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2019 (9) TMI 1190 - Tri - Insolvency and BankruptcyStatus of other COC members as financial creditors - financial creditors on the basis of their lending of money to the Corporate Debtor as unsecured loans - HELD THAT - On perusal of Section 73(1) of the Companies Act, 2013 read with Rule 2(c) of Companies (Acceptance of Deposit) Rules and after analysing the transactions between the Corporate Debtor and Respondents No. 3 to 11, it can be said that the said advance of money was accepted by Corporate Debtor as loan. Section 73(2) will not apply since none of the respondents no. 3-11 are members of Corporate debtor advancing such money - Considering that the said money advanced by the respondents to the Corporate Debtor is not deposit but loan, the question arises as to what kind of debt can it be categorised into. Certainly, this is not an Operational debt as there is no transaction for goods or services, the money is plainly advanced for the business purpose of the Corporate Debtor having clause of Interest though much higher as compared to market or other prevailing rates in normal parlance or business dealings. The Application is allowed thereby Respondents no. 3-11 are declared as not falling under category of Financial Creditors but may be unsecured creditors who may avail other remedies to recover their debt. Further it is ordered that the COC meetings held on 13.06.18, 29.08.18, 12.09.18 and 29.09.18 are non-est and resolutions passed if any therein such meetings stands nullified.
Issues Involved:
1. Status of Respondents No. 3 to 11 as Financial Creditors. 2. Validity of debts created by Respondents No. 3 to 11. 3. Compliance with Section 73 of the Companies Act, 2013. 4. Classification of transactions as Extortionate Credit Transactions under Section 50 of the Insolvency and Bankruptcy Code (IBC). Issue-wise Detailed Analysis: 1. Status of Respondents No. 3 to 11 as Financial Creditors: The applicant, a member of the Committee of Creditors (CoC), challenged the status of Respondents No. 3 to 11 as financial creditors. The respondents had advanced money to the Corporate Debtor as unsecured loans. The applicant argued that these transactions did not comply with Section 73 of the Companies Act, 2013, and thus the respondents should not be considered financial creditors under the Insolvency and Bankruptcy Code (IBC). 2. Validity of Debts Created by Respondents No. 3 to 11: The applicant sought to set aside the debts created by the Corporate Debtor with Respondents No. 3 to 11, claiming these were extortionate and illegal credit transactions. The applicant argued that the transactions were void under Section 23 and Section 24 of the Indian Contract Act because they did not comply with Section 73 of the Companies Act, 2013. The respondents countered that the loans were advanced due to the Corporate Debtor's financial needs and were mutually agreed upon. 3. Compliance with Section 73 of the Companies Act, 2013: The applicant contended that the transactions should be classified as deposits under Section 73 of the Companies Act, 2013, which bars companies from accepting money from private persons unless specific conditions are met. The respondents argued that even if the transactions violated Section 73, the responsibility for compliance lay with the Corporate Debtor and not the lenders. 4. Classification of Transactions as Extortionate Credit Transactions: The applicant argued that the loans were advanced at exorbitant interest rates, qualifying them as extortionate credit transactions under Section 50 of the IBC. The respondents denied this, stating that the interest rates were mutually agreed upon and reflected in the financial statements of the Corporate Debtor. Judgment: Status of Respondents No. 3 to 11 as Financial Creditors: The Tribunal concluded that the money advanced by Respondents No. 3 to 11 did not qualify as financial debt under Section 5(8) of the IBC. The transactions were not supported by formal loan agreements but were based on letters and correspondences. The Tribunal held that these transactions could not be classified as financial debt because they did not meet the criteria of being disbursed against the consideration for the time value of money. Validity of Debts Created by Respondents No. 3 to 11: The Tribunal declared that the debts created by Respondents No. 3 to 11 were not financial debts but could be considered unsecured loans. Consequently, Respondents No. 3 to 11 could not claim the status of financial creditors and were removed from the CoC. Compliance with Section 73 of the Companies Act, 2013: The Tribunal agreed with the applicant's argument that the transactions did not comply with Section 73 of the Companies Act, 2013. The money advanced by the respondents was classified as loans, not deposits, but still did not meet the statutory requirements. As a result, the transactions were deemed void under the Indian Contract Act. Classification of Transactions as Extortionate Credit Transactions: The Tribunal found that the interest rates charged by Respondents No. 3 to 11 were exorbitant, qualifying the transactions as extortionate credit transactions under Section 50 of the IBC. The Tribunal noted that the agreed interest rates were significantly higher than market rates, further supporting the classification of these transactions as extortionate. Orders: 1. Respondents No. 3 to 11 were declared as not falling under the category of Financial Creditors but may be unsecured creditors who may avail other remedies to recover their debt. 2. The CoC meetings held on 13.06.18, 29.08.18, 12.09.18, and 29.09.18 were declared non-est, and any resolutions passed therein were nullified. 3. The Resolution Professional (RP) was directed to reconstitute the CoC and proceed with the Corporate Insolvency Resolution Process (CIRP). 4. A copy of the order was to be made available to all parties concerned and sent to the Insolvency and Bankruptcy Board of India (IBBI) for record and further directions. Conclusion: The application was allowed, and the transactions between the Corporate Debtor and Respondents No. 3 to 11 were declared void. The respondents were removed from the CoC, and the RP was directed to reconstitute the CoC and proceed with the CIRP.
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