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TMI Blog2020 (12) TMI 758X X X X Extracts X X X X X X X X Extracts X X X X ..... rader is a Financial Creditor is not totally based on the decision of the Committee of Creditors . The Adjudicating Authority has determined the status of BVN Traders as a Financial Creditor in view of provisions and the fact situation . It would have been ideal and rather expected that Adjudicating Authority should have recorded reasons also, instead of taking a short cut by taking the support of Resolution of CoC. This was perhaps the reason CoC appears to have got emboldened that it can take such decisions in favour or against its own constituents - It is essential to note that on the initiation of Appellant Mr Rajnish Rai the Resolution Professional and the Members of the Committee of Creditors , excluding Respondent No. 3 BVN Traders, made deliberate attempt to eliminate the name of BVN Traders from the Committee of Creditors. It also appears that the Claim of Respondent No. 3 BVN Trader was illegally rejected as Financial Creditor , so that they could pass the Resolution to withdraw the CIRP with the required percentage of voting share, i.e., 90%. Since Respondent No. 3, which had 30.9% voting share in the CoC, the Resolution for withdrawal u/s 12A could not have mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant Company is a borrower, and the loan amount was directly disbursed to Appellant s Company for which the title deed was deposited with the Respondent No. 3. In the said transaction time value of money is unambiguously involved, and the Appellant Company s liability is regarding the debt owed by it - In the present case, Respondent No. 3 disbursed the debt against the Consideration for the time value of money. It is reiterated that the Appellant Company had raised the said amount from the Respondent No.3 to meet its working Capital Requirement. Hence the Respondent No. 3 is a Financial Creditor within the meaning of 5(7) and 5(8) of the Code. In the present context, it is clear that the expression disburse would refer to the fund transfer made by the Respondent No.3 to the Corporate Debtor for the particular purpose of funding, i.e. working capital. The expression disburse refers to money, which has been paid against consideration for the time value of money. In short, the disbursal must be money and must be against Consideration for the time value of money, meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbar Jha, Advocate For the Respondent : Mr DN Awasthi, Advocate for RP. Mr Abhishek Kumar Tripathi, Advocate for R-3. JUDGMENT [ Per; V. P. Singh, Member (T) ] This Appeal emanates from the Order dated 23rd January 2020 passed by the Adjudicating Authority/National Company Law Tribunal, Allahabad Bench, Allahabad in CA No.142/ALD/2019 in Company Petition (IB) No. 422/ALD/2018, whereby the Adjudicating Authority had rejected the Application filed by Appellant under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (in short I B Code ) and declared BVN Traders , Respondent No.3, as a Financial Creditor under Sec 5(7) of the Code and Debt as Financial Debt under Sec 5(8)(f) of the Code. The parties are represented by their original status in the Company Petition for the sake of convenience. 2. The brief facts of the case are as follows: The Appellant filed Company Application No.142/2019, under sub-section (5) of Section 60 of the I B Code, 2016 read with Rule 11 of NCLT Rules, 2016, in Company Petition No.422/ALD/2018, for a declaration that BVN Traders is not a Financial Creditor in connection with the loan extended to the corporate debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im copy with emphasis supplied) 5. Surprisingly, the CoC in its 7th meeting held on 14th February 2020 again discussed the proposed Resolution of RP, for not considering M/s BVN Traders as a Financial Creditor . The Committee of Creditors accepted the proposed Resolution (Annexure A8-Page 116 r/w Page 125) and passed with its majority that M/s BVN Traders is not a Financial Creditor . 6. After that The Committee of Creditors in its 8th meeting held on 18th February 2020 further passed a Resolution (Annexure A9-Page 142) to eliminate the name of M/s BVN Traders from the list of Committee of Creditors . 7. Thereafter, the Appellant has challenged the impugned Order on the ground that the Adjudicating Authority has erred in facts and law in holding that M/s BVN Traders is a Financial Creditor , which is mainly based on decision of the Committee of Creditors, though it was not empowered to decide that BVN Traders is a Financial or Operational Creditor (Appeal ground 9(V)). 8. In response to the above the Respondent No 3, M/s BVN Traders, contends that Mr Dilip Kapoor, a partner of the firm, used to infuse funds to the Corporate Debtor M/s Jain Manufacturing (In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermination of one Creditor as Operational or Financial is not dependent on the voting of Committee of Creditors . Accordingly, he did not opt Committee of Creditors to vote upon this issue. 13. The issues that arise for our Consideration are as under: i) Whether the Committee of Creditors constituted under Section21 of the I B Code, 2016, could determine that M/s BVN Traders is a Financial or Operational Creditor? ii) Whether the Resolution Professional could reclassify the status of a creditor from Financial to Operational Creditor based on the expert opinion despite that the Adjudicating Authority had taken a contrary view? iii) Whether the Order of the Adjudicating Authority in upholding that BVN Traders is a Financial Creditor based on the majority decision of Committee of Creditors is valid? 