In ruling on an appeal filed in Nirej Vadakkedathu Paul v. Sunstar Hotels and Estates Private Limited, the National Company Law Appellate Tribunal ("NCLAT"), Chennai Bench, comprised of Justice M. Venugopal (Judicial Member) and Shri Naresh Salecha (Technical Member), determined that shareholders of the Corporate Debtor have no locus to contest the initiation of CIRP against the Corporate Debtor. The CIRP against M/s McDowell Holdings Limited has been approved by the Bench.

Facts of the past A business sponsored by Mr. Vijay Mallya, M/s McDowell Holdings Ltd ("Corporate Debtor"), was formerly known as United Golden Beverages Limited. The Corporate Debtor held a Zuari Fertilizers and Chemicals Ltd Inter Corporate Deposit (ICD), which was eventually combined with Zurai Agro Chemical Limited (ZACL). The Corporate Debtor and ZACL and Mangalore Chemicals and Fertilizers Limited signed into a settlement agreement on June 17, 2019, under which the Corporate Debtor was required to refund Rs. 10,60,56,810 and any outstanding ICD interest.

M/s Sunstar Hotels and Estates Pvt. Ltd. ("Finance Creditor") and ZACL reached an agreement to release the Corporate Debtor from all obligations. As a result, the Financial Creditor assumed ZACL's position by exercising its right of subrogation to get payment from the Corporate Debtor. Under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the "IBC"), the Financial Creditor filed a petition asking for the start of the Corporate Insolvency Resolution Process (the "CIRP") against the Corporate Debtor due to a default of Rs. 16,80,66,348.

Shareholders Have No Locus To Challenge The Initiation Of CIRP Against Corporate Debtor: NCLAT Chennai: Best Senior Lawyers in Corporate Law Firms

Mr. Nirej Vadakkedathu Paul and 8 other shareholders of the corporate debtor submitted a request for intervention in the Section 7 petition. The Adjudicating Authority commenced CIRP against the Corporate Debtor on April 8, 2022, after admitting the Section 7 petition. The intervention application was denied on the same day. The order from April 8,202 was challenged in an appeal made before the NCLAT by the shareholders and intervenors.

The shareholders claimed that the financial creditor was attempting to seize the corporate debtor in order to recover their investment in the form of shares in other firms, which was worth more than Rs. 1000 crores. The Financial Creditor is attempting to seize control of the business at the request of the Ex-Promoter, Mr. Vijay Mallya, on behalf of the Ex-Promoter. In order to swindle different stakeholders, the Financial Creditor and the Corporate Debtor conspired to file the Section 7 petition. 

They did this under the pretext of a debt assignment and an alleged default. NCLAT Finding The Court noted that there is no legal provision allowing the shareholder of a corporate debtor to contest the latter's admission into CIRP when a Section 7 petition is filed against it and debt and default are determined by the adjudicating authority. 

The Bench determined that the Corporate Debtor's shareholders lack standing to contest the organization's admission to the CIRP. In light of this, the appeal was rejected, and the decision to initiate CIRP against the Corporate Debtor was upheld. Nirej Vadakkedathu, 

Case No. Corporate Appeal (AT) (CH) (Ins.) No. 142 of 2022 is the case number for Paul v. Sunstar Hotels and Estates Private Limited. Mr. P.H. Arvindh Pandian, Senior Advocate for NCLT representing Mr. Athiban Vijay, Attorneys, is the appellant's legal representative. Mr. P.S. Raman, Senior Advocate For Mr. Parthasarathy and Mr. Rahul Balaji, Attorneys for R-1, is the respondent's legal representative. Mr. Rishi Srinivas, R-2's lawyer.