2021 (9) TMI 1121 - AT - Insolvency and Bankruptcy

Validity of decision of IRP/RP holding that the claimant/ Applicant is a Financial Creditor but is not eligible to be a part of CoC - related party in terms of Section 5(24)(m) 5(24) (i) of the Insolvency and Bankruptcy Code 2016 - HELD THAT - The Respondent No. 1 had a share in the profits of the Corporate Debtor Company and cannot be said to be a person acting solely on account of the conversion of debt. In the instant case, the Corporate Debtor had issued non-convertible debentures to Respondent No. 1, which SEBI does not regulate. The SEBI only regulates the issue of debentures relating to convertible securities - In the present case, it was not a case of a convertible security. Appellant has annexed the xerox copy of the debenture certificate, which states that debentures is not convertible but redeemable on maturity - It is also evident that 2nd proviso to Section 21 (2) of the Code applies where instruments convertible into equity shares were converted prior to the insolvency commencement date. Therefore, 2nd proviso to Section 21(2) is not applicable in the present case and does not enure the benefit to Respondent No 1 ASK . It is evident that ASK has a substantial interest in the operations of the Corporate Debtor. Moreover, the intent is to increase the same is clear from their stake to claim a considerable ownership interest in the Corporate Debtor Company, i.e. 89.9%. Their significant involvement in the operations and day-to-day decision-making of the Corporate Debtor is substantiated - 'ASK' is, in effect, an insider of the Corporate Debtor having substantial interest in the ownership of the Corporate Debtor. Hence 'ASK' being a related party, and their claim with the IRP concerning the mentioned CIRP should be rejected, and they are not entitled to participate in the CoC. The Hon ble Supreme Court, in Municipal Corporation of Greater Mumbai v Abhilash Lal 2019 (11) TMI 844 - SUPREME COURT , has affirmed the principles that if any statute requires a thing to be done in a particular manner, it should be done in that in that manner or not at all and that there can be no estoppel against the express provisions of law. Therefore, the mere fact that the improperly constituted Committee of Creditors has approved a Resolution Plan during the pendency of the present Appeal can have no bearing on the merits of the Appeal. Respondent No. 1 ASK Investment Managers Ltd is a related party to the Corporate Debtor; therefore, it cannot be made part of COC with voting rights - Appeal allowed.

Summary

Issues Involved:
1. Whether the Applicant/Respondent No.1 (ASK Investment Managers Limited) is a related party in terms of Section 5(24)(h), 5(24)(m), and 5(24)(i) of the Insolvency and Bankruptcy Code, 2016.
2. Whether the Applicant/Respondent No.1 can be made a member of the Committee of Creditors (CoC) with voting rights.

Issue-wise Detailed Analysis:

1. Whether the Applicant/Respondent No.1 (ASK Investment Managers Limited) is a related party in terms of Section 5(24)(h), 5(24)(m), and 5(24)(i) of the Insolvency and Bankruptcy Code, 2016.
The Tribunal examined whether ASK Investment Managers Limited (Respondent No.1) qualifies as a related party of the Corporate Debtor under the specified sections of the Insolvency and Bankruptcy Code (IBC), 2016. The Respondent held an 8% shareholding in the Corporate Debtor and funded ?49.50 crores through debentures. The Appellant argued that the Respondent had significant control over the Corporate Debtor's management and policy-making, citing various clauses from the Subscription and Shareholders Agreement (SSHA) which granted the Respondent affirmative voting rights and the ability to nominate directors. The Tribunal noted that the Respondent had substantial influence over the Corporate Debtor's operations and decision-making processes, including the appointment of key personnel and participation in policy-making. It was determined that the Respondent's involvement and control met the criteria of a related party as defined in Section 5(24)(h), 5(24)(m), and 5(24)(i) of the IBC, 2016.

2. Whether the Applicant/Respondent No.1 can be made a member of the Committee of Creditors (CoC) with voting rights.
The Tribunal considered whether the Respondent, being a related party, could be included in the CoC with voting rights. The Adjudicating Authority had previously directed the Resolution Professional to include the Respondent in the CoC. However, the Tribunal referred to the Supreme Court's ruling in Phoenix ARC Private Limited v Spade Financial Services Ltd, which emphasized that related parties of the Corporate Debtor should not be allowed to participate in the CoC to avoid conflicts of interest. The Tribunal also referred to the Insolvency Law Committee Report of 2020, which clarified that the exclusion of related parties from the CoC is to prevent them from influencing decision-making processes at the expense of other financial creditors. It was concluded that the Respondent, being a related party, should not be included in the CoC with voting rights, as this would undermine the objective of the IBC to have the CIRP driven by external creditors.

Conclusion:
The Tribunal allowed the appeals and set aside the impugned order. It held that ASK Investment Managers Limited is a related party to the Corporate Debtor and, therefore, cannot be made part of the CoC with voting rights. The Tribunal emphasized that the inclusion of related parties in the CoC would conflict with the provisions and objectives of the IBC.