14. We have heard the arguments of the Learned Counsel for the parties and perused the records. Before starting a discussion, it is essential to go through the statutory provisions, which are as under: Section 18. Duties of interim Resolution professional 18. Duties of interim Resolution Professional.- (1) The interim Resolution professiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern. (2) For the purposes of sub-section (1), the interim Resolution professional shall have the authority- (a) to appoint accountants, legal or other professionals as may be necessary; (b) to enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process; (c) to raise interim finance provided that no security interest shall be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over such encumbered property: Provided that no prior consent of the Creditor shall be required where the value of such property is not less than the amount equivalent to twice the amount of the debt. (d) to issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern; and (e) to take all such actions as are necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4[* * *] provide for a single trustee or agent to act for all financial creditors, each financial Creditor may- (a) authorise the trustee or agent to act on his behalf in the Committee of creditors to the extent of his voting share; (b) represent himself in the Committee of creditors to the extent of his voting share; (c) appoint an insolvency professional (other than the Resolution professional) at his own cost to represent himself in the Committee of creditors to the extent of his voting share; or (d) exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally. [(6-A) Where a financial debt- (a) is in the form of securities or deposits and the terms of the financial debt provide for appointment of a trustee or agent to act as authorised representative for all the financial creditors, such trustee or agent shall act on behalf of such financial creditors; (b) is owed to a class of creditors exceeding the number as may be specified, other than the creditors covered under Clause (a) or sub-section (6), the interim Resolution professional shall make an application to the Adjudicating Authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Committee of creditors to- (a) members of 1[Committee of creditors, including the authorised representatives referred to in sub-sections (6) and (6A) of Section 21 and sub-section (5)]; (b) members of the suspended Board of Directors or the partners of the corporate persons, as the case may be; (c) operational creditors or their representatives if the amount of their aggregate dues is not less than ten per cent of the debt. (4) The directors, partners and one representative of operational creditors, as referred to in sub-section (3), may attend the meetings of Committee of creditors, but shall not have any right to vote in such meetings: Provided that the absence of any such director, partner or representative of operational creditors, as the case may be, shall not invalidate proceedings of such meeting. (5) [Subject to sub-sections (6), (6A) and (6B) of Section 21, any creditor] who is a member of the Committee of creditors may appoint an insolvency professional other than the Resolution professional to represent such Creditor in a meeting of the Committee of creditors: Provided that the fees payable to such insolvency professional representing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g by way of issuance of additional securities, creating a new class of securities or buying back or redemption of issued securities in case the corporate debtor is a company; (d) record any change in the ownership interest of the corporate debtor; (e) give instructions to financial institutions maintaining accounts of the corporate debtor for a debit transaction from any such accounts in excess of the amount as may be decided by the Committee of creditors in their meeting; (f) undertake any related party transaction; (g) amend any constitutional documents of the corporate debtor; (h) delegate its authority to any other person; (i) dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third parties; (j) make any change in the Management of the corporate debtor or its subsidiary; (k) transfer rights or financial debts or operational debts under material contracts otherwise than in the ordinary course of business; (l) make changes in the appointment or terms of contract of such personnel as specified by the Committee of creditors; or (m) make changes in the appointment or terms of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this Clause shall be fair and equitable to such creditors. Explanation 2.-For the purposes of this Clause, it is hereby declared that on and from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the provisions of this Clause shall also apply to the corporate insolvency resolution process of a corporate debtor- (i) where a resolution plan has not been approved or rejected by the Adjudicating Authority; (ii) where an appeal has been preferred under Section 61 or Section 62 or such an appeal is not time barred under any provision of law for the time being in force; or (iii) where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a resolution plan;] (c) provides for the Management of the affairs of the corporate debtor after approval of the resolution plan; (d) the implementation and supervision of the resolution plan; (e) does not contravene any of the provisions of the law for the time being in force; (f) conforms to such other requirements as may be specified by the Board. [Explanation.