2020 (12) TMI 1293 - Tri - Insolvency and Bankruptcy

Seeking order from this Tribunal to direct the respondent No. 2 to consider it as a Financial Creditor - CIRP proceedings going on - related party or not - Applicants main grievance is that they have not been made part of the CoC as they have been considered as related party nor their amount invested with the Corporate Debtor is being considered as Financial Debt and, therefore, they have been denied proportionate voting in the Corporate Debtor Company - demand for a Forensic Audit of the Corporate Debtor Company. HELD THAT - The Bench has no hesitation in accepting the fact that together the Applicants hold about 48% shareholding of the Corporate Debtor and Applicants No. 2 and 3 are shareholders with shareholding of more than 3% each and also were Directors of the Company and now suspended Directors of the Company. They were not only the Directors but also in control of the affairs of the Company. This Bench therefore concludes that the Applicants are Related Party in terms of Section 5(24)(a) and also in terms of Section 5(24)(m)(i) - The Applicants were not only the directors of the Company and covered squarely under Section 5(24)(a) of the Code but they were also managing the day-to-day affairs of the Company as per their own submissions and therefore, they are perfectly covered under Section 5(24)(m)(i) of the Code. The Bench has no doubt in its mind that the Applicants were aware of this fact and it is for this reason that the Applicant No. 2, as brought out by the Resolution Professional, has attended the CoC meeting held on 24.06.2020 (1st CoC meeting) as well as the 2nd CoC meeting held on 12.09.2020, as Suspended Director of the Company. The claim amount which the Applicants want to be treated as Financial Debt - HELD THAT - The Bench is of the considered view that the payments given, as per MoU dated 10.12.2018, is only for acquisition of shares and not as financial debt - This Bench is aware of the fact that the sum of ₹ 50 Lakhs was paid by the Applicant on behalf of the Corporate Debtor to SIDBI. It has been paid to SIDBI towards settlement of dues of M/s E G Global Estates Limited. The relevant Para of this letter of October 2019 mentions that we will pay token amount of ₹ 50 Lakhs towards as token amount for settlement of case of ₹ 4 crores filed by SIDBI against M/s. E G Global Estates Ltd. . The Bench notes, subsequently ₹ 50 Lakhs was paid directly by the Applicants to SIDBI on behalf of the Corporate Debtor. This Bench, therefore, have no doubt in its mind that any money given to the Corporate Debtor by the Applicants was only and only for the purpose of acquisition of the Company by way of incremental purchase of shares and not a financial debt . This Bench is also clear, as has been demonstrated in the other paragraphs, that the set of the Applicants are related party , therefore, have no business to be the part of the CoC. The Resolution Professional has rightly taken them as suspended directors of the Company. Prayer to conduct the forensic audit of the Corporate Debtor Company - HELD THAT - The Resolution Professional mentions that a forensic audit has already being conducted by M/s. Mazars Business Advisors Pvt. Ltd. and that the Auditors would be submitting their reports in next two months‟ time. Other prayers of the Applicants, regarding the existing CoC, be quashed as it is of no consequence and cannot be considered. Application dismissed.

Summary

Issues Involved:

1. Whether the Applicants should be considered as Financial Creditors and part of the Committee of Creditors (CoC).
2. Whether the Applicants are "related party" to the Corporate Debtor.
3. Validity of the minutes of the CoC meeting held on 24.07.2020.
4. Demand for a forensic audit of the Corporate Debtor Company.

Issue-wise Detailed Analysis:

1. Whether the Applicants should be considered as Financial Creditors and part of the Committee of Creditors (CoC):

The Applicants argued that they should be considered Financial Creditors due to their investments in the Corporate Debtor based on an MoU and a Loan Agreement. They claimed to have infused significant funds for the construction project and paid part of the loan amount to SIDBI. However, the Tribunal noted that the MoU was primarily for the acquisition of shares, not for financial debt. The Loan Agreement included a clause allowing the conversion of the loan into equity, which was indeed converted. Therefore, the Tribunal concluded that the funds provided by the Applicants were for acquiring shares, not as financial debt, and thus, the Applicants could not be considered Financial Creditors.

2. Whether the Applicants are "related party" to the Corporate Debtor:

The Tribunal examined the shareholding and directorship of the Applicants in the Corporate Debtor. The Applicants held about 48% of the shareholding, and two of them were directors. The Tribunal referred to Sections 5(24)(a) and 5(24)(m)(i) of the Insolvency and Bankruptcy Code (IBC), which define related parties. Given their significant shareholding and involvement in the management, the Tribunal concluded that the Applicants were indeed related parties. Consequently, as related parties, they were not entitled to be part of the CoC or have voting rights.

3. Validity of the minutes of the CoC meeting held on 24.07.2020:

The Applicants sought to quash the minutes of the CoC meeting, arguing that the inclusion of certain bungalow owners and the exclusion of their financial claims were arbitrary. The Tribunal found that the Applicants, being related parties, were rightly excluded from the CoC. The Tribunal also noted that the CoC's decisions, including the rejection of the forensic auditor's fees, were within its rights. Therefore, the Tribunal upheld the validity of the CoC meeting minutes.

4. Demand for a forensic audit of the Corporate Debtor Company:

The Applicants requested a forensic audit of the Corporate Debtor. The Tribunal noted that a forensic audit was already being conducted by M/s. Mazars Business Advisors Pvt. Ltd., with the report expected in two months. Therefore, the Tribunal found no merit in the Applicants' demand for a separate forensic audit.

Conclusion:

The Tribunal dismissed the application, concluding that the Applicants were related parties and not Financial Creditors. Their investments were for acquiring shares, not financial debt. The CoC meeting minutes were upheld, and the ongoing forensic audit was deemed sufficient. The Tribunal's decision emphasized the importance of adhering to the definitions and provisions of the IBC concerning related parties and financial creditors.