2020 (12) TMI 198 - Tri - Companies Law

Rejection/adjudication of ITNL Claim - reinstate and admit the claim relating to the loan granted by IL FS Transport Networks Ltd - restraint R1 from in any manner communicating the rejection and/or adjudication of the claim relating to the loan granted by IL FS Transportation Networks Limited - exempting the Applicant from affixing the affidavit annexed to this application on stamp paper and notarizing the present Application - HELD THAT - It is a settled proposition in law that the role of Resolution Professional (RP) in the IBC proceedings when admitting the claim, the RP is only acting as Administrator and have to collate and determine the claim based on the Claim Form submitted by the Creditors. Here, in this case, the financial debt of the Applicant is clearly established from the balance sheets of the R3, Subordination Agreement and DTD. Based on these factors, R1 determined the claim of the Applicant for ₹ 354.73 crores. Subsequently, on the intervention of the Debenture Holders, the R1/Claim Management Consultant whose functions are akin to that of a Resolution Professional, revised the claim based on Clause 2.2 of the Subordination Agreement. Clause 2.1(ii) of the Agreement clearly provides that the subordinated debt shall remain irrespective of occurrence of bankruptcy, insolvency, liquidation of the company, however, fully subordinated to the debt of the debenture holders and shall not be due and payable until all and any rights and claims of the debenture holders against the Company in respect of the debt have been irrevocably paid and discharged in full. This tripartite Subordination Agreement does not and will not be applicable to other creditors of R3. So, the logical corollary of the subordination agreement is that till the debenture holders are satisfied in full, the Applicant will not get anything from R3. This contract when interpreted gives the abovesaid meaning. The debt of the Applicant only become subordinated to the debt of the Debenture Holders as far as R3 is concerned. R1 being a Claim Management Consultant who is playing the role of Resolution Professional, after the determination of claim, should not have ventured into the business of interpreting the Subordination Agreement on the intervention of the debenture holders - Since this Asset Resolution process of IL FS companies is almost treated as per IBC proceedings, we feel that R1 has exceeded its jurisdiction and in exercise of wrong jurisdiction reversed the earlier decision of admitting the claim. In the case on hand, in fact, a situation as envisaged under Clause 2.1(ii) of the Agreement has occurred, and even assuming that the resolution process being worked out to the group companies of IL FS including R3 is taken as an event of default, the provisions of Clause 2.1(ii) prevails over Clause 2.2 and hence there is no cessation of the debt of the Applicant. Application allowed in part.

Summary

Issues Involved:
1. Rejection of Applicant's claim by Respondent No. 1 (R1).
2. Interpretation of Subordination Agreement clauses.
3. Role and jurisdiction of Claims Management Consultant (R1).
4. Public interest considerations.

Issue-Wise Detailed Analysis:

1. Rejection of Applicant's Claim by Respondent No. 1 (R1):
The Applicant sought to set aside the rejection of its claim of INR 354.73 crores by R1. The claim was initially admitted but later rejected based on Clause 2.2 of the Subordination Agreement, which states that the debt ceases to exist upon an event of default. The Applicant contended that R1's decision was based on an isolated reading of Clause 2.2 without considering Clause 2.1(ii), which contemplates the continuation of subordinated debt even after an event of default.

2. Interpretation of Subordination Agreement Clauses:
The Subordination Agreement contained conflicting clauses:
- Clause 2.1(ii): States that the subordinated debt remains at all times, even in cases of bankruptcy, insolvency, or liquidation, but is fully subordinated to the debt of the debenture holders.
- Clause 2.2: Indicates that the debt ceases to exist upon an event of default.

The Tribunal observed that Clause 2.1(ii) prevails over Clause 2.2, as it provides for the continuation of the subordinated debt despite an event of default. The Tribunal emphasized that the agreement should be interpreted in a manner that gives effect to all clauses, and the earlier clause (2.1(ii)) should override the latter clause (2.2) in case of conflict.

3. Role and Jurisdiction of Claims Management Consultant (R1):
R1, acting as the Claims Management Consultant, was compared to a Resolution Professional under the Insolvency and Bankruptcy Code (IBC). The Tribunal noted that R1's role was to collect, verify, and determine claims, not to adjudicate them. R1 exceeded its jurisdiction by interpreting the Subordination Agreement and rejecting the claim based on the intervention of debenture holders. The Tribunal highlighted that R1 should not have ventured into adjudication, as it was against the principles laid down by the Hon'ble Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India and Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta.

4. Public Interest Considerations:
The Tribunal considered the larger public interest, noting that the IL&FS group had significant public fund creditors, including pension funds and scheduled banks. The outright rejection of the Applicant's claim would jeopardize the interests of numerous investors. The Tribunal emphasized that a beneficial interpretation of the Subordination Agreement should not adversely affect the debenture holders, as the Applicant's debt remains subordinated.

Conclusion:
The Tribunal allowed the Application in part, setting aside the rejection of the Applicant's claim by R1 and directing R1 to reinstate the claim. The Tribunal concluded that Clause 2.1(ii) prevails over Clause 2.2, and the debt of the Applicant continues to exist despite the event of default. The Tribunal emphasized that R1 exceeded its jurisdiction and should not have adjudicated the claim. The decision was made considering both legal principles and public interest.