-For the purposes of Clause (e), if any approval o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors in which the resolution plan of the applicant is considered: Provided that the resolution applicant shall not have a right to vote at the Meeting of the Committee of creditors unless such resolution applicant is also a financial creditor. (6) The Resolution professional shall submit the resolution plan as approved by the Committee of creditors to the Adjudicating Authority. Section 31. Approval of resolution plan 31. Approval of resolution plan.- (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the Committee of creditors under sub-section (4) of Section 30 meets the requirements as referred to in sub-section (2) of Section 30, it shall by Order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, 3 [including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,] guarantors and other stakeholders involved in the resolution plan: [Provided that the Adjudicating Authority shall, before pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the IBBI vide their Circular no. Facilitation/002/2019 dated 1st March 2019, under the charter of responsibilities of IRP/RP and Committee of Creditors in a CIRP, and under Section 25(2)(e) of the Code read with Regulation 13 14, it is the duties of Resolution Professional maintain an updated list of claims, including verification and determination. The voting of Committee of Creditors regarding the determination of a Creditor as Financial or Operational is not applicable under law. Therefore, he did not opt Committee of Creditors to vote upon the issue in the 3rd Meeting of Committee of Creditors . 17. On perusal of the statutory provision of the Code, it appears that the Interim Resolution Professional constitutes a Committee of Creditors under Section 18(1)(c) of the Code. Under Section 18(1)(b) the IRP is to receive and collate all the claims submitted by creditors to him, in response to the public announcement. 18. Section 28 of the Code provides the occasions when Resolution Professional requires for approval of the Committee of Creditors for specific actions. It provides that the Resolution Professional during CIRP shall not take specific actions as enum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07.03.2019 Respondent No.3 M/s BVN Traders filed its claim in Form C as Financial Creditor. (Reply Diary No.21421-Annexure 1) As per Regulation 13 of CIRP Regulations, IRP/RP within 7 days from the last date of filing the claims has to prepare a list of creditors containing the amounts claimed by the Creditor, claims admitted or rejected with or without security interest. The IRP After verification admitted the part of the Claim of M/s BVN Traders as Financial Debt. (See notice dated 10.03.2019 for 1 st Meeting of CoC DT. 23.03.2019-Annexure A3-Page 51, 56, 85, 81, 86) 23.03.2019 First Meeting of Committee of Creditors was called by IRP Mr Manoj Kumar Singh. The name of M/s BVN Traders is shown at Sl. No.7 as Member of CoC in Ex. B of Notice, Annexure A3. Ex. C, Page 86, treats BVN as having secured loan with Title Deeds as Security Ground Note below stated that verification of Claim is an undergoing process, and Claim is provisionally admitted by IRP. In this CoC, deliber ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Member of CoC, with a voting share of 22.06%, also participated in the voting. 23.01.2020 The Adjudicating Authority rejected Company Application No. 142/ALD/ 2019 and declared M/s BVN Traders as Financial Creditor. (Annexure A1-Page 40) 14.02.2020 Agenda Item No.12: Regarding withdrawal of CIRP under Section 12A of the Code. (Voting percentage required 90%) Agenda Item No.13: Some CoC Members wanted to review their decision based on a legal opinion that M/s BVN Traders should not continue in the category of Financial Creditor and to remove its name from the CoC despite order of Adjudicating Authority. In 7 th CoC s meeting, it was resolved that M/s BVN Traders is not a Financial Creditor. (Annexure A8-Page 116) This Resolution was passed contrary to the Order of the Adjudicating Authority dated 23.01.2020 whereby M/s BVN Traders was declared as Financial Creditor. This Resolution was not passed 30.9% voted in favour, and 69.1% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority (NCLT) nor the Appellate Authority (NCLAT) has been endowed with the jurisdiction to reverse such commercial wisdom of the Committee of Creditors. 