2021 (1) TMI 1158 - Tri - Insolvency and Bankruptcy

Removal form CoC - Related party or not - seeking restoration of voting percentage of the applicant to 100% as earlier existed - removal of Resolutions passed in 7th, 8th and 9th CoC Meetings - whether TSTPCL is a related party as claimed by the applicant or not and its inclusion in the CoC as a Financial Creditor to the Corporate Debtor is as per the IBC? - HELD THAT - Respondent no. 3 squarely fits into the definition of 'related party' under section 5(24) (a), (h), (j), (1) and (m) of the Code. From the record submitted to the Tribunal it is observed that out of four directors of the Board of Directors, two directors are nominated by respondent no. 3. The role and responsibility of the Directors is to protect the interests of the Corporate Debtor and not to merely sit in the Board meetings of the corporation. They have a fiduciary role to protect the interests of the Corporate Debtor and are responsible for shareholders of the Corporate Debtor at all times. The Board is responsible to the shareholders of the Corporation. Therefore, the claim of the Resolution Professional that they are only nominated members and they do not have much say in the functioning of the company is untenable. Every director has responsibility to protect the interests of shareholders. Accordingly the Directors nominated by the corporation have to oversee the functioning of the Corporate Debtor. We are not in agreement with the views of the Resolution Professional as well as respondent no. 3 in this regard that they are only nominee-directors and that they do not have much say in the functioning of the Corporate Debtor. Further on a close perusal of the Companies Act, Listing Regulations, it is evident that disentitling of a shareholder, who is a related party from exercising his voting rights in respect of any resolution relating to any contract or arrangement to which such a related party is a party. Therefore, we are not in a position to accept the contention of respondents no. 1 and 3 that nominee-director does not have significant influence on the functioning of the Corporate Debtor as untenable and not acceptable. When we juxtapose and read the Articles of Association as well as the definition of 'related party' as given in the I B Code, it is evident that two nominee-directors of respondent no. 3 have significant influence in decision making process of the Corporate Debtor. The Articles of Association clearly mention that action on important matters should be taken only by affirmative vote of 3 (three) or more directors, but there must be included in the qualified majority at least one director nominate by APTPCL - Article 62 plays vital role in deciding the subject matter in this case. From reading of Article 62 it is clearly evident that nominee-directors of respondent no. 3 have significant influence in the functioning of the Corporate Debtor and they cannot now claim that they are only nominee-directors and they do not have much role in the Corporate Debtor. Such a claim is untenable. Thus, TSTPCL falls within the meaning of 'related party' as given in the I B Code and Articles of Association of the Corporate Debtor - the Resolution Professional shall reconstitute the CoC treating the TSTPCL as a 'related party' - application disposed off.

Summary

Issues Involved:
1. Whether TSTPCL is a related party under Section 5(24) of the I&B Code.
2. Whether the inclusion of TSTPCL as a member of the CoC and granting it 67% voting rights was lawful.
3. Whether the actions and decisions of the Resolution Professional were in accordance with the I&B Code.

Issue-wise Detailed Analysis:

1. Whether TSTPCL is a related party under Section 5(24) of the I&B Code:
The applicant argued that TSTPCL is a related party as per Section 5(24) of the I&B Code, citing several clauses including (a), (h), (j), (l), and (m). The applicant highlighted that TSTPCL holds 5.1% equity shares in the Corporate Debtor and has two non-executive directors on the Board, indicating significant influence. The Resolution Professional initially did not include TSTPCL in the CoC but later did so based on documents provided by TSTPCL, concluding it was not a related party. The Tribunal examined the Articles of Association, particularly Article 62, which requires an affirmative vote including a director nominated by TSTPCL for key decisions, indicating significant influence. The Tribunal concluded that TSTPCL fits the definition of a related party under the I&B Code.

2. Whether the inclusion of TSTPCL as a member of the CoC and granting it 67% voting rights was lawful:
The applicant contended that the Resolution Professional's decision to include TSTPCL as a member of the CoC with 67% voting rights, thus reducing the applicant's voting rights to 33%, was arbitrary and against the law. The Resolution Professional argued that the inclusion was based on the amount due to TSTPCL and in accordance with the I&B Code. The Tribunal, however, found that TSTPCL’s significant influence on the Corporate Debtor’s decisions, as evidenced by Article 62, made it a related party. Consequently, the inclusion of TSTPCL in the CoC was not lawful, and the CoC should be reconstituted treating TSTPCL as a related party.

3. Whether the actions and decisions of the Resolution Professional were in accordance with the I&B Code:
The applicant challenged various actions of the Resolution Professional, including allowing an unauthorized representative of TSTPCL to file a claim and participate in CoC meetings, and reducing the applicant’s voting rights. The Resolution Professional defended his actions, stating they were in line with the I&B Code and based on the claims received. The Tribunal, however, found that the Resolution Professional’s decision to include TSTPCL in the CoC was not in accordance with the I&B Code, as TSTPCL should have been treated as a related party. The Tribunal directed the Resolution Professional to reconstitute the CoC accordingly.

Conclusion:
The Tribunal concluded that TSTPCL is a related party under Section 5(24) of the I&B Code due to its significant influence on the Corporate Debtor’s decisions. The inclusion of TSTPCL in the CoC with 67% voting rights was not lawful, and the CoC should be reconstituted treating TSTPCL as a related party. The actions of the Resolution Professional in this regard were not in accordance with the I&B Code. The Tribunal directed the Resolution Professional to reconstitute the CoC treating TSTPCL as a related party.