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2022 (8) TMI 1350 - Tri - Companies LawValid participation of FC in the CoC or not - Members of CoC or not - related party to Corporate Debtor or not - whether the resignation of Bama came into effect and whether the said resignation would exclude them from the category of related party and whether they can be members of CoC? - failure on the part of RP to perform its duties (with regard to findings whether Bafha, is related party or not). HELD THAT - By virtue of the notice of the resignation not reaching the Company, Bafna continues to be nominee director in the CD and hence his status as related party does not cease. Apart from the above, the counsel for the FC contends that even if it is accepted that the notice of the resignation is served on the Company as per Section 168 of the Companies Act, 2013, the same has to be ignored in the light of the judgment of the Apex Court in the matter of Phoenix ARC Private Limited vs. Spade Financial Services Limited and others 2021 (2) TMI 91 - SUPREME COURT wherein it was held that in case related party FC ceases to become a related party with the sole intention of participating in the CoC, then it should be considered as a related party for the purpose of Section 21 (2) of the Code and shall not be entitled to participate in the CoC. As the facts of this case reveal, the order admitting the CD in to CIRP is on 18.02.2022 and the resignation letter was sent through courier on 11.02.2022 which is 7 days prior to the CD being taken into CIRP. Inspite of the differences, disputes and the breaches which took place much prior to the moving of the Application under Section 7 of IBC by the Baftia they continued as nominee directors till 11.02.2022. Though may not be with a malafide intention, in their own interest Bafha appears to have considered it appropriate to tender their resignation in order to safeguard their financial interest by taking part in the CoC. Hence the intention for resignation apparently seems to be to become part of CoC. Hence by virtue of the judgment in Phoenix ARC Private Limited vs. Spade Financial Services Limited and others Bafha will not be entitled to participate in the CoC. Though Bafha is an FC as held in section 7 petition filed by it and though it became entitled to recall the ICD due to the breaches committed by the CD, the agreements nevertheless, show that Bafha had good control over the affairs of the CD and it continued to have the control. Hence it taking part in the CoC meetings would be against the intent of the provisions of IBC. Bonafides of the Resolution Professional - allegations against the Resolution Professional are that he has failed to diligently carry out his duties and is merely relying on a legal opinion furnished to him for determining whether Bafha is a related party of the CD or not - HELD THAT - It is possible that Mr. Praful Bama and Mr. Yogesh Bama might have informed the IRP that they have tendered their resignation on 11.02.2022 and that the IRP might have believed the same, without proper verification. Since the date of resignation is being reflected as 11.02.2022 in the letter of resignation, there is a possibility of the IRP understanding the date of resignation as 11.02.2022, Though little due diligence might have revealed the truth, it cannot be said that the IRP, apart from being negligent, had conspired with Bafha and allowed them into the CoC. However, apart from the said mistaken understanding by the IRP, there is no material which would suggest that the IRP had done so with any malafide intention of helping Mr. Praful Bafna and Mr. Yogesh Bama in becoming part of CoC. IRP is hereby cautioned to be vigilant hereafter. This would be a stricture when his performance comes into question in future - The allegation that Bafna had purposefully misled the IRP does not receive much support. When Bama decides to become part of CoC, they would, by all means, endeavour to serve the notice in compliance of section 168. But however, due to non-service of the resignation letter on the Company, section 168 of the Companies Act stands un-compiled with and Mr. Praful and Yogesh Bama continue to be nominee directors and become disentitled to be a part of the CoC. Mr. Praful Prakash Bafha and Mr. Yogesh Prakash Bama are declared as related parties to the CD and shall not be continued in the CoC. The IRP shall reconstitute the CoC accordingly - Application allowed in part.
Issues Involved:
1. Classification of Respondent No. 3 as an unrelated Financial Creditor (FC) and its inclusion in the Committee of Creditors (CoC). 2. Validity and effect of the resignation of directors from the Corporate Debtor (CD). 3. Allegations against the Interim Resolution Professional (IRP) regarding diligence and potential misconduct. Issue-wise Detailed Analysis: 1. Classification of Respondent No. 3 as an Unrelated Financial Creditor (FC): The Tribunal examined whether Respondent No. 3 (Bafha) should be classified as a related party under Section 5(24) of the Insolvency and Bankruptcy Code (IBC). The IRP had classified Bafha as an unrelated FC, giving it a 53.87% voting share in the CoC, which diluted the Applicants' voting rights to 46.13%. The Tribunal found that Bafha had substantial rights in the operations and management of the CD and had common directors with the CD, making it a related party. The Tribunal referenced the Supreme Court ruling in Phoenix ARC Private Limited vs. Spade Financial Services Limited, which held that a related party FC ceasing to be a related party solely to participate in the CoC should still be considered a related party under Section 21(2) of the IBC. 2. Validity and Effect of the Resignation of Directors: The Tribunal scrutinized whether the resignation of Bafha's directors from the CD was effective and excluded them from being related parties. The resignation letters dated 11.02.2022 were sent via courier but were not delivered due to a locked door, and the correct pin code was not used. The Tribunal held that the resignation did not come into effect as it was not served on the CD in accordance with Section 168 of the Companies Act, 2013. Consequently, Bafha's directors continued to be nominee directors and related parties. The Tribunal also noted that the resignation appeared to be a strategic move to participate in the CoC, which aligns with the Supreme Court's ruling in Phoenix ARC. 3. Allegations Against the Interim Resolution Professional (IRP): The Tribunal addressed allegations that the IRP failed to diligently perform his duties by relying on a legal opinion to determine Bafha's status as a related party. The IRP had sought an opinion from an independent law firm and verified the resignation details on the MCA portal. The Tribunal found that while the IRP might have been negligent, there was no evidence of malafide intention or conspiracy with Bafha. The IRP was cautioned to be more vigilant in the future, and this caution would be considered in future performance evaluations. Conclusion: The Tribunal partly allowed the applications, declaring Mr. Praful Prakash Bafha and Mr. Yogesh Prakash Bafna as related parties to the CD and disqualifying them from participating in the CoC. The IRP was directed to reconstitute the CoC accordingly.
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