23. Sub-clause (e) of Section 25 of the I B Code, 2016 deals with the duties of the Resolution Professional, which mandates RP to maintain an updated list of claims . The question that arises for our consideration is whether the Resolution Professional was under the obligations to maintain an updated list of claims, was entitled to overturn its earlier decision of declaring BVN Traders as Operational Creditor instead of Financial Creditor . For this, it is essential to understand the responsibilities and duties of Interim Resolution Professional/Resolution Professional as defined under Section 18 of the Code. 24. Section 18(1)(b) of the Code authorises IRP to receive and collate all the claims submitted by claimants, under the public announcement made under Section 13 and 15 of the Code. Section 18(1)(c) authorises IRP to constitute a Committee of Creditors . Undisputedly, in this case, the IRP after collation of claims admitted the Claim of M/s BVN Traders as a Financial Creditor and debt as a Financial Debt . Up to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Creditors to call for a meeting for removal of Resolution Professional, it was improper for Resolution Professional to include Mahal Hotel Private Limited as Financial Creditor of the Member of the Committee of Creditors . (emphasis in bold supplied) In Company Appeal (AT) (Insolvency) No. 291 of 2018 M/s. Prasad Gempex Vs Star Agro Marine Exports Pvt. Ltd. Ors this Appellate Tribunal by judgment dated 01st February 2019 held that; 6. The connected Appeal has been preferred by SREI Infrastructure Finance Limited (Financial Creditor) against the Order dated 23rd July, 2018. By the said Order, the application preferred by the appellant SREI Infrastructure Finance Limited to set aside the decision of the Resolution Professional dated 15th April, 2018 for refusing, re-calculating or reducing the Claim in respect of the corporate debtor has not been entertained. Thus, the rejection/reduction of the Claim by Resolution Professional by Order dated 15th April, 2018 reached a finality. The question arises for Consideration in both the appeals is whether the Resolution Professional has jurisdiction to decide or reject the Claim of one or other Financial C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the Part II and in such case, the period during which such moratorium is in place shall be excluded for the purpose of counting the limitation. 8. The power of Resolution Professional also fell for consideration before the Hon ble Supreme Court in Swiss Ribbons Pvt. Ltd. Anr. vs Union of India Ors. Writ Petition (Civil) No. 99 of 2018 . In the said judgment dated 25th January 2019, the Hon ble Supreme Court held that Resolution Professional has no adjudicatory power. The Resolution Professional has to vet and verify the claims made and ultimately determine the amount of each Claim. As opposed to this, the Liquidator in the Liquidation proceedings under the I B Code has to consolidate and verify the claims and either admit or reject such claims under Sections 38 to 40 of the Code. Thus Resolution Professional could not adjudicate. What he did was to call alleged reports of experts and changed stand before Adjudicating Authority. When questioned by the Adjudicating Authority, he rushed to CoC, which did not agree to treat BVN Traders as Operational Creditor. This led to the Impugned Order. Still not satisfied he put up to CoC in 7th and 8th Meeting to g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CoC when BVN Traders was there. In 8th Meeting, BVN Traders was eliminated and object achieved. Then the Appellant filed the present Appeal. 31. It is apparent that every action of Resolution Professional, either about the change of status of BVN Traders from financial to Operational Creditor or regarding the elimination of name of BVN Traders from the Committee of Creditors was being done in collusion with erstwhile Member of suspended Board of Directors, Promoter and Managing Director Mr Rajnish Jain. It is pertinent to mention that, the Resolution Professional even in disregard of the orders of the Adjudicating Authority dated 23rd January 2020, subsequently proposed the Resolution before Committee of Creditors for considering BVN Traders as Operational Creditor and further for the elimination of name of BVN Traders from Committee of Creditors . It is also evident that when Appellant and Resolution Professional could not succeed in getting permission from the Adjudicating Authority to change the status of BVN Traders from Financial Creditor to Operation Creditor, Resolution Professional adopted the route of Committee of Creditors for the elimination of name of B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se under its Commercial wisdom. It is a matter of applying the law of I B Code, and if such factor is left to CoC, there would be a serious conflict of interest, as the present matter itself shows. Whether a person or entity is Financial Creditor as defined in Section 5(7) or Operational Creditor as defined in Section 5(20) is a matter of applying the law to facts. It cannot be a matter of voting, and choice as discretion is not relevant. During the CIRP, the IRP collates the Claim, and after that, the Committee of Creditors is formed under Section 18 of the Code. After the formation of the Committee of Creditors , only the aggrieved person can agitate the same and that too, only before the Adjudicating Authority. 36. However, we find that the Order of the Adjudicating Authority that BVN Trader is a Financial Creditor is not totally based on the decision of the Committee of Creditors . The Adjudicating Authority has determined the status of BVN Traders as a Financial Creditor in view of provisions and the fact situation . It would have been ideal and rather expected that Adjudicating Authority should have recorded reasons also, instead of taking a short cut by taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsibilities under the Code . 