both the 'Appellants' and the 'Respondents' have alleged to each other 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 ExPromoter," the NCLAT order noted.

NCLT had directed to initiate CIRP against McDowell Holdings Ltd over the plea filed by Sunstar Hotels and Estates under Section 7 of IBC in respect of the default amount of Rs 16.80 crore.

McDowell Holdings had availed Inter Corporate Deposit (ICD) from Zuari Fertilisers and Chemicals Ltd (ZFCL) which was later merged with Zurai Agro Chemical Limited (ZACL).

The erstwhile Vijay Mallya-promoted company later entered into a settlement agreement on June 17, 2019 with ZACL and Mangalore Chemicals and Fertilizers Ltd (MCFL) according to which, a sum of Rs 10.60 crore along with interest being 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 of shares of United Breweries Limited and amounts realised from the sale of these shares.

As per the agreement Rs 8.36 crore was the interest outstanding on the date of the settlement agreement and the repayment of borrowing was to be completed within 18 months, which was further extended twice and the payment was to be made by September 16, 2021.

However, despite an extended timeline, the MHL was unable to meet repayment obligations towards ZACL. Later ZACL entered into a formal agreement with Sunstar Hotels and Estates on November 2021.

It agreed to discharge the entire liability of the MHL which entitled Sunstar Hotels and Estates to enter into shoes of ZACL by way of the right of subrogation for Recovery of Dues from the holding company.