2020 (8) TMI 383 - AT - Insolvency and Bankruptcy

CIRP process - Financial Creditors or not - whether un-secured Creditors who may avail other remedies to recover their debts, or not - whether the loans advanced by the Appellants are legal in the eye of law and whether they can be treated as unsecured creditors? - HELD THAT - The stand of the Appellants that the loans were advanced by the individuals to the Corporate Debtor for the business purposes. The Appellants failed to provide any evidence showing that the Corporate Debtor required the loans and Board of the Corporate Debtor decided and resolved in its Board Meetings to take loans @ 3.3%,4% 5% rates of interest that too from the individuals. In normal course of business, the Company takes loans from the Public Sector Bank or the Private Banks at the rate of interest charged by the Banks or Private institutions - But in the present case, Respondent-Corporate Debtor accepted loans from the individuals with an exorbitant rates of interest and the said advancement of loans by the individuals may be at the behest of Directors in collusion with the individuals. No reasonable person would agree to such transaction hence we say there appears to be collusion. It is admitted position that the Appellants No. 2,3,4,6,7 9 have purportedly advanced loans to the Corporate Debtor with exorbitant rates of interest on 04.07.2016, 22.08.2016, 23.08.2016, 10.10.2017, 02.08.2016 and 21.03.2017 which are within period of two years preceding insolvency commencement date i.e., 01.06.2018. Even as per submission of the learned Counsel for the Appellants, these transactions are considered to be Extortionate Credit Transactions and the same needs to be quashed and set aside. The transactions of the Appellants No. 1, 5 8 which are prior to two years preceding the insolvency commencement date. However, taking into consideration, the exorbitant rates of interest charged by the Appellants, the said transactions are unconscionable. Thus, keeping in view that the rates of interest which they charged are exorbitant, we are of the view that claim of exorbitant rates of interest is extortionate regarding interest and thus illegal. However, Appellants No. 1,5 8 can make their claims for Principal Amount as Unsecured Creditors - appeal disposed off.

Summary

Issues Involved:

1. Status of Appellants as Financial Creditors.
2. Classification of loans as Extortionate Credit Transactions.
3. Legality of the loans advanced by the Appellants.
4. Validity of CoC meetings and resolutions.

Issue-wise Detailed Analysis:

1. Status of Appellants as Financial Creditors:

The Appellants challenged the order declaring them not as Financial Creditors but as unsecured creditors. They argued that the loans they advanced to the Corporate Debtor should be considered as Financial Debt under Section 5(8) of the Insolvency and Bankruptcy Code (IBC). The Adjudicating Authority, however, held that the Appellants do not fall under the category of Financial Creditors but may avail other remedies to recover their debts.

2. Classification of Loans as Extortionate Credit Transactions:

The Adjudicating Authority found the interest rates on the loans (ranging from 3.3% to 5% per month) to be exorbitant, thus classifying them as Extortionate Credit Transactions under Section 50 of IBC. The Appellants contended that only transactions within two years preceding the insolvency commencement date (01.06.2018) could be declared extortionate. Transactions of Appellants No. 1, 5, and 8 occurred before this period and thus should not be considered extortionate. However, the Tribunal held that despite the timing, the exorbitant interest rates rendered these transactions unconscionable.

3. Legality of the Loans Advanced by the Appellants:

The Tribunal noted that the loans were advanced at exorbitant interest rates without proper loan agreements or Board Resolutions from the Corporate Debtor. The transactions appeared collusive and not in the normal course of business. The Tribunal upheld the Adjudicating Authority's finding that these were Extortionate Credit Transactions and thus illegal.

4. Validity of CoC Meetings and Resolutions:

The inclusion of the Appellants as Financial Creditors in the Committee of Creditors (CoC) led to the reconstitution of the CoC and reduction of the voting rights of Respondent No. 1. The Adjudicating Authority declared the 2nd to 5th CoC meetings and the resolutions passed therein as null and void due to the illegal inclusion of the Appellants as Financial Creditors. The Tribunal affirmed this decision.

Conclusion:

The Tribunal disposed of the Appeal by modifying the order of the Adjudicating Authority:

a) Transactions of Appellants No. 2, 3, 4, 6, 7, and 9 were held to be Extortionate Credit Transactions and thus illegal and void.
b) Appellants No. 1, 5, and 8, though not falling under Section 50(1) of IBC, were deemed unsecured creditors for the principal amount only, without entitlement to the exorbitant interest.
c) The CoC meetings held on 13.06.2018, 29.08.2018, 12.09.2018, and 29.09.2018 were declared nonest, and any resolutions passed therein were nullified.
d) The order dated 29.07.2019 was affirmed.
e) No orders as to costs.