41. Thus, it appears that the Resolution Professional has failed to perform his obligation/duty to observe the Code, the Rules and Regulations as enumerated in the Code and CIRP Regulations while conducting CIRP for the reason of taking up such an Agenda of Meeting and leading to illegal Resolution of ousting the BVN Traders from the Committee of Creditors . 42. Therefore we are of the considered opinion that the Committee of Creditors was not empowered to adjudicate the issue that has cropped up in the present case, i.e. M/s BVN Traders is a Financial or Operational Creditor. Such adjudication is beyond the scope of consideration of the Committee of Creditors. Further, the Resolution Professional erred to reclassifying the status of a creditor from Financial to Operational Creditor , based on the alleged expert opinion despite that the Adjudicating Authority took a contrary view. Issue No 3 43. In the instant case, the alleged loan amount of ₹ 80,00,000/- (Rupees Eighty Lakh Only) @ 18% per annum was advanced to the Appellants Company against the title deed of Plot No. Y of 7/190 (1) Swaroop Nagar, Kanpur, 208002, which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y could be forsaken in the manner that any transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said sub-clauses (a) to (i) of Section 5(8) would be falling within the ambit of financial debt only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as financial debt within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money. 45. In the present case, undisputedly Appellant s company has deposited its title deed of Plot No. Y of 7/130(1), Swaroop Nagar, Kanpur-208002 against the loan amount of ₹ 80,00,000/- (Rupees Eighty Lakh Only) @ 18% per annum. The record shows, the Appellant Company is a borrower, and the loan amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue of interpretation of the phrase time of value of money as follows: The key feature of financial transaction as postulated by section 5(8) is its Consideration for time value of money. In other words, the legislature has included such financial transactions in the definition of Financial debt which are usually for a sum of money received today to be paid for over a period of time in a single or series of payments in future. It may also be a sum of money invested today to be repaid over a period of time in a single or series of instalments to be paid in future. In Black s Law Dictionary (9th edition) the expression Time Value has been defined to mean the price associated with the length of time that an investor must wait until an investment matures or the related income is earned. In both the cases, the inflows and outflows are distanced by time and there is a compensation for time value of money . In the present context, the Appellant Company has assured the Respondent No.3 to repay the loan in One month for which an interest @ 18% per annum has also charged as Consideration for the time value of money. 51. The term financial debt has been defined in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Bank Account statement annexed with Claim Form. Thus the transaction in question fulfils the requirement of Consideration for the time value of money. Hence the said transaction falls within the ambit of financial debt as per the Section 5(8) of the Code. (iv) Appellant has not denied the debt availed by it but only contended to the extent of it not being financial debt or a Financial Creditor. 53. Thus the Appellant Company is a borrower, and Reply of Respondent No.3 and its Form C submitted shows that loan amount was directly disbursed to Appellant s Company for its working capital requirement to smoothly run the business for which the aforementioned title deed was deposited with the Respondent No.3. In the said transaction time value of money is unambiguously involved. And the Appellant Company s liability is regarding the debt owed by it. Therefore we are of the considered opinion that the Respondent No.3 BVN Traders is a Financial Creditor within the meaning of Section 5(7) of the Code, and the debt in question is a financial debt within the meaning of Section 5(8) of the Code. (54.1) Reply (Diary No. 21421) shows that Dilip Kappor partner of Respondent No. 3 us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestioned by Adjudicating Authority, RP rushed to CoC in 4th Meeting dated 30.09.2019 when in Resolution (Annexure A7 Page 99) in Agenda Item 11 rejected Resolution that claims of BVN Traders be treated in the category of Operational Creditor, rather than Financial Creditor. 54.4) After Adjudicating Authority passed Interim Order, Resolution Professional in 7Th Meeting of CoC (Annexure A8 page 116 @ Page 127) took up Agenda 13 Discussion/Approval for not considering M/s. BVN Traders as Financial Creditor . It is surprising and interesting to note that Members recorded that despite the Order passed by Hon ble NCLT Allahabad the CoC is of the view that they no longer wish to continue M/s BVN Traders in the category of the Financial Creditor in the CoC and want to review their decision in this regard. No Longer wish ? This is strange. This is the danger due to which collating is not left to CoC. As mentioned, this was taken up, and resolutions were passed in the 7th Meeting and also 8th Meeting dated 18.2.2020 (Annexure A9) to resolve and oust BVN from CoC. Thus CoC sat in Appeal over Impugned Order and passed resolutions to the contrary, which cannot be said to be legal. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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