2020 (1) TMI 1518 - Tri - Insolvency and Bankruptcy

Eligibility of claimant to be made as part of the CoC or not - Applicant hit by Section 5(24) (h) 5(24) (m) (i) of Insolvency and Bankruptcy Code, 2016 or not - HELD THAT - At the time of enactment of IBC, whichever Company falling under the definition of related party, such company shall not have any right of representation, participation or voting in a meeting of the Committee of Creditors - Since this was an unqualified elimination of Financial Service Providers from becoming members of CoC, this situation has been remedied by inserting Proviso 2 to Section 21 (2) of the Code through IBC (2nd Amendment) Act, 2018, and now the Government has come out with an Ordinance dated 28th December 2019 including the bold words in the proviso mentioned widening the scope of exemption of financial Service providers from elimination from participating in CoC. The Insolvency Law Committee at the time of recommending second proviso to Section 21 (2) of the Code, it has been stated that this Related Party Rule should not be fastened upon the Financial Creditors such as Banks and ARCs and the Financial Creditors regulated by the Financial Creditor Regulators for taking them as CoC members because Financial Creditors holding large portion of financial debt in Corporate Debtor Companies for fixed returns are unable to participate in the restructuring of the company by way of Corporate Insolvency Resolution - in order to avoid that predicament, the legislature has inserted this amendment stating that though debt has been converted into equity, if the company is regulated by the financial sector regulator, first proviso to Sec. 21(2) of the Code shall not be applied. In this case, this Applicant has not even converted its debt into equity and it has not been holding 20% shareholding in the company - this Applicant already initiated Arbitration Proceedings against this Corporate Debtor, and the Arbitrator has also passed an award with respect to the debentures the Applicant has in the Corporate Debtor directing the Corporate Debtor to pay a decretal amount of ₹ 155,32,56,626 to the Applicant. This Applicant/Financial Creditor shall be permitted to become member of CoC so as to participate in considering the functioning of the Corporate Debtor and examining the Resolution Plan, if any, that may come up before the Committee of Creditors - the Resolution Professional is directed to make this Applicant as member of the CoC with voting rights proportionate to its claim against the Corporate Debtor. Application disposed off.

Summary

Issues Involved:
1. Eligibility of the Applicant as a Financial Creditor to be part of the Committee of Creditors (CoC).
2. Interpretation of "related party" under Sections 5(24)(h) & 5(24)(m)(i) of the Insolvency and Bankruptcy Code, 2016 (the Code).
3. Applicability of Proviso 2 to Section 21(2) of the Code regarding Financial Service Providers.
4. The impact of nominee directors and affirmative voting rights on the Applicant's eligibility.

Issue-wise Detailed Analysis:

1. Eligibility of the Applicant as a Financial Creditor to be part of the Committee of Creditors (CoC):
The Applicant, M/s. ASK Investment Managers Limited, filed applications challenging the decisions of the Interim Resolution Professional (IRP) and Resolution Professional (RP) that excluded the Applicant from the CoC despite being a Financial Creditor. The Applicant argued that it should be allowed to become a CoC member and exercise its voting rights proportionate to its shareholding because it is regulated by SEBI and represents 433 persons under a Portfolio Management Scheme.

2. Interpretation of "related party" under Sections 5(24)(h) & 5(24)(m)(i) of the Code:
The Tribunal initially dismissed the applications, considering the Applicant as a related party due to its 8% shareholding in the Corporate Debtor and the presence of two nominee directors with affirmative voting rights. The Tribunal reasoned that the Applicant's involvement in policy decisions through its nominee directors and affirmative voting rights made it a related party under the specified sections of the Code.

3. Applicability of Proviso 2 to Section 21(2) of the Code regarding Financial Service Providers:
Upon reevaluation, the Tribunal noted that the Applicant is a Financial Creditor regulated by SEBI, a Financial Sector Regulator. The Tribunal referred to the second proviso to Section 21(2) of the Code, which exempts financial creditors regulated by financial sector regulators from being considered related parties solely due to the conversion of debt into equity. The Tribunal emphasized that this exemption applies even if the debt is not converted into equity, provided the creditor is regulated by a financial sector regulator.

4. The impact of nominee directors and affirmative voting rights on the Applicant's eligibility:
The Tribunal acknowledged that while the Applicant had nominee directors and affirmative voting rights, these were incidental actions to protect its investment, not to gain profits like equity shareholders. The Tribunal concluded that such incidental rights should not disqualify the Applicant from becoming a CoC member. The Tribunal highlighted the legislative intent to allow financial creditors, especially those regulated by financial sector regulators, to participate in the CoC to protect their investments and ensure the maximization of the Corporate Debtor's value.

Conclusion:
The Tribunal revised its initial order and ruled that the Applicant, being a Financial Creditor regulated by SEBI, is eligible to become a CoC member. The Tribunal directed the Resolution Professional to include the Applicant in the CoC with voting rights proportionate to its claim against the Corporate Debtor. This decision ensures that financial creditors regulated by financial sector regulators can participate in the CoC, aligning with the legislative intent to protect their investments and maximize the value of the Corporate Debtor.