2022 (5) TMI 924 - AT - Insolvency and Bankruptcy

Initiation of CIRP - Application filed by the Appellants/Applicants rejected on the ground that the Appellants were Related Parties and cannot be treated as Financial Creditors within the meaning of Section 5(7) of the Code - HELD THAT - It is an undisputed fact that the Appellants together hold about 48% of the shareholding of the Company. It is the main contention of the Appellants that the Master Data of the Corporate Debtor was not updated in the Ministry of Corporate Affairs MCA Website and that they were never Directors of the Company and were only Additional Directors which designation also ceased as the Annual General Meeting contemplated under Section 161(1) of the Act was never conducted inducting them as Directors. A brief perusal of the Master Data of the Corporate Debtor reflects the fact that Appellants 2 3 continue to be Directors. It is also seen that the second Appellant Mr. Sushil Govindrao Uttarwar is the common Director of the Corporate Debtor as well as the present Appellant No. 1 Company. Further in the Application filed by the Appellants herein seeking intervention in the Section 7 Petition filed by SIDBI it is submitted that they have acquired 44% shareholding of the Corporate Debtor Company in November 2018 and arrayed themselves as Directors . It is significant to mention that a copy of the Master Data of the Corporate Debtor Company as per the records of the MCA Website was annexed to the said Application in support of their locus standi for intervening in the matter. Therefore the contention of the Appellants herein that they were not Directors of the Corporate Debtor Company is untenable. This Tribunal is of the considered view that the documentary evidence on record clearly establishes that the entire loan was converted into equity and hence no claim is maintainable under the guise that this amount be treated as a Financial Debt - this Tribunal holds that the Appellants are Related Parties and there are no substantial grounds to interfere with the well-reasoned Order of the Adjudicating Authority - Appeal dismissed.

Summary

Issues Involved:

1. Whether the appellants fall within the definition of 'Related Parties'.
2. Whether the appellants' claims can be considered as 'Financial Debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.

Issue-Wise Detailed Analysis:

1. Whether the appellants fall within the definition of 'Related Parties':

The appellants, who are investors and shareholders of the Corporate Debtor, infused funds into the company and were subsequently inducted as Additional Directors. They argued that they were not 'Related Parties' as their designation as Directors ceased when the Annual General Meeting (AGM) was not conducted. However, the tribunal found that the appellants continued to be listed as Directors in the Master Data of the Corporate Debtor. The tribunal referenced the Supreme Court's interpretation of 'Related Party' in "Phoenix Arc Private Limited Vs. Spade Financial Services Limited and Ors.," emphasizing the broad definition intended to capture all inter-relationships that could affect the insolvency process.

The tribunal concluded that the appellants were 'Related Parties' under Section 5(24) of the Code for several reasons:
- The appellants were Directors and managed the day-to-day affairs of the company.
- The second appellant accepted notices and participated in CoC meetings, which is against Section 21(1) of the Code.
- The appellants had a significant shareholding and control in the Corporate Debtor.

2. Whether the appellants' claims can be considered as 'Financial Debt':

The appellants contended that the funds infused should be treated as 'Financial Debt'. They had paid Rs.50 Lakhs directly to SIDBI to discharge the loan of the Corporate Debtor, intending to enhance their equity. However, the tribunal found that this payment was not a financial disbursement with 'Time Value of Money', a prerequisite for a debt to be considered 'Financial Debt' under Section 5(8) of the Code.

The tribunal also noted that a Board Resolution approved the conversion of the loan into equity, and the appellants had previously claimed to be Directors in another application. The documentary evidence showed that the loan was converted into equity, and the appellants' role in managing the company's affairs further supported this conclusion.

Conclusion:

The tribunal held that the appellants are 'Related Parties' and their claim to treat the infused amount as 'Financial Debt' is not maintainable. The appeal was dismissed, and the order of the Adjudicating Authority was upheld.